This study is to examine the existing tax base of Hong Kong to see whether it is narrow or not and evaluates any suitable ways for broaden the tax base.


Hong Kong's tax system has been established for about 60 years, the taxation legislation today is broadly similar in form and content to the 1940 ordinance. According to Halkyard and Phua (2007), Hong Kong lives in a Jurassic Park tax world. With regarding to the Article 108 of the Basic Law, Hong Kong should continue to practice a low tax policy and allow Hong Kong to enforce an independent taxation system and enact its own laws on tax types, rates, reductions, allowances, exemptions and other taxation matters. To have an overview on tax system of Hong Kong, the tax system is far from the international trend and relatively simpler when compare with other countries. In Hong Kong, tax income is base on the territorial principle; income generated from outside Hong Kong is not subject to any tax in Hong Kong. The tax system mainly relies on three types of taxes; they are Salaries Tax, Profits Tax and Property Tax. Direct taxes are the main sources of income of the government. Both of them are easily been fluctuating by the change of the economic condition. In recent years, ageing population problem become more serious, the salaries tax income become shrinking, hence the income from the direct tax become unstable. In addition, the type of tax levy is limited; there are no capital gains tax, no sales tax, no tax on interest and no tax on dividend. There are no new stable sources of income for government to tackle the heavily fiscal burden. It makes a signal to the government that is Hong Kong tax base narrow? In order to maintain the fiscal financial position and tackle the heavily welfare expenditure in future, as well as the competitiveness of Hong Kong, Hong Kong needs to have a tax reform to broaden the tax base. In 2006, Hong Kong government released a consultation document on the tax reform in Hong Kong that is “Broadening the Tax Base, Ensuring Our Future Prosperity”. They explain that narrow tax base is the problem of Hong Kong and suggest many reforms for broaden the tax base, such as Goods and Services Tax (GST), Green Tax etc, but there is no such a definite answer for solving the problem.

1.2Aim and Objectives

As a result, we would like to have a study on the Hong Kong's tax system, the aim for this study is to consider and examine the possible ways to broader the tax base in Hong Kong.

In order to achieve the aims, four procedures have been done. First, we need to undertake an analytical literature review in the area that is Hong Kong tax base is narrow? Second, if the tax base were narrow in Hong Kong, is that a need for Hong Kong to broaden the tax base? If so, we would consider any possible ways that can widen the tax base and examine the advantages and disadvantages of those methods. Third, to evaluate those methods, is it suitable for Hong Kong? At last, to give recommendation and conclusions on those finding to find out the most suitable way for widen the tax base.

1.3Chapter Outline

In Chapter 2, it is analytical part of the study; we would like to find out the literatures via the library's database. Access the tax base of Hong Kong by compare with other countries. If the tax base of Hong Kong is narrow and need to broaden the tax base to stable the sources of income, then we would like to discuss different tax reform options and find out their merit/impact. Such as reduction on Personal Allowance of Salaries Tax, introduction of Goods and Services Tax (GST), Green Tax, Capital Gains Tax (CGT), Tax on Luxury Goods and Land and Sea Departure Tax. By using this method, we can have a deep understanding on the rationale of the tax reforms.

In Chapter 3, it is about research method, this part is to tell the public that what approaches have been undertake in my study and would analysis their merits and disadvantages. In my study, both primary and secondary sources have been used. Questionnaire for the primary sources; survey by others and tax reform experience of Singapore is for secondary sources.

In Chapter 4, this is the result from the primary and secondary sources. We would like to conduct a questionnaire to obtain the primary information to find out the public's opinions of the tax base of Hong Kong; the result from the questionnaire would be more objective. Since the sample size is small, the result from the questionnaire may be not representative. Therefore, we would like to use the research from the professional to offset the shortcomings of the result on questionnaire. Furthermore, we would study the foreign countries experiences to help us to understand the actual impact of the new tax reform when they are in practices. We finally use Singapore as study target and it is very valuable for us. Since tax system is varying from difference countries, therefore maybe not all issue is suitable for Hong Kong.

In Chapter 5, we would have an overall conclusions and recommendation after the consideration of the literature reviews and findings, broaden the tax base is needed.

After the above procedures have been done, we would suggest a low rate and simple GST would be the best choice for Hong Kong. It is base on the consumption expenditure and would not fluctuate by economic situation. It can broaden the tax base and produce stable tax income for the government effectively. Also, it is consistent with the international trend and would enhance the competitiveness of Hong Kong to attract more talent investor and ensure the position of international financial center. But there are still many voices against GST, as it would widen the wealth gap.

Nowadays, tax base is the critical problem of Hong Kong tax system, the government should continue to study options for broaden the tax base, more deep consultation on the impact and the timetable for implementation.


The following literature reviews concern two issues. The first issue is the tax base of Hong Kong is narrow and a need to broaden the tax base? The second one is concern about any methods for Hong Kong to broaden the tax base.

2.1Is the tax base of Hong Kong too narrow and a need for broaden tax base?

What is narrow tax base? It can be regard as a deficiency in the tax system. There are three characteristics on narrow tax base.

First, the tax system relies on a few sources of taxation. The whole tax system of the economy is relying on a few sources/limited sources of income or only relies on a few taxpayers. Second, revenue level of the public, when there is an economic downturn, the government cannot generate sufficient income to tackle the huge financial burden and handle the future challenges. The last one is related to the nature of the tax system. Is the tax measures/ tax rate is stick on the international trend? If it is far away from the international trend or regional trend, the system will be less competitiveness.

If the tax system of the countries fulfill the above three points, the tax base of this tax system will be regarding as narrow tax base.

KPMG also support the above three points. “A tax base will be “narrow” if it is not sufficiently broad to protect the revenue from distortions and/or discriminatory effects of taxation on one form of economic activity as opposed to another; and/or if there is inadequate revenue for the purposes required.” Said by KPMG. It is truth, if a government does not have adequate revenue for its' own operation, it should be a problem on the tax revenues or consumption pattern of the government.

