Imposing dividend tax seems arduous in Hong Kong
Heated debate about whether Hong Kong should impose dividend tax got overwhelmingly opposed voices, saying it may lead to capital outflow which could further sabotages Hong Kong's image as an international financial centre.
Overwhelming voice opposed to dividend tax
“Introducing dividend tax may counter with the principle of the simple, low-rate tax system in Hong Kong,” said Christopher Cheung Wah-fung, the lawmaker of the financial industry. While taxing dividends may help broaden the tax base, it will lead to double taxation on corporate income.
Chueng further rebuked the policy, saying the dividend tax policy would weaken Hong Kong's status as an international financial centre and prompt foreign institutional investors to invest overseas markets.
Hong Kong 01, a local media outlet published an article on its column proposing the city to adopt dividend tax. The article is titled “Dividend tax is the irresistible trend while simple-low tax system is at disadvantage” argued it is unfair to levy taxes on labour's wages while not on capital gain.
HK01 backed up its point saying Paul Chan, financial secretary of Hong Kong published an article in 2017 and he confirmed: “It is gradually weakening the concept of free competition by applying simple and low tax system in regardless of any sector and any scale of the business.”
Retail investors also voiced their concerns. Susan Lee, a 62-year-old woman who has retired and relied living on dividend income mainly from Real Estate Investment Trust (REIT) and blue-chips stock said, “Our society is under capitalism and it is unfair to share my profits gained from stock.” She added, “I bear own risks of my investment decisions. Most importantly, the listed companies have taken the responsibility for paying profit tax.”
Why dividend tax is not applicable in Hong Kong?
Hong Kong's schedular income tax system levies taxes via profits tax, property tax and salaries tax on incomes sourced locally. Dividends received by shareholders are not taxable. “A prospective government should make long-term plans for public finances and social policies and play a role in wealth distribution,” said Fernando Cheung Chiu-hung, a lawmaker at the Labour Party, in his blog in 2014.
Hong Kong has a flat corporate tax rate of 16.5% on assessable profits to corporations. If dividends derived from corporate profits are also taxed, the issue of double taxation arises. It means the same corporate profit first is taxed at the corporate level and second at the individual level when distributed to shareholders.
Meanwhile, all securities listed on the Stock Exchange of Hong Kong currently have already been subject to stamp duty at a rate of 0.1 per cent on the value of transactions on both the buyer and seller sides. Any increase in the tax rate may propel investors to diversify their portfolio worldwide, causing a shortage of liquidity in Hong Kong.
What you should know about dividend tax
Dividend heavily depends on economic cycles. When the economic is under trough period, Dividend payment generally decreases since corporate profits is deteriorated. According to the US Internal Revenue Service and International Monetary Fund (IMF), the dividend income reported by US taxpayers notably shrink during the global financial crisis in 2008 to 2009 and rebounded after the economic recession.
In addition to the economic cycle, the amount of dividend is significantly influenced by corporate dividend policies. Companies can invest their retained earnings in future projects or conduct share repurchase instead of issuing dividends. If the dividend is reduced to 0, there are no dividend taxes for the government.
“On behalf of listed companies, they can convert their reserve to share capital and distribute scrip issues to shareholders instead of dividends,” Cheung Wah-fung added. “Major shareholder can still gain profit by selling bonus issues and easily avoid taxation.”
As early as in 1975, the government announced the intention of introducing a tax on dividends, albeit to no avail in the end. When the government possibly faced a structural fiscal deficit in the early 2000s, the discussion of taxing dividend was reignited. Two rounds of consultation regarding the reformation for broadening the tax base were exercised in 2001 and 2006. The government rejected the suggestion after consultations, concerning not to complicate the tax system by introducing this new tax.
Reporting by Felix Tam.
《The Young Financial Post 新報人財經》
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