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would bring greater business to Hong Kong. My honourable Friend Mr. Sayer thought that the loss of $66 million in revenue would not be too important, while my honourable Friend Mr. James Wu thought that it would be made up from other sources, mainly profits tax. For this to be so, however, net profits of the order of $440 million would need to be generated and, given the relatively small margins made on offshore borrowing and lending transactions, a market equivalent to perhaps Hong Kong $100,000 million would have to be built up. I doubt whether even the most optimistic
would expect a market of this order of size to develop very quickly. So there would undoubtedly be significant loss of
revenue.
65.
It has been suggested in some quarters, as an alternative, that interest paid by licensed banks should not be subject to withholding tax.
However, in practice, this would amount to very much the same thing, because already more than three quarters of our revenue from interest tax is generated from deposits with licensed banks and, if such a concession were to be made, this proportion would naturally tend to increase.
And to remove withholding tax in respect
of foreign currency deposits with the licensed banks, but not in respect of Hong Kong dollar deposits, would surely increase the risk of erosion of the Hong Kong dollar deposit
base.
66.
Let me say at this point that, although I can understand the argument that deposits in foreign currencies placed outside Hong Kong can tend to erode the Hong Kong dollar deposit base, I also believe that the remedy lies in the banks' own hands.
For, if they pay competitive
interest rates and reduce their margins, money can be attracted back to Hong Kong dollar deposits, even with the withholding tax. If competitive rates were paid and withholding tax were not applied, then - without exchange control - the
possibility would be opened up of large external flows exercising a destabilising influence on our foreign exchange market and external trade. I should just interpolate here that it is simply not true that there is a communication gap between Government and the financial sector, particularly the banks, whatever has been said, or rather written, to the
contrary.
/My
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