In 1990, Greig found that when compared with many industrialized nations, Hong Kong tax system is relatively simple and more favorable to the taxpayer. It would attract investors but it also cause the narrow tax base of Hong Kong. The main reason is Hong Kong tax system is based on the “territorial principle”, that means only profits that arise in or derived from Hong Kong are subject to tax in Hong Kong. Income from outside Hong Kong is not subject to any form of taxation. I.e. the variations of tax type levied are limited and limited the source of income of the government.

According to the survey done by Advisory Committee in 2001, they drew attention to the operating deficits of the government in 2000-01 budget and summarize that Hong Kong may encounter a serious fiscal problems if they do not solve the problem on the inconsistency of the tax revenues and narrow tax bases. They found that Hong Kong is the lowest taxation jurisdiction of the comparative group when examine on the total tax revenue as a percentage of GDP. The main reason is Hong Kong tax system is run as a simply manner. Furthermore, Hong Kong relies too much on land base revenue and direct tax revenue than The Organization for Economic Co-operation and Development (“the OECD”) or Asia Pacific averages. Refer to graph on Appendix 1, more than 70% of tax revenue comes from direct tax in Hong Kong but around 40% in OECD and 50% in Asia Pacific. It proves that Hong Kong tax base is actually rely too much on the direct taxes rather than consumption tax when compare to others. In addition, by compare to other developed countries, the tax rate in Hong Kong is relatively lower than other developed jurisdictions. According to the statistic of the Government, Hong Kong is the World's 3rd lowest tax misery. Refer to Appendix 2, the tax rate of Hong Kong is the third lowest around the world, it is 37 points below Singapore and 117.5 points below Mainland China. It is quite different from international trend. To sum up, Hong Kong's tax base is narrow because of lower tax rate and limited range of taxes income.

Another author, Simmons (2005) also support Hong Kong tax base is narrow, it bring up two respects. The first is same as the view of Advisory Committee; he agrees that tax base is narrow with respect to limited range of taxes that are levied. Another issue is that the salaries tax net is very narrow and shrinking. HKSA (2000) shows that less than 40% of working population of 3.5 million people paid salaries tax and about 6.7% of working population contributes almost 80% of salaries tax revenue. The revenue relies on a few of taxpayers and will consist a big problem towards the financial burden. Census and Statistical Department (2009) find that nowadays in Hong Kong,ageing problem becomes more serious and causes welfare expenses increase, thus increase the financial burden. Refer to Appendix 3, it shows the population in Hong Kong that above the age 70 is continuously increase in these few years (increased from 8.7% of total population in 2005 to 9.6% in 2008). As Advisory Committee said, HK tax system is reliance on direct tax (e.g salaries tax), if number of taxpayers reduce, it will cause fluctuation on tax revenue, as a result, there is a need to broaden the tax base of Hong Kong to ensure the Government have sufficient fiscal income and able to tackle any fiscal burden for long-run.

Halkyard (1998) and Cullen and Krever (2006) stated that Hong Kong tax base is extremely narrow as well; the reasons are the same as above authors. Cullen and Krever (2006) express that a narrow taxation base is that still relies on operationally separate tax schedules for difference types of income such as no general income tax. This point is quite suitable for Hong Kong as Hong Kong tax system actually rely on three main taxes: Salaries Tax, Profits Tax and Property Tax. For the profits tax, according to HKSA (2000), 80% of the profits tax was paid by 5% of taxable business. That means that whole society relies on a few taxpayers. Cullen and Krever (2006) also identified that Hong Kong tax base has a serious systemic fiscal flaw that needs to be fixed. Besides, they found that Hong Kong tax system is very outdated as reliance by government on the use of land as a revenue-raising oil-like commodity to an extent not seen elsewhere in the modern development world anymore. In 1997, as financial crisis broke out in August and because of the Government's policy on housing, land sales and land utilization, land related revenue declined dramatically in recent years. It causes the revenue of Government becomes unstable. As there is an actual example, Hong Kong cannot rely too much on land-base revenue anymore. The important issue is Hong Kong needs a tax reform to improve the narrow tax base in order to solve the fiscal flaw. Especially by means of indirect tax as it is not volatile than direct taxes.

According to Daniel (2001), he had done an analysis on Hong Kong Tax Base; he indicated that Hong Kong tax system is retaining a low, simple and predictable tax regime. In general, there are sufficient incomes to fulfill the requirement, but when there is something happened like SARS in 2003, it may cause financial burden for the government to raise fund to solve the problem. Therefore, Daniel suggested that Government should review on the tax system and explore new revenues of imposing direct and indirect taxes to ensure more steady sources and a wider base of revenue for the government.

To sum up all the authors' opinions, Hong Kong tax base is far too narrow when compared to those Asian countries and the countries in The OECD. As government expenditure cannot be cut overnight, the Government needs a stable source of revenue to maintain a healthy financial position. Broadening the tax base should be the Government's strategy to stabilize long-term revenue sources and to achieve fiscal balance. As such, government revenue would not fall materially in times of economic depression.

2.2How to choose a suitable reform for Hong Kong?

There is a set of principles that is generally accepted around the world to assess whether the tax system is good or not. OECD also indicated principles for assessing the tax system as well. According to the document “Broadening the Tax Base Enduring Our Future Prosperity” launch by the government in 2006, a good tax system should include the following three points.

The first point is fairness, a good tax system should comply with the “capacity to pay” principle. Although difference people are pay the same rate of tax. The design and the support measures of the tax system should ensure that peoples with greater financial capacity would bear heavier tax liability without widening the wealth gap.

Second, provision of stable and significant revenue; a good tax system should be able to provide stable and significant revenue for the Government to handle the future challenges and fulfill the needs of the community and create social harmony. A good tax system should work even if there are any economic downturns or any financial crisis.

The last one is maintaining international competitiveness; a good tax system should be clear and simple and be able to maintain Hong Kong attractiveness to international capital and talent

2.3Any methods for Hong Kong broaden the tax base?

