32.     Hong Kong is already a major asset management centre in Asia .  In 2003, total assets of our fund management business amounted to $2,950 billion, of which $1,860 billion were sourced from overseas investors and accounted for 63 per cent of the total.  The potential to expand our asset management business remains considerable, given the vast pension scheme assets held by banks, fund managers and insurance companies in Asia , coupled with the continued growth of personal savings in the Mainland.

33.     The Government has consulted the industry on our proposals to exempt offshore funds from profits tax.  We will shortly introduce the necessary legislative amendments into this Council.

34.    To promote the further development of our asset management business, the Government last year consulted interested parties and the public at large on the abolition of estate duty.  While abolition and retention both have their pros and cons, the majority view tends to support abolition.

35.    Those who oppose abolition consider that estate duty, which is imposed on the better-off in society, is in line with the principle of affordability.  They are also of the view that this duty is not an important consideration in investment decisions.  Some are even concerned about the possible impact of abolition on certain professions.  They have pointed out that, if the duty is abolished, the Government will lose a stable source of income and suffer a reduction in revenue, and the fiscal deficit will be aggravated.

36.    Those in support of abolition take the view that, although the tax is targeted at the better-off, in practice the latter may avoid it through various legal means.  Of the dutiable cases processed by the Inland Revenue Department last year, about 70 per cent involved assets with an estate value, after exemptions, below $20 million.  They point out that, in other places, estate duty avoidance is also very common and it is no easy task to plug these loopholes.  Others think that, as the assessment of estate duty takes time, and the assets of citizens, particularly operators of small and medium enterprises (SMEs), may be frozen during the assessment period, this causes them cash flow problems.  In settling estate duty, some enterprises may have to sell their assets to raise cash and as a result encounter operating difficulties.

37.     In recent years, global financial services have experienced phenomenal growth.  The financial markets in the Asia Pacific region have also quickened the pace of their development.  Hong Kong is looking at unprecedented opportunities in this sector, but at the same time faces increasing competition.  A number of countries in the region, including India , Malaysia , New Zealand and Australia , have abolished estate duty over the past 20 years.  In Europe, Italy and Sweden have also abolished the tax.  We understand that one of the main reasons for the decision by some countries to abolish estate duty is the adverse impact on SMEs.

38.     Investment decisions are influenced by many factors.  It is impossible for us to give an accurate estimate of the amount of foreign and domestic investment that will be induced if estate duty is abolished.  Nonetheless, we believe that, with its abolition, Hong Kong will become more attractive to investors.  Many members of the industry envisage that abolition will encourage more people to hold assets in Hong Kong through a corporate vehicle or trust.  More overseas companies and professionals will come here, and this will facilitate the further development of our asset management services, create more employment opportunities, and in turn make Hong Kong more competitive as an international financial centre.  Trading in the financial market will also become more active, and contribute additional government revenue from stamp duty and other taxes.

39.    On balance, after weighing these factors, I propose to abolish the tax and will introduce the relevant bill into this Council as soon as possible.

40.    The financial services industry is a high value-added industry and very important to our economy: its direct contribution is 13 per cent of GDP.  The industry also fosters growth in a number of professional services, and this in turn becomes a strong driving force for other sectors, such as real estate and the consumer market.  With globalisation of the industry, the flows of capital, financial talent and expertise have become easier and more frequent, and have created new opportunities for Hong Kong .  I hope that the foregoing measures will encourage the further development of our financial services industry and strengthen our position as an international financial centre.

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