Should the government provide refundable R&D credits to stimulate private investment?

However, the administration must first clarify its definition of R&D activities and expenditures, PwC said.

Providing refundable R&D credits for research investments is a step forward to boost innovation-based entrepreneurship in Hong Kong, according to the pre-budget report of accounting and professional services firm PwC.

Whilst Hong Kong is already a leading IP hub, the government can still craft the necessary policies and hone its tax regime to further encourage private investments in IP. 

This includes a recommendation from PwC to reduce the 8.25% profits tax rate for IP hubs set up in Hong Kong as well as super tax deduction for R&D expenditure both subcontracted and incurred in the Bay Area. 

Moreover, Hong Kong’s tax treaty network should be expanded and unilateral tax credits should be offered for Hong Kong-based IP hubs.

To achieve all this, the government must first clarify its definition of R&D activities and expenditures. 

“On top of the super-tax deduction proposed in the Chief Executive’s Policy Address for encouraging the private sector to invest more in R&D, we suggest that the Government provides clearer guidance when defining R&D activities and expenditures,” said PwC Hong Kong Tax Partner Jeremy Choi.

PwC also recommends certain adjustments to the salary tax to alleviate financial burden on the middle class which includes increasing deductions for child allowance to $120,000, extending mortgage interest deduction period up to a maximum of 25 years and raising maximum interest deductible to $150,000 per annum.