Submissions by HKEx 

16 September 2004

Principal Assistant Secretary for the Treasury (Revenue)
Treasury Branch, Financial Services and the Treasury Bureau
4th Floor, Central Government Offices, Main Wing
Lower Albert Road
Hong Kong

Dear Sir,

Estate Duty Review: Consultation Document

We are writing to submit our views on the above consultation paper.

Overall, the Exchange supports the complete abolition of estate duty, as this would be beneficial to the stock market and to the economy of Hong Kong.  Our views are set out in more detail below.

The existence of a tax on assets situated in Hong Kong acts as a deterrent to the holding of Hong Kong assets.  Such tax detracts from Hong Kong's role as a centre for capital formation and a centre for the provision of financial services.  It is particularly important to abolish estate duty, as argued further below, in view of Hong Kong's large and growing role as a financial centre for Mainland China.

Estate duty, similar to capital gains tax and tax on dividends, is a form of double taxation that is inconsistent with Hong Kong's general and long-standing philosophy against double taxation.  As an individual has already paid the relevant taxes during the accumulation of wealth, imposing further tax on the accumulated capital after death is inconsistent with this philosophy. 

The consultation paper argues (paragraph 7) that other financial centres like London and New York flourish despite being in jurisdictions that have some form of estate duty.  We do not dispute this (although we note that many of jurisdictions that have some form of estate duty are now restricting its scope or even abolishing it).  However, London and New York are located within very large domestic economies which form a natural base for their success.  Centres in smaller economies like Ireland or Luxembourg are positioned within the legal framework of European Union and enjoy unimpeded access to its vast markets.  Hong Kong, as a small economy outside any major bloc, has no such advantages.  If Hong Kong is to be successful as a financial centre, its regime has to be more competitive than those of its better-endowed peers.  Accordingly, in most dimensions, Hong Kong has an extremely open and laissez-faire regime.  For example, there are no exchange controls, no taxes on dividends, virtually no restrictions on foreign investment, etc.  Estate duty is one exception to this generally open picture. 

The consultation paper argues that individuals can avoid estate duty by using foreign holding companies, trusts and other schemes.  This may be true for many individuals, although by no means all.  However, it is surely not desirable from a public policy perspective to encourage individuals to use offshore vehicles for tax avoidance.  There is the diversion of resources and energy into the related schemes.  Although part of the fees may go to Hong Kong-based professionals, a large part will go to professionals in the respective offshore jurisdictions, representing a drain on the economy.  Then there is the significant cost and risk for the individual in establishing and maintaining such vehicles.  In case of dispute, the individual may find himself having to pursue his rights in foreign courts at great expense and difficulty.  And on the individual's death, it is not uncommon for his successors, who may not even be aware of the vehicles in question, to be unable to trace the assets, so that the assets might even remain with some offshore bank.  We would urge consideration of these unintended consequences of estate duty.

If estate duty were abolished, we believe that individuals - both local and overseas - would be encouraged to hold more assets in Hong Kong or relocate overseas trusts to Hong Kong or even to set up local trusts to hold and administer their overseas assets.  These all would boost the financial services industry in Hong Kong, including the stock market, the brokerage industry, fund management, private banking, and related supporting professional services - with additional revenues, employment, and (for the Government) profits and salaries tax revenues arising therefrom.  We are not able to quantify the benefits, but we would expect them to be significant.  And as discussed above, the present drain of resources overseas imposed by the need to establish schemes to avoid estate duty would cease; thus the abolition of estate duty would bring Hong Kong a double boost.

The issue of estate duty is particularly important because of Hong Kong's role as a financial services centre for the Mainland China.  With the growing number of H-shares listed in Hong Kong for which the underlying business and assets represented by those shares are located outside Hong Kong, the imposition of estate duty on an individual's estate comprising H-shares will deviate from the general principle of exempting property situated outside Hong Kong from being taxed.  Hong Kong's financial markets depend today, and will depend even more in the future, on the participation of Mainland parties. Today, these parties are mainly listed companies; however, as the Mainland authorities gradually relax controls on their overseas activities, there is a growing segment of Mainland investors.  At present, most Mainland investors are individuals.  The great attraction of Hong Kong for these individuals is precisely its laissez-faire environment. 

From the issuers' perspective, in particular for those whose assets are located substantially outside Hong Kong, estate duty might be a discouraging factor for them to seek listing in Hong Kong because shareholdings of individual investors will be subject to estate duty.  Hong Kong would become a secondary choice to potential issuers against competing places in the region where there is no estate duty, for instance, Shanghai.

As the Mainland itself does not have estate duty, it will be a factor of concern to the seeking of listing in Hong Kong by Mainland companies or to the participation of Mainland individuals in the Hong Kong financial markets if Hong Kong continues to impose estate duty.  Rather, everything should be done to make Mainland participation in Hong Kong as frictionless as possible. 

We hope that our views are helpful to you in formulating proposals on estate duty for the 2005-06 Budget.


Yours faithfully


Charles Lee