LEGISLATIVE COUNCIL ― 22 June 2017 10405

OFFICIAL RECORD OF PROCEEDINGS

Thursday, 22 June 2017

The Council continued to meet at Nine o'clock

MEMBERS PRESENT:

THE PRESIDENT THE HONOURABLE ANDREW LEUNG KWAN-YUEN, G.B.S., J.P.

THE HONOURABLE LEUNG YIU-CHUNG

THE HONOURABLE ABRAHAM SHEK LAI-HIM, G.B.S., J.P.

THE HONOURABLE TOMMY CHEUNG YU-YAN, G.B.S., J.P.

PROF THE HONOURABLE JOSEPH LEE KOK-LONG, S.B.S., J.P.

THE HONOURABLE JEFFREY LAM KIN-FUNG, G.B.S., J.P.

THE HONOURABLE WONG TING-KWONG, S.B.S., J.P.

THE HONOURABLE STARRY LEE WAI-KING, S.B.S., J.P.

THE HONOURABLE CHAN HAK-KAN, B.B.S., J.P.

THE HONOURABLE CHAN KIN-POR, B.B.S., J.P.

DR THE HONOURABLE PRISCILLA LEUNG MEI-FUN, S.B.S., J.P.

THE HONOURABLE WONG KWOK-KIN, S.B.S., J.P.

THE HONOURABLE MRS REGINA IP LAU SUK-YEE, G.B.S., J.P.

10406 LEGISLATIVE COUNCIL ― 22 June 2017

THE HONOURABLE PAUL TSE WAI-CHUN, J.P.

THE HONOURABLE LEUNG KWOK-HUNG#

THE HONOURABLE CLAUDIA MO

THE HONOURABLE STEVEN HO CHUN-YIN, B.B.S.

THE HONOURABLE FRANKIE YICK CHI-MING, J.P.

THE HONOURABLE WU CHI-WAI, M.H.

THE HONOURABLE YIU SI-WING, B.B.S.

THE HONOURABLE MA FUNG-KWOK, S.B.S., J.P.

THE HONOURABLE CHARLES PETER MOK, J.P.

THE HONOURABLE CHAN CHI-CHUEN

THE HONOURABLE CHAN HAN-PAN, J.P.

THE HONOURABLE LEUNG CHE-CHEUNG, B.B.S., M.H., J.P.

THE HONOURABLE KENNETH LEUNG

THE HONOURABLE ALICE MAK MEI-KUEN, B.B.S., J.P.

DR THE HONOURABLE KWOK KA-KI

THE HONOURABLE KWOK WAI-KEUNG

THE HONOURABLE CHRISTOPHER CHEUNG WAH-FUNG, S.B.S., J.P.

# According to the Judgment of the Court of First Instance of the High Court on 14 July 2017, LEUNG Kwok-hung, Nathan LAW Kwun-chung, YIU Chung-yim and LAU Siu-lai have been disqualified from assuming the office of a member of the Legislative Council, and have vacated the same since 12 October 2016, and are not entitled to act as a member of the Legislative Council. LEGISLATIVE COUNCIL ― 22 June 2017 10407

DR THE HONOURABLE HELENA WONG PIK-WAN

THE HONOURABLE IP KIN-YUEN

DR THE HONOURABLE ELIZABETH QUAT, J.P.

THE HONOURABLE MARTIN LIAO CHEUNG-KONG, S.B.S., J.P.

THE HONOURABLE POON SIU-PING, B.B.S., M.H.

DR THE HONOURABLE CHIANG LAI-WAN, J.P.

IR DR THE HONOURABLE LO WAI-KWOK, S.B.S., M.H., J.P.

THE HONOURABLE CHUNG KWOK-PAN

THE HONOURABLE ALVIN YEUNG

THE HONOURABLE ANDREW WAN SIU-KIN

THE HONOURABLE CHU HOI-DICK

THE HONOURABLE JIMMY NG WING-KA, J.P.

DR THE HONOURABLE JUNIUS HO KWAN-YIU, J.P.

