WEDNESDAY, MARCH 1, 1978
14
R. HADDON-CAVE SAID BECAUSE OF THESE REASONS. THE GOVERNMENT AGREED WITH THE WORKING PARTY THAT THE REVIEW COMMITTEE'S RECOMMENDATION ON TAXATION TREATMENT OF INTEREST SHOULD BE ACCEPTED AS IT STANDS AND A BILL TO AMEND THE INLAND REVENUE ORDINANCE WILL BE PUBLISHED IN THE GOVERNMENT GAZETTE ON FRIDAY.
HE SAID THE PROPOSED LEGISLATION, IF PASSED INTO LAW, WOULD BE EFFECTIVE FROM THE YEAR OF ASSESSMENT 1978-79.
MR. HADDON-CAVE SAID THIS CHANGE IN THE LAW WILL HAVE IMPLICATIONS FOR PROFITS FROM TWO SEPARATE TYPES OF ACTIVITY.
+FIRSTLY, AS REGARDS PROFITS DERIVED FROM INCOME RECEIVED ON FUNDS BORROWED IN HONG KONG, BUT INVESTED OVERSEAS, SUCH OVERSEAS ASSETS ARE NORMALLY DENOMINATED IN FOREIGN CURRENCIES, BUT NOT NECESSARILY.
+THE ADDITIONAL TAX LIABILITY WOULD BE 17 PER CENT OF THE NET PROFITS DERIVED FROM SUCH INTEREST EARNINGS.
+THESE OVERSEAS ASSETS ARE NORMALLY ACQUIRED PARTLY BECAUSE EANKS WOULD NOT OTHERWISE BE ABLE TO MEET THEIR STATUTORY LIQUIDITY REQUIREMENTS, PARTLY TO SERVICE THE FOREIGN CURRENCY REQUIREMENTS OF HONG KONG CUSTOMERS, AND PARTLY BECAUSE OF A LACK OF SUITABLE INSTRUMENTS IN HONG KONG.+
HE POINTED OUT THAT THE AFTER-TAX PROFITABILITY OF BANKS WILL BE REDUCED AND BANKS WITH LARGE NET FOREIGN CURRENCY POSITIONS WILL BE PARTICULARLY AFFECTED.
HOWEVER, HE SAID +BANKS AND SIMILAR FINANCIAL INSTITUTIONS ARE AT PRESENT IN A VERY PRIVILEGED TAX POSITION COMPARED WITH EUSINESSES GENERALLY, AND EVEN TAKING INTO ACCOUNT ANY FOREIGN TAX PAYMENTS, THEY PRESENTLY ENJOY AN EFFECTIVE RATE OF TAX HERE WELL BELOW 17 PER CENT.+
THE SECOND TYPE OF ACTIVITY AFFECTED BY THIS CHANGE IN THE LAW IS THE SO-CALLED OFFSHORE BUSINESS CONDUCTED BY BANKS AND OTHER FINANCIAL INSTITUTIONS: LENDINGS TO NON-RESIDENTS ARE FINANCED, NOT BY BORROWINGS OF HONG KONG DOLLARS, BUT BY EORROW INGS OF FOREIGN CURRENCIES FROM ABROAD.
MR. HADDON-CAVE SAID THIS TYPE OF BUSINESS HAS BEEN GROWING VERY RAPIDLY AND IS CONDUCTED BOTH BY LONG-ESTABLISHED LOCAL BANKS AND OVERSEAS INSTITUTIONS RECENTLY ESTABLISHED IN HONG KONG SOLELY FOR THIS PURPOSE.
AT PRESENT, SUCH INSTITUTIONS DO NOT HAVE TO PAY PROFITS TAX ON ANY INTEREST GENERATED BY SUCH EUSINESS, EVEN THOUGH THE EUSINESS 13 CARRIED ON IN HONG KONG.
BUT UNDER THE PROPOSED AMENDMENT TO THE LAW ALL SUCH PROFITS ILLE TAXAILE.
MR. HADDON-CAVE