Although Government has a sur about HK$25.4 billion in 2007/08, the government still needs to stabilize revenue, improve public finances, and to provide a buffer for any future economic downturns for long-term. In addition, there are still many voices that Hong Kong tax base is narrow, therefore broaden the tax base is needed. Some authors suggest the following methods for Hong Kong to achieve the goal; both of them have their advantages and disadvantages.

2.3.1Deduction of Personal Allowances in Salaries Tax

This is a method to increase revenue productivity of existing taxes by reducing the personal allowances in salaries tax calculation. This is a simple and direct method to broaden the tax base as it no need to introduce any new taxes and will not make the tax system more complex.

As Cullen and Krever (2006) mentioned, Hong Kong tax system relies on the personal tax and corporation tax. It's about one-third of the total tax revenue. Reduction of personal allowances of salaries tax would widen the number of taxpayer. Because of some salaries-earners currently paying no salaries tax after the personal allowance, if the personal allowance decrease, some of them would fall into the tax net and become a new taxpayer. The greater number of taxpayers, the greater tax revenue of the government.

According to the study of Advisory Committee (2001), they find that personal allowances of Hong Kong are higher than international standard and it is increased faster than inflation. Therefore, it has a room for government to reduce the personal allowances. They concluded a result on reductions in allowances, if there are a reduction in allowances of 10%, 25% and 50% would respectively yield additional revenue of $2 billion, $6 billion and $14 billion. A total abolition of allowances would yield additional revenue of $40 billion but it does not put into practices.

Although this method can produce extra tax revenue for the government, living standard of low-income family should be concerned. If they fall into the tax net due to the reduction of personal allowance, it would increase their financial burden of those families and the government may need to provide financial assistance to those dependent families. Once there is any economic downturn, the income level of resident reduce and number of taxpayer increase due to the reduction, although there are extra income, the income is still limited as those new potential taxpayer have minimal tax liabilities only.

As HKSA (2000) mentioned, nowadays in Hong Kong, salaries tax revenue is shrinking due to ageing problem. The additional revenue generated from them would be very limited and could not help stabilize the revenue. Although this is a simple method to achieve the goal, it would not be the best method for Hong Kong.

2.3.2Goods and Services Tax (GST)

Goods and Services Tax (GST) is a type of indirect tax, it is a value added tax (VAT) that imposed on the goods and services and is wide base, and the tax is levied according to consumption and ability to pay tax. If you buy more things, the greater tax you pay. It is capable of yielding sustainable revenue on an ongoing basis.

Hong Kong is the one jurisdiction that does not have any tax on goods and services. It's only having betting duty and duties on petrol, tobacco, diesel etc. Drum and Edwards (2007) said that GST is an alternative option for broadening the tax base and thereby securing revenue into the future. If implement GST, this will be a new sources of tax income. It seems so suitable for Hong Kong. He also indicated that GST is an efficient and relatively easily implemented way of meeting the objective of the government in relation to broadening the tax base, it can provide the government sufficient revenue to offset implementation costs, including some form of reimbursement for low income earners. Although GST is an effective way to achieve the goal, they argue that GST is not as good as we think. He point out a main problem on GST, it will lead to an acceleration of inflation and consequential economic downturn! In the experience of other countries, most of them have the same result. For example, the price increase stabilized fairly quickly when Australia implements GST. Even though it has drawback, Paul stated a good point that “successfully introduced a GST, will be convincing a skeptical electorate that the long-term gains from GST out weigh any short-term pain.” Therefore, for long-term goal, GST is still a good alternative method for Hong Kong.

A well-known person named Guy Ellis (partner at PricewaterhouseCoopers) had some opinions in feature of Hong Kong Securities (2006) as well; he agreed that GST would provide a more stable source of revenue for Hong Kong especially during periods of economic downturn. Since GST is a wide base tax, it involves people in difference income classes. Ellis also points out two issues that should be pay much attention. First, GST may affect the living standard of the middle or low-income class and increase the wealth gap. Because of poor and the rich people pay the same amount of tax on the same consumption. But Caspersen and Metcalf (1994) argued that the tax burden associated to the low-income class was only very mildly regressive, not a big problem at all. Not only Caspersen and Metcalf (1994), but also Nightingale (1999) support this is not a problem as everyone get benefit from public expenditure so that we should contribute to the society even though the amount is small. The other issue is GST would hit the retail and tourism industries the hardest and fears of inflationary pressures resulting from a consumption levy are also paramount. With reference to the case of Australia, GST led a one-off change in the price of many items in the economy and affects the low-income class. Hence, to put GST more workable in Hong Kong, the government should consider exemptions or concessions and try hard to keep the burden low for the more dis-advabtaged by taking more studies on the impact bring by the GST.

For the disadvantage of affect the tourism and retail, Ma (2006) also agrees with this point. Hong Kong has a reputation of a “shopping paradise”, many peoples like travel to Hong Kong and purchases their favorite goods, if tax is imposed on the goods and services, undoubtedly, it would affect the consumption pattern of the traveler as well as the local resident. Although the tax revenue would increase, the GDP of Hong Kong maybe affected. “In long run the effect will be positive” said by Ma (2006), hence, in general, he supports to maintain a low GST rate for broaden tax base. It can help maintain Hong Kong's competitiveness, and make a room to attract capital and talent, as well as to improve our business environment.

In addition, Daniel (2001) also suggests GST to solve the problem. It can improve the tax base considerably and reduce the volatility of fiscal income, as it is an indirect tax. Even just 1 percent sales tax would generate revenue of HK$7 billion. Furthermore, he has the same view with the above two authors as it would have adverse impact on the retail as well as tourism businesses, also would impose burden on lower income earners. Daniel had state a new point that since Hong Kong is maintain a simple tax structure and preserve its image of low tax regime, once introduce GST in Hong Kong, it is hardly to maintain these two principles and destroy the competitiveness of Hong Kong.

To have a little conclusion, GST can be a method to solve the problem if, and only if the GST is implementing at a low rate in Hong Kong.

