US tax reform could have strong effect on HK

CHINA DAILY HK EDITION What impact, if any, will the Republican tax reform signed into law just before Christmas have on United States companies doing business in Hong Kong, and the city’s coffers? Hong Kong with its low tax rate of 15 percent has attracted a significant number of US companies to locate their overseas or regional headquarters in the special administrative region. This has let the firms subject their foreign earnings to Hong Kong’s low tax rates and keep such foreign earnings in Hong Kong-based banks. The large number of US companies and individuals keeping their money offshore in Hong Kong has resulted in the US government sending and basing internal revenue agents in the SAR to track down these funds by auditing Americans’ earnings kept offshore. The scrutiny will intensify as the government actively pursues these offshore funds to make sure they are repatriated and taxed. The precise impact of the 490-page bill remains to be seen. Republicans secretly drafted the bill, unveiled in the Senate only hours before a small-hours vote early on a Saturday morning, without the typical debate expected for such a sweeping tax-reform package that will affect nearly every US company and individual. It was approved to applause from Republicans in the chamber. Democrats had walked out of the Senate without one of the party’s senators supporting the bill. The Republican process left Democrats as bystanders to the biggest tax overhaul since 1986. By contrast, the tax reform bill passed in 1986 under president Ronald Reagan was debated and crafted on a bipartisan basis over more than 18 months. The tax rate for big corporations was cut almost in half. It has been reduced from 35 percent to 20 percent. Funds repatriated from overseas will be taxed at an even lower rate — 10 percent. It is estimated that US corporations keep more than 70 percent of their earnings — $1.3 trillion — overseas. Coupled with state and local tax breaks corporations will be allowed to deduct, the incentives to repatriate are significant. In fact the tax bill is designed to make US corporations repatriate more than two-thirds of their foreign capital. All major US companies have promised to repatriate their foreign funds if the tax rate is reduced to 10 percent. There is likely to be a massive capital repatriation of funds that will include outflow from Hong Kong’s banking system. However, corporate tax planning will mandate that a percentage of foreign income still be kept offshore. The only question is how much. The tax overhaul is designed to benefit the US economic recovery. The sweeping tax cuts and repatriation of billions of dollars of offshore funds will encourage US companies to invest and expand operations back home, create new jobs and stimulate the US economy. A sidebar of the tax reform bill is that Chinese mainland and other foreign companies are also setting up operations in the US, thus depriving Hong Kong of the transshipment fees it has generated from such companies. The sweeping tax cuts will stimulate the US economy and job market, forcing the Federal Reserve to tighten its monetary measures and steepen its interest-rate increases. The federal funds rate was raised four times since 2015 — to between 1 and 1.25 percent from 0 to 0.25 — compared with Hong Kong’s 0.7 percent during the same period. The four Fed rate increases have not directly affected the Hong Kong Interbank Offered Rate to date — and more importantly not affected the Hong Kong property market — but that probably won’t be the case after the tax bill takes effect. If the Fed accelerates its rate rises following the tax bill’s passage, as most economists believe it will, that will exert pressure on Hong Kong banks to raise HIBOR. A local rate increase coupled with central government controls on people from the Chinese mainland transferring funds to Hong Kong to purchase properties — a double whammy — should have a significant impact on property prices in the SAR. Property prices may actually start dropping, something Hong Kong hasn’t experienced since the SARS outbreak of 2003. That is good news for Hong Kong property buyers. An additional bright side for Hong Kong is that a stronger dollar resulting from a US economic recovery should boost exports from the mainland that should benefit Hong Kong’s logistics and financial services industries. The question is, can they make up the shortfall that the repatriation of US companies’ foreign funds sitting in the local banking system will make. It is possible, but doubtful. Hong Kong will have to reinvent itself yet again. The author is a strategic consultant, co-founder of the Pets Central network of veterinary hospitals and author of the Custom Maid series of books.