Bloomberg News

H.K.’s Tsang Struggles to Meet Tax Vow as Singapore Threat Looms

June 19, 2011

June 20 (Bloomberg) -- Hong Kong Chief Executive Donald Tsang said “You got me on that,” when challenged on his claim to have carried out all he pledged when he stood for office in 2007. The missing achievement: cutting corporate taxes.

With a year left of his term, Tsang is running out of time to restore some of Hong Kong’s edge against regional rivals including Singapore, which has slashed taxes in a bid to attract global companies to base their Asian operations there.

“We are losing the advantage that used to be an astonishingly low tax rate,” David O’Rear, chief economist of the Hong Kong General Chamber of Commerce, the city’s largest business group, said in a phone interview. “We’ve seen others, including China and Taiwan and Macau, also lower their tax rates in competition with us.”

Singapore narrowed the corporate tax rate gap with Hong Kong to 50 basis points last year from 10 percentage points in 1999, drawing investment that put the island’s economy on course to overtake more-populous Hong Kong’s this year, International Monetary Fund estimates show. Surging home prices and rising income inequality in Hong Kong have helped drive Tsang’s approval rating to a record low.

“I’m still trying to find the opportunity” to meet the tax cut promise, Tsang said in a Bloomberg Television interview in Melbourne aired today. “At the moment, the Hong Kong people feel we should not reduce corporate profits tax and while it was feasible and acceptable in 2007, it is not acceptable now.”

Casinos, Exports

Singapore’s gross domestic product surged 22.5 percent in the three months through March from the previous quarter, compared with Hong Kong’s 2.8 percent expansion. As well as slashing taxes on company profits, Singapore has lifted a ban on casinos and boosted the financial and legal services industries to reduce reliance on exports.

Hong Kong is still the world’s biggest market for initial public offerings. Russian and Mongolian resource companies as well as European luxury brands have joined the city’s $2.4 trillion stock market. The total value of Singapore-traded shares is $562 billion, data compiled by Bloomberg show.

Hong Kong cut taxes for companies by half a percentage point to 16.5 percent in 2008 to fend off the threat from Singapore. Tsang had pledged to bring the rate to 15 percent.

Cutting taxes now would be seen by the public as “a strong indication that Donald serves the interests of big business,” said Joseph Cheng, a political-science professor at the City University of Hong Kong.

Hong Kong’s biggest income gap since it was returned to China is stoking protests against the government. Home prices that surged more than 70 percent since the start of 2009 are making property increasingly unaffordable, the Hong Kong Monetary Authority said last week.

Tsang’s approval rating has slumped to 23 percent, the lowest level since he began leading the city in 2005, according to a survey of 1,000 residents by the University of Hong Kong released June 14. The poll was carried out between June 1 and 8 and had a margin of error of plus or minus 4 percentage points.

The “gap between rich and poor unfortunately is a byproduct of capitalism, particularly in a very successful global financial center like Hong Kong,” Tsang said.

--With assistance from Michelle Yun in Hong Kong, Shraysi Tandon in Melbourne and Shamim Adam in Singapore, Fion Li in Hong Kong. Editors: Ben Richardson, Peter Hirschberg

To contact the reporter on this story: Daniel Petrie in Sydney at dpetrie5@bloomberg.net Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net


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