THE HONOURABLE LAM CHEUK-TING

THE HONOURABLE HOLDEN CHOW HO-DING

THE HONOURABLE SHIU KA-FAI

THE HONOURABLE WILSON OR CHONG-SHING, M.H.

THE HONOURABLE YUNG HOI-YAN

DR THE HONOURABLE PIERRE CHAN

THE HONOURABLE CHAN CHUN-YING

10408 LEGISLATIVE COUNCIL ― 22 June 2017

THE HONOURABLE TANYA CHAN

THE HONOURABLE CHEUNG KWOK-KWAN, J.P.

THE HONOURABLE LAU KWOK-FAN, M.H.

DR THE HONOURABLE CHENG CHUNG-TAI

THE HONOURABLE KWONG CHUN-YU

THE HONOURABLE JEREMY TAM MAN-HO

THE HONOURABLE NATHAN LAW KWUN-CHUNG#

DR THE HONOURABLE YIU CHUNG-YIM#

DR THE HONOURABLE LAU SIU-LAI#

MEMBERS ABSENT:

THE HONOURABLE JAMES TO KUN-SUN

THE HONOURABLE MICHAEL TIEN PUK-SUN, B.B.S., J.P.

THE HONOURABLE DENNIS KWOK WING-HANG

DR THE HONOURABLE FERNANDO CHEUNG CHIU-HUNG

THE HONOURABLE HO KAI-MING

THE HONOURABLE SHIU KA-CHUN

THE HONOURABLE HUI CHI-FUNG

# According to the Judgment of the Court of First Instance of the High Court on 14 July 2017, LEUNG Kwok-hung, Nathan LAW Kwun-chung, YIU Chung-yim and LAU Siu-lai have been disqualified from assuming the office of a member of the Legislative Council, and have vacated the same since 12 October 2016, and are not entitled to act as a member of the Legislative Council. LEGISLATIVE COUNCIL ― 22 June 2017 10409

THE HONOURABLE LUK CHUNG-HUNG

THE HONOURABLE KENNETH LAU IP-KEUNG, M.H., J.P.

PUBLIC OFFICERS ATTENDING:

PROF THE HONOURABLE ANTHONY CHEUNG BING-LEUNG, G.B.S., J.P. SECRETARY FOR TRANSPORT AND HOUSING

MR JAMES HENRY LAU JR., J.P. UNDER SECRETARY FOR FINANCIAL SERVICES AND THE TREASURY

CLERKS IN ATTENDANCE:

MISS FLORA TAI YIN-PING, ASSISTANT SECRETARY GENERAL

MS DORA WAI, ASSISTANT SECRETARY GENERAL

10410 LEGISLATIVE COUNCIL ― 22 June 2017

GOVERNMENT BILLS

Committee Stage

CHAIRMAN (in Cantonese): Good morning. Committee will continue with the second debate. Mr LEUNG Yiu-chung, please speak.

INLAND REVENUE (AMENDMENT) (NO. 2) BILL 2017

MR LEUNG YIU-CHUNG (in Cantonese): Chairman, I notice that when Dr KWOK Ka-ki spoke in this debate session yesterday, he pointed out that there was a good intention behind the new policy. It is certainly so, and I also wish that the current tax reform can provide the SAR Government with a good prospect. This is the common wish of the people of Hong Kong, but I am worried that this is only our wishful thinking. As we all know, other countries are also promoting the development of the industry, and Hong Kong is not the only place making these changes. If a competitive environment is created for the development of the industry, a lot of people will be attracted to participate.

I have generally talked about yesterday the development of the industry in Mainland China, and from which we can see that not just in Hong Kong, any industry which is financially profitable under the capitalist system and free market mechanism will naturally attract competitors. Hence, should the Government be so optimistic about this? For example, as pointed out by Mr LEUNG Kwok-hung yesterday, things might not go as smoothly as we think. With regard to the profits derived, Mr LEUNG Kwok-hung indicated yesterday that only $2.6 billion of profits have been recorded in Ireland, and should these be regarded as huge profits? It should not be very difficult to engage in other businesses and reap such profits in Hong Kong. However, in order to develop aircraft leasing business, we have to make a breakthrough in tax reform and the attempt cannot be regarded as a simple one.