2.3.3Green Tax

Green tax is a tax charge on substances that are harmful to the environment, such as plastic bags, tyres and batteries as well as electricity or other forms of energy. Many supporters said this method have two dividends. “First is refers to an improvement in environmental quality, second is associated with a reduction for a revenue-neutrals burden of the tax system by using additional tax revenues for a revenue-neutral cut of existing distortionary taxes.” Said by Bohringer et al. (2003). If introduced, it would be levied on the “user pays” principle.

In order to widen the tax revenue and improve the environment, Daniel (2001) suggests Hong Kong can introduce green tax. He argues that green tax can encourage economic players to use resources more efficiently and maximize welfare. Also, it indicate that the rationale of the tax is “making the polluter pay” principle, it quite fulfill the principle of good tax system - fairness. It can bring two advantages for Hong Kong, improve the environment and bring additional tax revenue. Walker and Yip (1999) place an example of foreign experience, in Sweden, the government cut taxes on personal income but raised taxes on carbon. The revenue successfully shifted, was SK$14.4 billion, namely HK$14.4 billion. This example proves that green tax can bring additional tax revenue for government. Although this would bring revenue for Government, it would bring additional cost for industrial area as well, and would damage the competitiveness of Hong Kong.

But Southwood (2007) does not support this point. He thinks that the traditional green tax is not a suitable means for broadening the tax base as this tax usually involves factors and objectives other than purely fiscal requirements. It's link up the behavior of the taxpayers. If the payer is efficiently using the resources, then they no need pay high tax on it. It would hide a risk that the revenue from green tax is not stable as we think. We cannot have a precise estimate on the tax revenue of each year. However Southwood support that green tax can improve the environment of Hong Kong and able us to attract more overseas talent or institutions to work or invest in Hong Kong, thereby to enhance the competitiveness of Hong Kong rather than broaden the tax base for Hong Kong.

In 2000, there is a journal in “The OECD Observer” shows that green tax can generate favorable revenue, in OECD countries, the revenue from green tax currently average about 2.5% of GDP and around 7% of total tax revenue, the number is quite impressive. “In 2002, revenue from environmental taxes in European Union of 15 Member States accounted for 6.5% of total revenues from taxes and social contribution and 2.7% of GDP.” Said by Dr Maria (2005), although it can generate favorable revenue, the author said it should not be the means for broaden tax base, the main purpose of this tax is just a tool for preserve, protect and improve the quality of the environment and to protect peoples' health.

Nowadays, Hong Kong already have plastic bag tax, undoubtedly, it can bring revenue for Hong Kong. But green tax is not the best option for Hong Kong to broaden the tax base. Since green tax would change the behavior of taxpayer in reduce use of energy and environmentally unfriendly substances, the more successful a green tax is, the less revenue for the Government. For long-term goal, it is not suitable for Hong Kong.

2.3.4Capital Gains Tax (CGT)

Some authors would propose to introduce capital gains tax as a means for broaden the tax base. Refer to graph on Appendix 4, countries around Hong Kong, most of them have CGT but Hong Kong doesn't. Imply that there is a room for Hong Kong to introduce capital gains tax.

CGT is fair tax that it only applies to capital gains and would not widen the wealth gap, quite suitable for Hong Kong, as there is uneven distribution of income of people in Hong Kong. Daniel (2001) agrees this suggestion. He said that CGT is based on the equity principle. It can help to reduce inequality in distribution of wealth and reduce investment distortion. Although it does not widen the wealth gap, there are other potential problems that need to pay attention. Daniel has pointed out three problems, the first problem is that since this is a tax levied on gain on capital asset (e.g. property, shares), there are no such a basis for indexation and valuation; consequently, we can't have a precise estimate on the gain and the taxable amount maybe wrong. The second problem is this tax is link up with the economic cycle. When there are economic downturns, the value of the capital asset will decrease; the revenue of the government would not be stable and be volatile. The last is the investor would try to invest offshore to avoid tax on their investment gain in Hong Kong. “CGT is likely to have a disproportionately negative effect toward to Hong Kong's image overseas, as well as acting as an disincentive to investment and entrepreneurship” said by Daniel. It would induce capital outflow and would have a detrimental effect on Hong Kong as a destination for regional share listings and as a regional financial center.

Except for the above disadvantages, many authors point out the main problem of CGT is it would bring “Lock-in effect”. Since taxes are deferred until the capital asset is sold rather than the sale processing. Refer to the graph in appendix 5, Leonard and George (2002) prove that when the tax rate is high, the investors would tend to hold the assets for long period and would not realize them to avoid high CGT. When the tax rate is fall, the investors are more likely to sell their assets. Such way is call Lock-in effect. When the investors lock in their assets in such way, the government would loss revenue and affects the efficiency of stock market and property market. Kanemoto (1997); Chari et al (2004) and Sahm (2008) also support this point. Kanemoto (1997) believed that lock-in effect is the most important drawback of CGT. He thinks that this effect would delay the sale of potential assets and obstructs the development of those assets. Furthermore, Johnson (2009) said lock in capital preventing the capital from shifting from old to better investment; the investor only would sell the old investment when the return can cover the CGT.

Small conclusion, investors would try to avoid high tax by holding the assets in long term or try to invest overseas, which make the revenue of the government unstable. Therefore, for long term, it is not a good choose for Hong Kong to broaden the tax base.

2.3.5Tax on Luxury Goods

This is the tax levied on the luxury goods rather than necessities. It would not increase the burden of low-income class and in-line with the “capacity to pay” principle. According to Yuan (2005), China's luxury goods market already the world's third largest; there is a room for Hong Kong to tax on luxury goods. Elda (1991) said that luxury tax might attempt to reduce the burgeoning deficit for the government. He proposed that levies 10% surcharge on the high priced item that would bring the government about $9 billion for the next five year. Indeed, it would be a new source of income for Hong Kong but there is a problem that there is no internationally or socially recognized definition of luxury goods. If there were wrongly identify the necessaries as luxury goods, it would affect lots of people and may have a risk of widen the wealth gap. Since it only tax on luxury goods, the range is limited, if want to bring significant revenue for the government, the rate must set at a high level. This would have an adverse impact on the retail, tourism industries and reputation of “Shopping Paradise”. As a result, to ensure stable revenue, tax on luxury goods is not a good choice.

