Hong Kong Towards a Leading Global FinTech Hub

96 97 Part II: Key Observations, Policy Implications and Recommended Actions for Hong Kong The Hong Kong fintech sector continues to grow along with the increased adoption of fintech among banks and the fast-growing fintech startup community. In 2019, fintech investment in Hong Kong nearly doubled to US$374mn across 25 deals compared with the previous year. 323 Despite the pandemic, 41% of Hong Kong fintech companies successfully scaled up at Series A fundraising or higher. 324 In addition, Hong Kong ranked as the most resilient economy in Asia for seven years in the past 11 years, 325 and was crowned the world’s top IPO venue. 326 Hong Kong ranked 11th in the Global Innovation Index 2020 and was named one of the top three best jurisdictions worldwide to start, locate and scale a business. 327 Although Hong Kong is recognized internationally for its accomplishments and resilience in economic development, it spends comparatively much less on R&D than regional competitors such as Singapore and Japan. 328 Exhibit 21 shows that Hong Kong experienced a year-on-year average growth rate of 3.72% between the time period 1998 and 2018. The Inland Revenue Ordinance 2018 (the Ordinance) was enacted on 2 November 2018 to provide more tax deductions for expenditures incurred by enterprises in eligible R&D activities and encourage more enterprises to conduct R&D activities in Hong Kong. Under the Ordinance, enterprises would be able to enjoy additional tax deductions for expenditures incurred on domestic R&D activities. The first HK$2mn (US$257,000) of eligible R&D activities can enjoy a 300% tax deduction, and expenditures beyond this amount can enjoy a 200% deduction. 329 There is no cap on the amount of enhanced tax deductions. However, the effectiveness of the tax deduction policy is questionable. As of November 2019, the Innovation and Technology Commission received 60 applications from enterprises claiming the R&D tax deduction, with a total HK$980.3mn (US$126mn). 330 While it is not practical to assume that all corporates will perform R&D activities, the percentage of companies who applied for an R&D tax deduction is relatively low. 331 With the intention of encouraging R&D, tax incentives are proven to be effective at stimulating business R&D, with every 1.4 units of R&D investment rewarded from 1 unit of R&D tax deduction support. 332 In particular, compared with large-size companies, 333 Opportunity 7 Observation: The Hong Kong government acknowledged the significance of R&D activities by enacting the Inland Revenue Ordinance 2018 to provide a tax deduction for expenditures by enterprises for eligible R&D activities, and to encourage more enterprises to conduct R&D activities in Hong Kong. However, the tax deduction policy has not achieved its intended effectiveness, as reflected by the low application rate for the tax deduction. Objective: To ensure that companies engaged in R&D activities are aware of the tax deduction to promote an increased level of R&D for fintech development. Recommended action: Review, evaluate and promote the tax deduction policy for expenditures by enterprises for eligible R&D activities. The definition of R&D activities should be broadened to different stages of innovation, including pre-commercialization, commercialization, and marketing. 323. The Business Time. | Fintech investment in Singapore more than doubled in 2019: Accenture (Feb 2020) | https:// www.businesstimes.com.sg/garage/fintech-investment-in-singapore-more-than-doubled-in-2019-accenture 324. InvestHK. | FintechHK: Fast track your next success (Jan 2021). | https://www.hongkong-fintech.hk/media/ lyvgm41k/fintechhk-flyer_eng_jan-2021.pdf 325. InvestHK. | FintechHK: Fast track your next success (Jan 2021). | https://www.investhk.gov.hk/sites/default/files/ FintechHK%20Flyer_ENG_Jan%202021.pdf 326. Hong Kong Monetary Authority. | Hong Kong Financial Service Sector at a Glance (Feb 2021). | https://www.hkma . gov.hk/eng/key-functions/international-financial-centre/hong-kong-as-an-international-financial-centre/#hong_ kong_financial_service_sector_at_a_glance 327. The HKSAR Government. | Press Releases: Hong Kong ranked world's third easiest place to do business (Oct 2019). | https://www.info.gov.hk/gia/general/201910/24/P2019102400512.htm 328. The World Bank. | Research and development expenditure (% of GDP, Hong Kong, Japan and Singapore are selected). | https://tcdata360.worldbank.org/indicators/GB.XPD.RSDV.GD.ZS?country=HKG&indicator=2013&cou ntries=SGP,JPN&viz=line_chart&years=1996,2018 329. Inland Revenue Department, the Government of the Hong Kong Special Administrative Region. | Deduction for Research and Development Expenditure (Apr 2019). | https://www.ird.gov.hk/eng/pdf/dipn55.pdf 330. The Government of the Special Administrative Region, Press Release. | LCQ18: Enhanced tax deduction for research and development expenditures (Nov 2019). | https://www.info.gov.hk/gia/general/201911/20/ P2019112000350.htm?fontSize=1 331. As of Dec 2020, there were around 350 000 SMEs in Hong Kong. It is assumed that one tenth SMEs would perform R&D activities, there is just 0.17% of those SMEs have applied and successfully claimed the R&D tax deduction. For details, please visit Support and Consultation Centres for SMEs, Trade and Industry Department. | Small and medium enterprises (SMEs). | https://www.success.tid.gov.hk/english/aboutus/sme/service_ detail_6863.html 332. VOX EU. | Effectiveness of R&D tax incentives in OECD economies (Oct 2020). | https://voxeu.org/article/ effectiveness-rd-tax-incentives-oecd-economies 333. Referencing to the definition of OECD economies, small firms are with fewer than 50 employees, medium-sized firms are with 50-249 employees, and large firms are with 250 employees or more. In Hong Kong, the enterprises employ fewer than 50 persons are regarded as SMEs. 1996 3 2 1 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Japan Singapore Hong Kong World Median [ Exhibit 21 ] : Comparison of R&D Expenditures with Japan and Singapore as % of GDP Source: World Bank