I will talk about this breakthrough later, and let me first respond to …

CHAIRMAN (in Cantonese): Mr LEUNG Yiu-chung, we are now discussing the clauses involved in the current debate. You should speak on the amendments proposed to the relevant clauses instead of the overall policy. Discussions on LEGISLATIVE COUNCIL ― 22 June 2017 10411 the Government's policy have already been completed during deliberation of the Bills Committee and the Second Reading debate. Please speak on the relevant clauses.

MR LEUNG YIU-CHUNG (in Cantonese): I will come to the discussion very soon.

CHAIRMAN (in Cantonese): We are now discussing clauses 4, 8 and 10.

MR LEUNG YIU-CHUNG (in Cantonese): I know, I will get to the point very soon, and those are just opening remarks.

Let me first respond to a point made by Mr James TO yesterday in the current debate session. With regard to the amendments proposed to clauses 4, 8 and 10, he opined that the biggest problem lied in the fact that the Government had only indicated its wish to move the amendments at the final meeting of the Bills Committee, and this was indeed most undesirable. According to him, the amendments were proposed in response to the comments made by the Organisation for Economic Co-operation and Development ("OECD") about the issue on ring-fencing and onshore leasing activities.

Mr James TO said that such a practice was most undesirable. Nevertheless, can we take the matter more seriously and say that it is in fact a dereliction of duty on the part of the government officials concerned? OECD is an international organization with an important status in this respect, but the Government had known nothing about its stance, and it was not until shortly before the final meeting of the Bills Committee that the Government eventually realized what had gone wrong and proposed the amendments hastily. Is this a mistake or a dereliction of duty? In this connection, the Government has never given us a proper explanation, and I think this is where the problem lies.

Apart from this, the Government has explained that the main objective of the amendments is simply to add a new tax assessment option so that the new tax regime will be extended to cover onshore aircraft leasing activities. Under the proposed amendments, all local airline companies will be provided with an additional tax assessment option so that they may compare the pros and cons of 10412 LEGISLATIVE COUNCIL ― 22 June 2017 the current and new tax regimes in accordance with their own business consideration and strategy, and then elect for assessment under the new tax regime or remain under the current tax regime.

Chairman, this is the point which I would like to raise just now. Relatively speaking, this is indeed a breakthrough and a new policy, which is completely different from the standardized tax assessment option we are now adopting. The first difference is that profit-makers are allowed to choose freely between the two options and elect for assessment under the regime most favourable to them, and this is already one great breakthrough. Under the existing standardized assessment option, corporations are required to submit their financial reports to the Inland Revenue Department to declare the amount of profits they have gained, and the profits tax they have to pay will then be calculated at the standard tax rate. It is just as simple as that, but under the proposed amendments as mentioned above, corporations are allowed to elect for tax assessment under the regime most favourable to them, and is it not an unprecedented arrangement?

Secondly, apart from obtaining depreciation allowance under the current tax regime, corporations may alternatively elect for assessment under the proposed new regime so that they will be entitled to 20% of the tax base for the computation of the taxable amount of lease payments and half rate of the prevailing standard tax rate, thus enjoying an even lower tax rate. I have cited yesterday the comments made by HUI Hon-chung, who said that the tax rate applicable would only be 3% in the end after all these deductions. It is indeed an unprecedented arrangement if profits tax is really charged at a mere 3% as suggested by him. Mr LEUNG Kwok-hung pointed out yesterday that the business operations of small enterprises would not be so difficult if they were given the same choices, and I agree with him.