2.3.6Land and Sea Departure Tax

It is a tax levied when peoples leave or come to Hong Kong. The charge is based on “user pays” principle. Since Hong Kong is a tourist spots, Daniel (2001) thinks that departures tax would provide a reliable and growing source of additional revenue for Hong Kong. At present, only peoples leaving Hong Kong by air and by sea through marine ferry terminals to Mainland China and Macau need to pay tax. How about travelers by land to Mainland China? This tax would eliminate the unfair treatment under which only some passengers leaving Hong Kong are subject to departure tax. Daniel has an estimate on it, along the figure of 1999, if about 39 million lands crossing to Mainland China, HK$10 per cross-border passengers, and the government would have approximately HK$0.39 billion revenue. The figure is considerable. It would provide a stable source of income but it would have negative effect on the tourism industry.


There are three main objectives of this study. First, we would like to provide analytical literature review on the Hong Kong tax system and it's tax base, in addition to examine if it were the case of narrow tax base in Hong Kong and consider whether Hong Kong need to broaden the tax base or not. Second, if broaden the tax base for Hong Kong is needed, we would try to discuss the possible methods that can help Hong Kong to broaden the tax base and examine the advantages and disadvantages of those methods. Finally, we would make recommendations and conclusions on those findings and try to find out the most suitable way for Hong Kong to broaden the tax base in long term.


Methodology provides us a basic knowledge on how the research was approached and how the result is making by the author to achieve the aim and objectives of the study. Primary sources of information are the first hand information that gathers by the author for particular use. Secondary sources of information are the information that gathers by others researchers for other/same purpose. In my study, both primary and secondary sources of information have been used to ensure a feasible use of resources.

In order to find out some theory to support my study, I have undertaken an analytical literature review to catch up the basic knowledge of the tax base of Hong Kong. We can search the literatures via the database of the library and we mainly focus on both academic and business journals. Mostly, journals from 1980 to 2009 in “National Tax Journal” and “Asia-Pacific Journal of Taxation” would be most useful.

Later on, I would like to use questionnaire for the primary sources; Research from others and the tax reform experience of Singapore for the secondary sources. Both of them can help me to find out whether Hong Kong tax base is narrow and needed for broaden the tax base and find out the suitable method for Hong Kong to achieve the goal as well.

3.2Primary Sources

We have considered different possible methods to conduct this part of the study. Interviews, questionnaires, systematic review, polling were all considered. Finally, questionnaire has been used. Questionnaire is the method to gather some opinions from the public by setting some questions that are related to the topic. In the original proposal, we proposed to conduct a large-scale survey by filing the questionnaires to collect opinions of broaden the tax base in Hong Kong by asking corporations and differences professions in Hong Kong. As time is limited, large-scale questionnaires were not made. Instead, we have conducted a small-scaled questionnaire with undergraduate who working in financial or accounting industry to understand more about the possible influence of broaden tax base in Hong Kong. In the questionnaire, there are total 11 questions. Both of them are closed-end question, as it would enhance the response rate of the questionnaire. The first three questions are basic information of the respondent. Question 4 to Question 7 is related to the tax system of Hong Kong. The rest of them are related to the choice of tax reform.

As the time limited, all of the questionnaires were sent out via email to the target person. They are encouraged to share the questionnaire to their peer, colleague and their friends as well. Nowadays in Hong Kong, peoples use lots of time on the Internet, it is convenience for the person to fill in the questionnaire and return it by email at anytime and everywhere. It is the fastest and simple way for us to gather the opinions. The information gather from them would be kept confidential. In addition, it would reduce the feeling of embarrassing when compare to the one to one interview, they can respond the questionnaire without any pressure.

This time, total 200 questionnaires have sent to the target person by email and almost 100 of them replied. Almost half of them reply the questionnaire, although the sample size is small, it still can represent the opinions of the person in related field.

3.3Secondary Sources

To make the study more comprehensive, secondary sources also been consider. Apart from my own questionnaire, the research done by other professional also been used in my study. The target of them is professional person; the result from them would be more accurate, reality and more objective. It can offset the drawback of the homemade questionnaire.

Besides, in order to evaluate different tax reforms based on the feasibility of the rules, cultural, historical and political characteristics. We would like to consider the experience from other countries as the reference. Some articles from the databases were mainly on the experiences and consequences of broaden the tax base in other countries. It would helpful for my study to examine the tax reform under the actual implementation, so that we can find that whether the methods are possible for Hong Kong or not. In my study, we would consider the tax reform experience of Singapore, as the economic systems are more similar to Hong Kong and easy for us to have a comprehensive study and comparison.


Throughout the study, we find that there are some limitations and it would affect the accuracy of the result.

First, regarding the part of the questionnaire, due to the time is limited; most of the samples are selected from the undergraduate in the accounting field rather than selected from the professional level. Although they are all in accounting field, they may not actually understand what tax base is and what tax reform is. Therefore, the result from them would not be professional. Besides, the sample size is petty small. The response rate is low, it is only half of them reply the questionnaires. The result from them would be unrepresentative and cannot representation the opinion of the whole society.

Second, the answer by the respondent is base on their knowledge and honesty, if the question is misunderstands by the target person, the target would present a wrong answer on the questionnaire, finally the result from the question would not accurate.

Last, but not least, the selection of the foreign experience is quite difficult. Every countries has different tax reform, it is quite difficult for us to choose a suitable case. Lucky, we can find the relevance article from the database and finally we can find an article that is about the comparison between Hong Kong and Singapore, that's why we choose Singapore as our reference.


The topic on broadening the tax base for Hong Kong has been discussed for a few years. On July 2006, the government has released a consultation document on the tax reform in Hong Kong entitled “Broadening the Tax Base, Ensuring our Future Prosperity” However, there are no such a definite answer on how to broaden the tax base for Hong Kong.

