XN000022-1974-03-27 — Page 16

Wednesday, March 27, 1974.

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Referring to suggestions as an alternative that interest paid by

licensed banks should not be subject to withholding tax, the Financial

Secretary said that in practice this would amount to the same thing.

The reason was that "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."

He added that to remove withholding tax from foreign currency

deposits with the licensed banks but not from Hong Kong dollar deposits,

would "surely increase the risk of erosion of the Hong Kong dollar deposit base."

Commenting on the argument that deposits in foreign currencies placed

outside Hong Kong could tend to erode the Hong Kong dollar deposit base,

Mr. Haddon-Cavo believed that "the remedy lies in the bank's own hands."

If they paid competitive interest rates and reduced their margins,

money could be attracted back to Hong Kong dollar deposits, even with the

withholding tax, he said.

·

If competitive rates were paid and withholding tax were not applied,

this would open up the possibility of "large external flows exercising a de-

stabilising influence on our foreign exchange market and external trade," he added.

On the limited moratorium on banking licences, Mr. Haddon-Cave said

he was glad to see that his "tentative thoughts on greater freedom" had

generally been welcomed by Members of the Council.

This, he said, would be subject, in the case of a foreign applicant,

to the question of reciprocity which was, and would remain, a part of government

policy.

He explained that having established a case for accepting an application

for a licence, it would only be actually granted if the applicant's country

of origin would grant a licence to a Hong Kong incorporated bank satisfying

similar oriteria.

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