I hope the Liberal Party or representatives of the business sector, small enterprises in particular, can fight for this because if the Bill is passed, why cannot the same arrangements be applicable to small enterprises? A conducive business environment can be created for small enterprises if profits tax is charged at only 3%, and this will certainly help reduce disputes between the business sector and the labour sector. We can just come to think about it, if the amount which small enterprises pay as tax is only $3 in every $100 they gain as profits, they will have no problem acceding to requests concerning pay rise or the abolition of the offsetting arrangements under the Mandatory Provident Fund LEGISLATIVE COUNCIL ― 22 June 2017 10413

System, and what difficulties and disputes will there be? If other small enterprises can also be benefited from the tax concession measures, it will not only help minimize labour disputes but will also be conducive to their development because, given such an extremely low profits tax rate, there is no reason why they cannot survive.

Moreover, we all know that in many countries, places and even in Hong Kong, a lot of people are making risky and reckless moves to avoid paying taxes which they should pay. In order to evade tax, people will not hesitate to challenge the law. Yet, certain corporations do not even need to do anything to evade tax now and will be given tax reduction automatically. Can this be considered reasonable? I have already pointed out yesterday that if such arrangements can be made, instead of benefiting only one special industry, why not extend their coverage to benefit other small enterprises at the same time? Furthermore, not everyone would have the chance to invest in that special industry. As pointed out by some fellow colleagues yesterday, only a small number of enterprises can join the competition, and most of which are big enterprises. Will these big enterprises do anything to contribute to our society after they have reaped profits in Hong Kong? Nobody knows.

The Government believes optimistically that the introduction of the new tax regime will bring about a marked increase in our Gross Domestic Product ("GDP") as well as the number of job vacancies. However, we will only suffer losses before benefits are gained. First of all, I consider it extremely unfair and unreasonable to benefit such big consortia. During our discussions on the tax regime today, it is our hope to achieve an even distribution of social resources, so that reasonable and fair arrangements would be made to benefit society with the tax collected …

CHAIRMAN (in Cantonese): Mr LEUNG Yiu-chung, you have digressed from the subject. I have to remind you that we are not discussing the policy issues involved now, but are debating on the amendments proposed to the relevant clauses. Please speak on the amendments of these clauses.

MR LEUNG YIU-CHUNG (in Cantonese): I am not talking about policy issues, but the effects and impacts of the two tax regimes. I consider the arrangements unjust and unfair, and therefore do not agree to the proposals.

10414 LEGISLATIVE COUNCIL ― 22 June 2017

CHAIRMAN (in Cantonese): Mr LEUNG Yiu-chung, we are now discussing the amendments, not the tax regimes and their rationale. Please speak on the amendments of the relevant clauses.

MR LEUNG YIU-CHUNG (in Cantonese): I was exactly speaking on the amendments just now.

CHAIRMAN (in Cantonese): You should understand that you are repeating the points which a number of Members have raised previously. The Council has now entered the Committee stage, and we are discussing clauses 4, 8 and 10. You may express your views on the amendments proposed to these clauses, but should not talk about other policy issues.

MR LEUNG YIU-CHUNG (in Cantonese): Chairman, I have already explained the details relating to the tax reform and the amendments, and I consider it unjust and unreasonable to make such changes. With regard to the reasons why they are considered unjust and unreasonable, I have also elaborated on what constitutes a just and reasonable approach to take the Government's recommendations forward. In short, the proposals should be implemented across the board, or a major review should be conducted on our tax regime, and the proposed measures should not be introduced solely for the industry in question. This is my stance on the proposed amendments.

Chairman, I only wish to point out finally that with regard to the proposed amendments, I am afraid that we will only suffer a double loss in the end. The Government has made changes of both the tax regime and the mode of assessment, but nobody really knows if these can generate economic benefits. As I pointed out just now, the Government alleged that there would be an increase in our GDP and the number of job vacancies, but this is just an estimation and no one knows if this will really come true. I do not know on what statistical basis has the Government made such an estimation, but it is a regrettable fact that the former "God of Wealth" has made a wrong estimation of the situation every year when he prepared the Budget, although his estimations were made on the basis of some very objective figures. Hence, what are the reasons for making the assertion this time that the proposed tax reform can generate such huge economic benefits? Nobody actually knows.

