Guide Me HongKong

Press Release: Chancellor of the Exchequer George Osborne, unveiled the UK emergency Budget last week, which was aimed at slashing spending and savings billions of dollars to address the rising public-sector debt in the UK. The Budget contained a mix of spending cuts and tax increases that would result in savings worth US$188billion a year. 

Briefly, the various changes that were announced during the Budget included: 

- Increasing VAT from the current 17.5% to 20% from next year onwards. 

- Increasing capital gains tax from 18% to 28% for those who pay higher rates of income tax. 

- Reducing corporate tax from 28% to 24% over a five-year period. 

- Introducing a banking levy on British banks as well as subsidiaries and branches of overseas banks, when their relevant aggregate  liabilities exceed 20 billion pounds. The levy will be set at 0.04% in 2011, before increasing it to 0.07%. 

- Exempting income tax on those earning less than 7,475 pounds a year from next year onwards. 

- Curbing social benefits such as freezing child benefits, placing a cap on housing benefits and implementing means testings for   disability allowances. 

The UK Budget has received mixed reactions. Although, the corporate tax cut is welcomed by the business community, there has been some criticism levied against the capital gains tax hike, VAT increase and banking levy. 

Looking at the capital gains tax hike, Britain runs the risk of warding off investors and dampening entrepreneurial activity, simply because investments will no longer reap the same returns as they used to earlier. This could result in businesses and investments moving to Asia to jurisdictions such as Hong Kong or Singapore that have abolished capital gains tax. The prospect seems all the more attractive, given the ease of company formation in Hong Kong (http://www.guidemehongkong.com/company/c746-hong-kong-co ...). 

Similarly an increase in VAT could hurt consumer confidence and bring down consumer spending. This could in turn affect the pace of economic recovery and add to inflation woes. According to KPMG's insolvency specialist Richard Fleming, "We could see consumer spend drop by billions. Those retailers teetering on the edge may find the VAT rise pushes them over the edge." Another sector that will be adversely impacted by the VAT increase is the charity sector, which will now have to to pay an extra 140 million pounds a year in VAT. Some charity organizations that are relatively small in nature may not even survive. By contrast, Hong Kong does not impose VAT / GST / Sales tax or Services tax. 

As far as the bank levy is concerned, it is possible for banks to shift their business to more business friendly and tax friendly jurisdictions that do not impose such levies. Given Hong Kong's tax system (http://www.guidemehongkong.com/tax/c753-hong-kong-tax-sy ...) and status as a matured financial center, it is likely to be a natural destination for transferring financial operations. Singapore, Shanghai and Tokyo are other alternatives. 

Finally, the proposed corporate tax cut is still way above Hong Kong's corporate tax rate of 16.5%. This effectively implies that businesses that set up a Hong Kong company are more likely to retain their profits, as compared to doing business in the UK. 

The above arguments clearly favor the business landscape in Asia, especially Hong Kong, vis-a-vis UK's business environment. Will this lead to an exodus of business professionals, bankers, financial institutions, entrepreneurs, and investors to Asia?