'S'pore tax reforms will not erode HK advantage'

'S'pore tax reforms will not erode HK advantage'

Agence France-Presse, Hong Kong

Singapore has fired a shot across Hong Kong's bows by announcing a plan to reduce personal and corporate taxes but economists do not expect this to improve its competitive position against its regional rival in the short term.

Both are vying to be the premier financial centre in the region and the Asian headquarters for major multinational companies.

But with the focus of global investment shifting to China and North Asia from Southeast Asia since the 1997-98 Asian financial crisis, Hong Kong's proximity to these markets remains a compelling attraction, economists said.

And as Hong Kong's financial secretary Anthony Leung pointed out on Thursday when Singapore's planned tax cuts were announced, the territory still has lower tax rates than the Lion City.

The Singapore government's Economic Review Committee recommended the government target a 20 percent rate for both corporate and personal income tax within three years. The corporate tax rate now stands at 24.5 percent and the top marginal personal tax rate is 26 percent.

It is also proposing the government hike the goods and services tax (GST) from three percent to five percent to partially make up for the cuts.

The committee said such changes were needed to ensure Singapore continued to attract investment and talent.

Hong Kong does not have a goods and services tax, although it is considering introducing one due to persistent budget deficits in recent years. The territory currently has a flat personal income tax rate of 15 percent and a corporate tax rate of 16 percent.

BNP Paribas Peregrine's Singapore-based regional economist Chan Kok Peng said Singapore still had a long way to go before it caught up with Hong Kong in terms of tax.

"There is no need (for Hong Kong) to be worried for the time being," he said.

Prudential-Bache regional strategist Robert Rountree also said the tax cuts in Singapore would have no particular bearing on Hong Kong.

Companies moved to the territory because of China and "that reason is way above any kind of tax consideration", he said.

Barclays Capital credit research director Bernard Peh believes that Singapore will become more competitive but warned the city- state needed to tread carefully to avoid falling into the kind of fiscal position Hong Kong now found itself in.

He added both cities could thrive as regional centers.

"Hong Kong has the advantage of a huge hinterland, but Singapore is near the potentially growing Southeast Asia region. Indonesia is huge."

The Association of Southeast Asian Nations (ASEAN) free trade area is due to come into being next year and this could be expanded to include major trading partners.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.