LEGISLATIVE COUNCIL ― 22 June 2017 10415

I am afraid that we will only suffer a double loss because the Government is so optimistic that it would of course be best to us if things can turn out that way. Otherwise, in the face of challenges from other competitors, the tax reform proposals have already been implemented but it is questionable whether they can achieve the desired effects. Under such circumstances, is it really worth making the changes? I do not think so and therefore will not support the proposed amendments.

Chairman, I so submit.

MR CHAN CHI-CHUEN (in Cantonese): Good morning, Chairman. This is the second time I speak in the Committee of the whole Council. In my first speech, I have expressed doubt on the formula of computing the assessable profits in clause 14I(2) as referred to in clause 4 in the proposed CSAs.

Just now, Mr LEUNG Yiu-chung has quoted Mr LEUNG Kwok-hung or another Member as saying that a tax of $3 or so will be payable for a profit of $100. However, my computation result is different. According to the formula, we should multiply $100 by 20%, which is $20. This $20 should then be multiplied by 8.25%. Thus, the projected tax payment for a profit of $100 is only $1.65 in accordance with the formula. Chairman, in this session, I will focus on clause 14J(1) to discuss the appropriateness of the amendment of taxing aircraft lessors and aircraft leasing managers at a rate of 8.25%.

The authorities' current proposal is to give tax concessions to aircraft leasing managers and aircraft lessors at a rate of 8.25%, which is half of the prevailing tax rate. The authorities have explained that many aircraft leasing operators opted to establish their bases in Ireland and Singapore as the corporate tax rate applicable to aircraft leasing operators is 12.5% in Ireland and even as low as 5% in Singapore. In comparison, Hong Kong is charging a higher tax rate. The authorities, thus, believe that the city should further reduce its tax rate to 8.25% as proposed in the current amendment for aircraft lessors and aircraft leasing managers, in a bid to attract them to establish their headquarters here to generate tax revenue. According to the Government, the revenue so generated is originally not in our pockets, so whatever the tax rate is, it should not be regarded as the offering of a big gift. Rather, it is an additional revenue income we earn as much as we can. To me, however, I find this logic rather dangerous. It is like staging a price war with your neighbouring stores or vegetable vendors.

10416 LEGISLATIVE COUNCIL ― 22 June 2017

The authorities think that a simple tax cut to 8.25% is sufficient to attract aircraft leasing operators to Hong Kong. But do you think Ireland and Singapore will sit and await their doom? Among the world top ten aircraft leasing operators, five are established in Ireland. The five heavyweights manage a total of 6 000 aircraft, accounting for a market share of 55%. Hong Kong has shown a great ambition, eyeing to ultimately snatch an 18% share in the aircraft leasing market. But is this forecast made on the premise that its competitors would not hit back, making retaliating tax cut or other measures to regain their market leadership? In case its competitors reduce their tax rates to below 8%, will Hong Kong come up with a proposal to further cut the rate to 5% next year? This is similar to the logic of multiplying by 20% I mentioned yesterday. If the origin intent could not be met even after the passage of the Government's amendment, is the ineffectiveness of the proposal attributable to the insufficient tax cut or the inadequate support measures? To put it in the extreme, if other regions lower the tax rate to zero, would the authorities subsidize the aircraft leasing operators with "barbecued pork with rice" in order to lure them to operate in Hong Kong? I really cannot make any sense out of it.

The Government has come up with these figures. I can only believe that they are correct. Like groping our way across the river, we can only use these figures to see if they are effective … and has the Government in place a comprehensive planning? What I mean is if the Government would once again propose amendments three or five years after the passage of this amendment when there are changes in the market environment and when it has some idea of the effectiveness of the current measures. I think there are grounds for being suspicious. No matter the incentive is a "spicy" or "sweet" one, once we start the granting of concessions, it will be followed by endless adjustments. What's more, once we have granted the concessions to the aircraft leasing business, other industries including emerging industries will probably follow suit and request for similar legislative amendments. I do not say the precedent is good or bad. Anyway, the authorities have told us that there is no need to pay attention to the reduced revenue income or possible provision of subsidies after applying the formula, as we are set to be tremendously benefited in the long run, including the indirectly indirect benefits of creating job opportunities and so on―the same logic it has pursued in the passage of the Asian Infrastructure Investment Bank issue. We can only trust what the authorities have said.

