Question 1

Read the following article, which is an extract from a press release by the Hong Kong Institute of CPAs, titled ‘Hong Kong Institute of CPAs' budget submission asks government to use tax policies and budget measures to help families and lower income groups and boost support for SMEs and overall business competitiveness,' and then answer the questions required.

Hong Kong Institute of CPAs

Hong Kong, 10 January 2013

The Hong Kong Institute of CPAs says that, financially, Hong Kong remains in a sound position. The Institute expects a budget surplus in excess of HK$25 billion for 2012-13 and fiscal reserves of about HK$695 billion by 31 March 2013. In its budget proposals for 2013-14, it calls on the government to offer more help to families and to increase the city's international competitiveness.

According to the Institute's submission, one of the main concerns of the city's taxpayers is keeping up with rising costs. The proposal suggests a range of measures to help families and individuals, including widening the marginal tax bands from HK$40,000 to HK$50,000, increasing child allowances from HK$63,000 to HK$70,000, allowing deductions for voluntary MPF contributions with an annual cap of HK$60,000, allowing deductions for private healthcare insurance premiums with an annual cap of HK$12,000, offering a rental payment deduction as an alternative to the home loan interest deduction, adjusting the price thresholds of different stamp duty rates in line with property price inflation, providing a waiver on property rates of up to HK$2,500 per quarter, and an electricity subsidy of HK$1,800 for the coming year.

Florence Chan, chair of the Institute's taxation faculty executive committee, says, ‘Lower and middle income groups face continuing pressure from rising costs. The Institute's proposal would give a helping hand to families with children and other dependants, in relation to significant costs such as education, housing and health care. Families are the building blocks of the Hong Kong community and the heart of future generations, so tax measures devised to assist them should always be a priority,' she adds. 2 ACT B414 Taxation I The Institute's proposals also call for tax incentives focusing on the city's international competitiveness. The recommendations include: a reduction of the corporate profits tax rate to 15% for companies with gross income not exceeding HK$2 million, a tax waiver on assessable profits up to HK$500,000, a business registration fee waiver, an extension of the profits tax exemption for offshore funds and exemptions for onshore funds meeting specific criteria, an extension of tax deductions for research and development and intellectual property usage, and tax concessions for regional headquarters and offices.

Required:
a Discuss the objectives of a good tax system and the characteristics it should possess.
b Comment on the proposals as submitted by the HKICPA and evaluate whether they are desirable or undesirable in terms of the ideal objectives and characteristics of a good tax system.