4.1Primary Sources: Questionnaires

In order to know the public's opinion, a small-scale of questionnaire has been carried out. Total 200 questionnaires sent out and almost 100 questionnaires replies though email. The sample of questionnaire is attached in Appendix 6. The findings of questionnaire are as follows: -

Question 1

Question 2

Question 3

Question no.1 to 3 is background information of the interviewee. For question 1, there are above 70% of respondent is undergraduate and only 16% of them are at secondary level and about 13% of them are at the professional level. Regarding to question 2, almost half of the interviewee work as a clerk in the accounting or auditing field, and the rest of them are work as a professional such as accountant or actually a full time student or unemployment. For question 3, 62% of the interviewee is a taxpayer in Hong Kong but 38% of them are not.

This background information provides us a better analysis on the views of different type of people on the tax system in Hong Kong and their views on possible choices for Hong Kong to broaden the tax base.

Question 4

In Question 4, almost 50% of interviewees agree that Hong Kong tax is relying too much on land-based revenue or other direct tax (such as salaries tax). 37% of them have no comment on the tax system and 19% of them are disagreeing against Hong Kong tax is reliance on direct tax. The reason for agree the statement is that Hong Kong is mainly rely on three type of taxes, Salaries Tax, Property Tax and Profits Tax. It is far away from the international trend, as other countries no longer rely on the revenue from direct taxes.

Question 5

In Question 5, about 68% of the respondents agree or strongly agree that Hong Kong tax base is relatively narrow when compare with other similar countries by international standards. For those agree that the tax base is narrow, they point out that the tax type of levy in Hong Kong is relatively less than other countries, in most other developed countries, they would have sales tax, capital gains tax or tax on interest/dividend, but Hong Kong didn't. Another sign that they think Hong Kong tax base is narrow is that the tax rate of Hong Kong is very low! The tax rate of Hong Kong is almost the lowest around the world. Since the type levy is limited, the tax revenue of Hong Kong is limited too, that's why they think that Hong Kong's tax base is narrow.

Question 6

In Question 6, only 53% of interviewee agree or strongly agree that there is a need to broaden Hong Kong's tax base. They think that Hong Kong's tax base is narrow now, the income is not stable for government to handle the huge financial burden, and therefore, they think there is a need to broaden the tax base of Hong Kong in order to get a stable source of income for the government and help to ensure future prosperity for Hong Kong. But there are about 28% of interviewee do not agree with this question and think that broaden the tax base would bring a tax burden on them and may widen the wealth gap for the low-income classes.

Question 7

In Question 7, almost 70% of interviewee agrees that Hong Kong is facing the ageing problem and only 6% of them are does not agree. Since Hong Kong tax system is rely on direct tax such as salaries tax for their sources of income, the interviewee worried that nowadays Hong Kong is facing an ageing problem, the peoples become more older and the taxpayers of salaries tax is decreasing, they think that this way of shrinking will have an adverse effect on the government's income and affect the stability of such income. That's why they would suggest Hong Kong should broaden the tax base in order to have a stabilize sources of income and tackle the huge welfare expenditure and handle the routine expenditure.

Question 8

About 50% of interviewee is considering GST as an alternative reform for broaden tax base for Hong Kong. For those supporters of GST, they think that GST is a good choice for Hong Kong as it is wide base tax that would widen the tax base for Hong Kong. In addition, GST is a consumption tax base on the amount of your consumption, it fulfill the “user pay” principle, as you would pay more tax if you consume more. In opposite, only a few of them (about 27%) are strongly or moderately disagree to implement GST in Hong Kong. The reason for against GST is that they think that it is not a suitable timing for introduce GST as there are a financial sur in 2007/08. Besides, they consider that GST would impose a financial burden on low-income class and widen the wealth gap because everyone is charge on the same rate. Furthermore, they argue that Hong Kong has a reputation as a “shopping paradise”; introduction of GST would dampen public consumption and attack the development of tourism. Finally, interviewee thinks that Hong Kong tax system is maintaining a simple and low tax rate system. They worried that GST would make the system become more complex. Since Hong Kong is a world financial center, the key successful factor for Hong Kong is simple, low tax rate system, if GST is introduce, it would affect competitiveness of Hong Kong.

Question 9

If there are additional relief measures on GST, 55% of interviewee would support to introduce GST, almost 5% increase when compare to the answer of question 8 (50% support GST). They think that if government would provide cash allowances or providing other exemption to them, such as medical services, transport services or lower the salaries tax rate, the tax burden of them can be reduce and would not have too much adverse effect toward to the low-income families. It would be a win-win situation for both low-income class and the government. Residents can reduce tax burden and government can have a stable sources of income. For opposite side, there are 17% that do not support GST, as they don't think the relief measures would have a great help for them. If the relief measure cannot precisely target to the low-income class, the relief measures is useless.

Question 10

For those supporter support GST, most of them (72%) think that it would affect the living standard of low-income class. But they do not think that it would be an obstruct for introduce GST as government is concern to introduce GST at low-rate and would provide some relief measures on it to reduce the influence of GST.

Question 11

Apart from GST, the interviewee would support to use Green Tax to broaden the tax base, it about 38% support that. The reason for choose green tax is they think it is a new sources of income for the government just like plastic bag tax implement in Hong Kong in 2009. In addition, they believe that green tax can help to improve the environment of Hong Kong as well; hence it can enhance the competitiveness of Hong Kong and attract more talent investors to Hong Kong.

Except green tax, the second best choice is tax on luxury goods (27%); they believe that this tax would have the least effect on the low-income class; only the people who have ability to buy the luxury goods need to pay tax. This tax fulfills the “user pay” principle as well. But one thing they concern is that the definition of luxury goods, as there is no such a standard/definition on what are luxury goods.

The third choice hold 21% of supporters, it is capital gains tax, they believe that it would be a good choice as capital market at that moment is heavy trading, so many capital inflow in Hong Kong, it would be a good sources of income for government. But one issue need to concern is that it may affect investor's behaviors and may affect overseas investors to make investment in Hong Kong and finally would cause a capital outflow in future.