Let us look into some actual figures. The aircraft leasing industry is indeed quite profitable, though the purchase of an aircraft also involves huge investment. In Hong Kong, for example, the annual profits of the two local LEGISLATIVE COUNCIL ― 22 June 2017 10417 listed aircraft leasing operators, both subsidiaries of large consortia in Mainland China, are as high as $1 billion. Perhaps, the Government may think that if it can attract these companies to establish their headquarters in Hong Kong, even taxing them at a rate of 8.25%, there will still be tens of millions of dollars in revenue income. What is wrong with that? However, when these companies are enjoying a profits tax rate of 8.25% according to the formula, our local small and medium enterprises, which are operating under great difficulties, are subject to a tax rate of 16.5%. So, in case overseas markets introduce a tax cut to compete for this piece of "meat", would the Government conduct a review of all local industries which are facing difficulties as a result of tax concessions measures introduced in other places, including emerging, developing, and declining industries, and to introduce the same adjustment measures for them?

If the aircraft leasing sector can successfully lobby the Government to reduce its profits tax rate by half, other industries may follow suit and make similar requests. As far as the legislative intent is concerned, there should definitely be someone who said to the Government: "please proceed with the tax rate reduction. I will come here once you cut the rate". The Government thus put forward this tax concessions proposal. From the perspective of the Government, the introduction of the proposal, which can be implemented in a form of a trail scheme, does not involve substantial cost. If the scheme runs successfully, it can earn tax revenue, no matter it is substantial or otherwise. It is the way of thinking of the Government, this mentality of "take it or leave it", which has placed it at a disadvantage during its negotiations with the Walt Disney Company. Now, the industry is requesting for a rate cut to 8%. If there were a counterparty in the negotiation, asking the Government to lower the tax rate to 8% or 7%, the Government might ultimately accede to it. For the Government, this is brand new tax revenue it does not have before. Members should not think that it is scaremongering or is a slippery slope. The Government has already applied this theory. For example, when we once requested the Government to withdraw 20 capital works projects from a list of more than 3 000 projects, it was on the slippery slope by replying that: "If I allow you to withdraw 20 projects this time, will you request for withdrawing all 100, 200 or 300 projects next time?" Even the Government applies this logic in drawing conclusion.

I think this time if we open this door―I will not make such negative remark as opening a Pandora's box―other sectors will also exert pressure on the Government for the provision of tax concessions. I have already heard someone say if the leasing of aircraft can, why can the leasing of vessels not? Is it right? 10418 LEGISLATIVE COUNCIL ― 22 June 2017

Some other people said that it would be better to have the leasing of aircraft and vessels done in one go to save a lot of trouble. The two are just the same kind of thing, only with different examples and neighbouring regions for comparison. Hence, this precedent may pave the way for the downward adjustment of profits tax. This trend is not obvious now for this industry will not directly prejudice our interests. Nor do I believe that many Hong Kong people will care about the direct benefits it will bring about. Still, I will not speculate on the Government's motives or what LEUNG Chun-ying is doing, though some Members have escalated the issue to the political plane by saying that they have a clear idea of the situation and they all know full well about this. In fact, just in theory, I think the provision of the tax concessions has contravened the profits tax principle, as the repeated tax reduction initiatives will disable the wealth distribution function of the tax regime.

