Hong Kong Towards a Leading Global FinTech Hub

98 99 Part II: Key Observations, Policy Implications and Recommended Actions for Hong Kong the tax deduction policy encourages small- and medium-size companies to spend more on R&D, which includes labor costs and consumables. 334 Thus, the tax deduction policy is a positive policy intervention in general to encourage Hong Kong SMEs to invest and participate more in R&D, considering the fact that over 98% of enterprises in Hong Kong are SMEs. 335 In view of the lackluster results the current tax deduction has had on qualified R&D activities, it is recommended the government consider regular evaluations on the effectiveness of the tax deductions policy. The Inland Revenue Department (IRD)’s judgement as to whether an R&D expenditure incurred is deductible is one of the key issues for an enterprise to consider. 336 There seems to be confusion in the fintech industry as to what activities quality for a tax deduction. Instead of having traditional R&D activities in earlier stages, fintech applicants might have qualifying R&D activities in the later stages of innovation (e.g. commercialization of fintech solutions, entrepreneur training, and product modification). Periodic review and clarification of eligible tax deductions will be essential to promote more R&D activities. The government could increase company awareness as to which R&D activities are eligible for a tax deduction. Some ways could include: regular online and in-person seminars for accountants, consulting firms and enterprises that explain the tax deduction policy for eligible R&D activities. This would help the fintech industry identify and lodge claims for tax-deductable R&D activities. 337 Talent Cultivation and Upskill Development The financial and fintech industries are strategically important for Hong Kong’s economic growth and job creation. Despite being significant economic pillars and providing over 270,000 jobs in 2019, 338 it is foreseeable that a fintech talent shortage will exist as the fintech ecosystem expands significantly in the near future. According to the Fintech Employment 2019 report, 95% of fintech companies in Hong Kong agreed that they were facing a severe shortage of fintech talent. 339 334. VOX EU. | Effectiveness of R&D tax incentives in OECD economies (Oct 2020). | https://voxeu.org/article/ effectiveness-rd-tax-incentives-oecd-economies 335. 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 336. KMPG. | Enhanced tax deduction for R&D activities in Hong Kong (May 2018). | https://home.kpmg/cn/en/ home/insights/2018/05/tax-alert-07-hk-enhanced-tax-deduction.html 337. PwC. | The DIPN provides guidance and certain flexibility on reduction for R&D expenditure (Apr 2019). | https:// www.pwchk.com/en/hk-tax-news/2019q2/hongkongtax-news-apr2019-3.pdf 338. HKTDC Research. | Financial Services Industry in Hong Kong (Feb 2021). | https://research.hktdc.com/en/ article/MzEzOTI4MDY3 339. Michael Page. | Hiring in Fintech – Survey and Dialogue. | https://www.michaelpage.com.hk/sites/michaelpage. com.hk/files/16785-hk_fintech_brochure_mp.v8.pdf 340. For more details, please visit https://www.aof.org.hk/docs/default-source/hkimr/applied-research-report/aibdr ep4fa377c27c1649a6a219501ac8df30b7.pdf?sfvrsn=96c26d1d_6 Finding qualified talent remains the biggest challenge for Hong Kong’s fintech sector, with the major barriers coming from domestic skills shortages, difficulties in attracting foreign talent due to fierce competition between different financial cities, and low diversity in job categories. Tam (2021) has compared job categories of AI and big data talent in Hong Kong and Singapore. It was discovered that 5 out of the Top 10 employers in Hong Kong hiring AI and big data talent are universities, while 8 out of the Top 10 employers hiring AI and big data talent in Singapore are from the financial industry. 340 Hong Kong’s talent ecosystem is substantially less diversified than Singapore’s, and its less vibrant and unbalanced ecosystem is less attractive to both local and overseas fintech talent. Hong Kong’s regulators need to address the unique talent demands of fintech companies. Not only do they require researchers and experts in technology and data, they also need experienced management with financial services knowledge. According to findings from the Fintech Talent Development, Competency, and Manpower Study published by the HKUST Business School in 2020, compared with technical capability, there was a big gap in people capability, especially among middle-level management and junior- level personnel in the fintech industry. The percentages drop even lower to only around one-third of the required need. Therefore, it remains for the Hong Kong government to consider strengthening and upskilling the local fintech talent force for the financial sector. Suggestions on multi-pronged approaches to strengthen the fintech talent pipeline are discussed in the following section.