The rest of them are support land and sea departure tax (9%) as to be fair to all travelers both comes from/to Hong Kong. The remaining 5% have suggested other choice such as tax on interest/dividend or high tax on cigarette.

4.2Secondary Sources: Similar Research from Others

Except the result from my questionnaires, there are similar results were found from the other's research. In the survey done by ACCA Hong Kong in July 2006, they found out some opinions of the member, and some findings are similar to our survey. The results are summarizing as follows: -

Hong Kong is relying too much on the land-based revenue rather than the indirect tax. The tax system of Hong Kong is only relying on three type of tax; they are salaries tax, profits tax and property tax. They argue that Hong Kong cannot be relying on direct tax anymore as those taxes become unreliable and fluctuates wildly.

Hong Kong tax base is relatively narrow by comparing with other similar countries such as Singapore, Japan and Korea. The most typical reason is that Hong Kong has no capital gain tax, no tax on dividend, no tax on interest and no tax on goods and services.

Hong Kong tax revenue has shrinking now as the ageing problem in Hong Kong is become more serious, the dependent ratio is increase, it cause the tax revenue becomes unstable to tackle the welfare expenditure.

It is suggest that Hong Kong should broaden the tax base in order to have a great future for Hong Kong. Many new tax reforms have been suggested to the members and found out that GST has a high ranking as an appropriate option to broaden Hong Kong's tax base if it is provided an appropriate relief measures on the GST system. The other choices would be luxury tax, green tax, departure tax and capital gain tax.

To stick with my topic, they suggest GST is the suitable way for broadens the tax base of Hong Kong. The reason given that widely base of GST can generate impressive revenue for the government and can help Hong Kong to shift the tax burden from direct tax to indirect tax. In addition, GST is fulfilling the principle of “user pay”; it is fair to all peoples as you pay more when you consume more. But they also argue that GST has some drawback, the first is that it would destroy the simple tax system of Hong Kong. Second, the administration cost for implementation is quite high as this is a new tax for Hong Kong and Hong Kong has no such a sales tax system before. The other reason is that this tax is a regressive purpose; it would affect the wealth gap of low-income class, economic environment, and tourism as well as the trading environment of Hong Kong.

Although GST has so many drawbacks, they still support GST is the most suitable way for broaden the tax base. They advise that before the implementation, the government should have a deep consultation on the merit and impact of GST, so that it can implement successfully.

4.3Findings from Secondary Sources: Foreign Countries Experiences

Tax base narrow and ageing problem is not the unique problem for Hong Kong. They all happened in other countries such as Singapore, New Zealand, Japan, and Korea etc. Tax reforms over the past 20 years, most of the countries would use GST to broaden the tax base for themselves. Such as New Zealand (1986), Canada (1991), Singapore (1994) and Australia (2000). The follow chapter would focus on GST and share the experience of Singapore.

Singapore is similar size with Hong Kong. It also faces the ageing problem and instability of revenue. According to the statistics taken from the Prime Minister's speech, the old age dependency ratio is expected to be deteriorating from 1.14 to 1.5 in 2010. The combined effect of falling birth rates and rising old age dependency cause huge welfare expenditure. Since Singapore is also relying the income from salaries tax, this effect is the signal for them that it is a necessarily to reduce the direct tax to maintain the competitive location for foreign investors.

To broaden the tax base, Singapore follow the experience of New Zealand, chooses GST to solve the problem and finally they are the only two countries that are relatively successes when compared with Canada and Australia. Singapore first introduces GST on 1 April 1994. They start from the tax rate at 3% and it is a single positive rate with a comprehensive base. Certain financial services and the sale and lease of residential properties are exempt, only the export is at zero rates. There are two unique features of Singapore's GST are high registration threshold of S$1 million and low standard rate of 3%. The purpose of that is to broaden the tax base and to stable the revenue of the government, further is to reducing the fiscal reliance on direct taxation.

Cnossen (1982) thinks that GST with widest base and a single rate would ensure economic neutrality, simplicity with respect to administration and compliance, and stability of the tax yield. Singapore government believe it and think that it would reduce the reliance on the income taxation; also it would preserve the incentive to work, promote savings, encourage enterprise, and maintain international competitiveness in attracting foreign talent and investment. Undoubtedly, Singapore has successfully widened the tax base and shifted the tax burden from the direct taxes to the indirect taxes. According to the Singapore Department of Statistics, prior the GST reform, direct taxes accounted for about 60% of the total tax revenue. After the reform, the percentage changed from 60% to 50%, that's mean the proportion of indirect tax is increased. It is a good start of the tax reform.

After the tax reform, Singapore is achieving the goal successfully, but during the period of tax reform, Singapore has facing some obstructs and Hong Kong should learn from this lesson in order to have a successful reform.

The first point is that the major obstacle of GST is the instinctive public reaction and the consequential political response arising from concerns that a broad-based consumption tax is regressive and imposes an undue financial burden on the poor. As this is a new stuff for the country, the public may likely to be ignorant or to harbor misconceptions about the reform and its impact. They may worry that it would potentially impost an absolute incremental burden on poor families. To solve this problem, Singapore has provide the transitional relief measures to those who might otherwise be unfairly affected by an change in the tax reform and provide some measures for those poor families who cannot immediately afford to pay the tax in order to remove the burden of the consumption tax. The relief measures must be effective in targeting all, or substantially all of the intended low-income class, so that it can help the poor families to maintain the living standard as if there is no GST. For example in Singapore, the Government ensures low standard rate would not be increase over the first five years. Also, they increase the grants on the annual EDUSAVE grant, so that it can reduce the fiscal burden on the child's education.

A good relief measures should be avoided an unnecessary long-term fiscal commitment and allowed flexibility in the timing of their withdrawal when the low-income families started to enjoy higher real incomes to better cope with the GST (Poh 2003). According to Sanford (1993), relief measure is very important, as it is the key success factor of GST. Canada's GST is fail because of the absence of the relief package. A successful relief not only can reduce the tax burden of the public but also can educate the public on the objectives, merits, and distributional implications of the reform, so that it can reduce the noise from opponent.

