Capital Gains Tax with Hong Kong Characteristics: Necessity, Feasibility and Design

Abstract

Hong Kong is known for its simple and low rate tax system. Its current schedular income tax mechanism has its origin from the United Kingdom back in the 1940s. When capital gains tax (CGT) was introduced in the UK in 1965, no similar step was taken in Hong Kong. The economic and social conditions underlying the original design of the system have changed dramatically over the years and will continue to change, but the system itself remains largely the same without much reform to keep pace with these changes. Furthermore, recent years have seen Hong Kong develop one of the world’s least affordable housing markets, exerting a profound influence on the prospects of the city and its people, particularly the younger generation. Among other things, the tax measures undertaken by the Hong Kong government in tackling the situation focus solely on stamp duty levied on transactions involving residential properties. This paper argues for the need to introduce in Hong Kong a CGT with Hong Kong characteristics with a view to reducing speculative property investment, stabilising the housing market and alleviating the social divide between the rich and the poor. The stamp duty changes in recent years show that the tax system in Hong Kong is not wholly immune from changes and in fact Hong Kong people are not necessarily resistant to any of such changes. This paper also provides a design of the proposed CGT, with references to its equivalent in the United Kingdom (UK) and taking into account the peculiar Hong Kong circumstances and characteristics.