Fine art of taxation, a la S’pore and HK

The art of taxation, declared King Louis XIV’s Minister of Finances Jean-Baptiste Colbert, is in “so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing”.

The Budgets of Singapore and Hong Kong – released two days apart this week – have thrown into relief their two governments’ now contrasting approaches to this finely calibrated political art.

Both cities, regional rivals in courting investments and talents, have long been known for their attractively low tax regimes, even as they face similar pressures to spend more on social needs, given an ageing population and a widening rich-poor gap.

This year, Singapore threw a surprise curveball. It hiked the top marginal tax rate on high-income earners from 20 per cent to 22 per cent – a historic reversal of a long-time trend of reductions.
Any such move has been firmly ruled out by Hong Kong, with Financial Secretary John Tsang saying the city already enjoys a highly progressive tax rate. Instead, he suggested, Hong Kong should look at reviving the idea of a broad-based goods and services tax (GST). The city has no such tax.

So will Singapore’s tax hike this week change the calculus for investors and talent in both cities?

While Singapore Deputy Prime Minister Tharman Shanmugaratnam has said it “should not significantly dent Singapore’s competitiveness”, he also warned it would be “naive to think that we can keep raising tax rates without affecting our competitiveness”, noting that many Singaporeans are working overseas, including in Hong Kong.

For now though, there is little sign that people are looking to move as a result. While tax rates are important, they are not the main deciding factor in where people choose to live, say analysts.

Accounting firm Ernst and Young’s tax partner (Hong Kong and Macau), Ms Tracy Ho, tells The Straits Times the feedback from its clients in Singapore is that “there is some impact, but not significant enough to change their mobility plans”.

Adds Deloitte’s tax partner (China), Mr Davy Yun: “Tax ranks as the third or fourth most important factor; the top would still be the companies’ market, such as whether it is China or South-east Asia or India. ”

But despite this, and even as Hong Kong keeps a close eye on what Singapore does, it is unlikely the city will go down the same path any time soon to feather its nest.

Some labour interests such as the Federation of Trade Unions have called for the richest to be taxed more instead of implementing the GST. But the louder hissing is from Hong Kong’s powerful business and professional interests, which argue that keeping direct taxes low – and depressing them further if possible – remains a sacred cow.

Says Mr Yun: “It is a symbol. In Hong Kong, we have a clear philosophy. Tax increases will affect people’s confidence in government policies.”

Another reason is that unlike in Singapore, GST has not yet been deployed as a tool to increase revenue. Arguing that this is a better option, Ms Ho says it diversifies sources and will help Hong Kong “avoid being hit too hard during rainy days”. To help cushion the impact on the low-income earners, she suggests exempting certain necessities and giving subsidies. “This will create a lot of administrative work, but that will be more fair and the idea will then be more accepted by the general public.”

At this point, though, a GST remains as politically anathema in Hong Kong – where the government is unpopular and the society polarised – as any rise in direct taxes. The last time the idea was tabled, in 2006, it was scrapped after an uproar.

With Hong Kong thus likely to stay on the spot, the immediate picture is that Singapore will be more expensive for high-income earners.

Before, a family of four earning HK$2.3 million (S$402,000) or more will be paying higher taxes in Singapore than in Hong Kong. Now, they will be doing so as long as they earn over HK$2 million, calculates Ernst and Young.

However, for overseas investors and executives, this is often offset by Singapore’s more competitive corporate tax rates that include tax breaks and incentives for certain industries and MNCs – which Hong Kong does not offer, notes Mr Yun. Singapore also has more double taxation tax treaties, with 76 signed versus Hong Kong’s 32.

“In the end, it all balances out,” says Ms Ho.

The experts are loath to spell out the tipping point where a society moves from a low- to high-tax system that will undercut its competitiveness. “Roughly speaking, 20 per cent and below for top personal income rate may be considered low,” says Mr Yun. But he hastens to add: “We can’t just look at a magic number but rather the whole environment, from schools to pollution.”

In an echo of the 17th century French politician, he says: “It is not a science but an art.”