Second, managing the political process of tax reform are crucial, political constituents having a great power on driving the public to fight against the tax reform. From the experience of Singapore, they use the power of the media; to extensive publicity to the package of compensative measures and reported widely on the government's various assurances, therefore they would think that they can enjoy the gains under the reform and that these gains cannot be divorced from the losses they will suffer because of consumption tax payment. As a result, to reduces the number of the opponent.

The last issue should be take attention to is the timetable for the tax reform. Lesson from Singapore's GST reform, the most suitable time for introduce a new tax reform is at a time when the country was enjoying sustained economic growth and large budgetary sures, so that the government have a room to introduce GST at a very low rate with lots of relief measures and also could afford to operate the overall reform in a revenue-negative manner. Also, Poh (2003) emphasized that the consultation from the public is needed but the process should not be of such a long duration, as it would give an opportunity to the opponents to organize themselves in a bid to entrench their claim. Young (1991) support this argument and said that the failure reason for Canada is because of the long consultation period (3.5 years) and delay the implementation of GST and increase the number of opponent.

To have a small conclusion, learning from foreign countries experience, a wide base and low tax rate GST would be a best choice to widen the tax base and would provide more stable and predictable revenue for the government. Also, it can help to shift the tax burden of the government from direct taxes to indirect taxes. If Hong Kong likely to introduce GST in future, the government should pay more attention to the relief measure and the timetable for consultation, if the government can control these issues successfully, the number of opponent can be reduce and GST can be run smoothly.


To have a conclusion, in a few years, government started to have detailed study on the problem of the tax base. Hong Kong tax system still live in Jurassic Park tax world. To have an overall view on the tax system, Hong Kong tax base is relative narrow by compare with other countries. The tax system is highly rely on the three main taxes, Salaries Tax, Profits Tax and Property Tax, both of them are direct taxes and would easily fluctuate by the economic situation. It is not consistent with international trend. In addition, Hong Kong is base on territorial principle, income generate from outside Hong Kong is not subject to any form of tax. Furthermore, the type of tax levy is limited; there are no capital tax, no sale tax, no tax on interest and no tax on dividend in Hong Kong. It is the reasons to prove that the tax base of Hong Kong is narrow.

Furthermore, people who age above 65 is increase rapidly, the dependency ratio is become serious, hence it would have a high pressure on the expenditure of medical and welfare significantly, the ageing problem become the concern problem in Hong Kong. Since salaries tax is one of the important revenue sources for Hong Kong, if the ageing problem becomes more serious, the tax income from this source would become unstable and it is difficult for the government to generate sufficient revenue to support the public expenditure.

Therefore, broaden the tax base of Hong Kong is needed. It has so many advantages for Hong Kong. First, enhance the competitiveness of Hong Kong, attract more talent investors invest in Hong Kong to strengthen the position of international financial center. Second, to ensure to have sufficient income to tackle the heavy burden on the public expenditure. Third, to follow the international trend, shift the tax burden from direct taxes to indirect taxes to stabilize the tax revenue.

In order to broaden the tax base of Hong Kong, government started to have some consultations on 2006. Finally, they have found out many methods that would be help to achieve the goal. They are included reduction of personal allowance of salaries tax, introduction of Goods and Services Tax, Green Tax, Capital Gains Tax, Tax on Luxury Goods, Land & Sea Departure Tax. Both of them have their advantages and disadvantages. Since they are new stuff for Hong Kong, therefore, they would impose significant cost to the public and add complexity. Nevertheless, both of them would broaden the tax base, and would be a new source of income for the government. But most of them are for short-term purpose only; they cannot provide stable revenue for the government in long-term. Except introduction of GST, it is a long-term plan.

After the consideration on the questionnaire and the foreign experience of Singapore, most of them would believe that GST would be the best choice for Hong Kong to solve the problem. GST would be more consistent with the international trend, since GST is consumption tax rather then income tax, it would fulfill the criteria of a good tax system (fairness, maintain competitiveness and provide stable sources of income). It can help to shift the tax burden and make rooms for government to lower the salaries tax rate and profits tax rate to attract more investors. In addition, it would help to generate a stable and predictable source of income for the government to tackle the existing and future challenges.

However, most peoples would challenge GST is not the best choice as GST is a wide base tax impose on consumption. Since GST is base on the user-pay principle, everyone is charged on the same rate no matter which income level is; it would impose an unnecessary fiscal burden on the low-income class and would affect the living standard of those families. But everyone has the responsibility to pay tax as both of us have chance to enjoy the public services in Hong Kong. So that, to summarize the opinion of the literature and experience of Singapore, it is not a big issue.

Further problem on GST is the timeframe of introduction and the relief measures, base on the experience of Singapore, both of them are very important. In order to have a successful GST system in Hong Kong, government need to have a deeper concern on the relief measures, as it is a key success factor for GST. It can maintain the living standard of the poor families as if the situation of pre-GST. Further, it would educate the public what is the real purpose of introduce GST; the main purpose is to broaden the tax base, rather than levy more tax in Hong Kong. Hence it can eliminate the misgivings of the public.

In the recent years, Hong Kong achieved a fiscal balance and strong fiscal reserves, but the problem of the narrow tax base still a persecution for Hong Kong. In order to deal with the challenges of the global competition, Hong Kong need to broaden the tax base, find out stable sources of revenue to support the public expenditure and deal with the future challenges. At that moment, GST would be the best choice for us. But we need to clarify that GST is a new tax in Hong Kong. When we propose new tax, we must believe that unlike flu, it almost never goes away. Hence, for the future, before the introducing any new tax, the government should have an in-depth analysis, continue study on the merit and the impact of the new tax (GST). When it is the stable time, GST would be a good tool for Hong Kong to stable the revenue, enhance the competitiveness and solve the ageing problem.
Appendix 1

Percentage on total revenue

Hong Kong


Asia Pacific

Personal Tax




Profits Tax




Taxation from Property




Goods and Services Tax (General Goods)




Goods and Services Tax (Specific Goods)




Source: ChinaStones -

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