One last question that I particularly wish to raise is whether the environmental and air transport infrastructure costs associated with the implementation of the tax regime may outweigh the economic benefits from the aircraft leasing business that may be attracted to Hong Kong. In fact, according to the Bills Committee report, a similar question had also been raised in the meeting. It is a matter of cost and benefit. Whether the loss will outweigh the gain, or if it is a smarter bargain? Let us see how the Government replied to this question. The authorities said: "[A]s there is at present no offshore aircraft leasing business in Hong Kong. The question of revenue forgone as a result of introducing the proposed tax concession would not arise." As mentioned before, there is currently no presence of the industry, so every penny we earn is new revenue income. Yet, the Government said: "[T]here is no information on the ownership of such aircraft in the aircraft leasing business that would be transacted in Hong Kong following the implementation of the Bill." Of course, it does not have such information. The Government is uncertain how many companies the proposal would attract to register in Hong Kong. Nor does it have any idea of the number of aircraft the companies will buy and the amount of money they will invest in Hong Kong. But a relevant projection is indispensable, without which we just cannot calculate the costs and benefits involved. Whether, at the end of the day, we will make a breakeven, or if the costs outweigh the benefits? The Government continued to say: "where an aircraft calls at Hong Kong, the aircraft operators would need to pay airport charges"―of course, the service cannot be provided free of charge―"which would help offset the cost of airport operation." What the Government refers to is the day-to-day operating costs, not the costs for the provision of additional infrastructure or transport facilities arising from the LEGISLATIVE COUNCIL ― 22 June 2017 10419 proposal. The Government further said: "Measures are also put in place which would help reduce the environmental impact of air traffic in Hong Kong, especially along the flight path and in the area closest to the Hong Kong International Airport." In other words, the Government has told Members that it would endeavor to keep the costs or social costs to the lowest, without replying or unable to reply to the question on the cost-benefit comparison. That is why some Members have expressed their reservation about the amendment.

Besides, Dr KWOK Ka-ki, who has raised the most doubts and questions on the Bill, should side with us to vote against or abstain from voting on the amendment. Indeed, many people just do not understand why he is in favour of the amendment after asking so many questions on it yesterday. They are baffled why he will give his support. He has once questioned that: "whether the introduction of a tax regime for qualifying aircraft lessors and qualifying aircraft leasing managers carrying on an offshore aircraft leasing business in Hong Kong would set a precedent for other sectors, such as the maritime cargo carriage sector or pharmaceutical industry". I can answer this question. The maritime cargo carriage sector will surely do so and vessels will definitely be the next to enjoy the tax cut. In respect of the formula he has mentioned, I have not gone into it to study how much Hong Kong will benefit from it. It is also hard to calculate the relevant costs. Hence, the Government said in its reply: "The Administration would take into account the needs of the sector concerned and the impact on public revenue and the possible benefits to the society as a whole, among other factors, in considering whether a new tax concession regime should be set up for another sector." It seems as though it has not answered the question. Being unable even to answer my question on the aircraft leasing, the Government only said it would consider again when it proposes new initiative for another sector. Nevertheless, I have digressed a little from the subject, and I will speak again where necessary during the Third Reading of the Bill.

I so submit.

DR KWOK KA-KI (in Cantonese): Chairman, I will speak on clause 4 which involves the proposed section 14G and 14I. Actually, I have said at the very beginning that it is very unfair to Secretary for Transport and Housing because he has to do a "one-man show" here. Chairman, this debate today is about a tax concession measure. If we refer to the government papers and what has been discussed at the Bills Committee meetings, we should be aware that the proposal 10420 LEGISLATIVE COUNCIL ― 22 June 2017 is not quite related to transport affairs. The Government has put forth two points, and one of which, as can be seen in the government papers and the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"), is that most of the aircraft of offshore aircraft lessors will not take off or land in Hong Kong, so the aircraft will not become a transport issue to Hong Kong. And the proposal should be under the portfolio of Secretary Prof K C CHAN. Even if Secretary Prof CHAN should not be the only public officer attending this meeting, he should at least be sitting next to Secretary Prof Anthony CHEUNG to support him.

Chairman, why do I say so? As can be seen from our debate, the tax concession will become a precedent, which is what worries us most. No matter the precedent is a good or bad one, it will or will likely become a critical reference that some industries have enjoyed preferential tax treatments in Hong Kong. I prefer describing it as a preferential treatment rather than a tax concession. If a particular industry is entitled to a preferential treatment without comprehensive or sufficient justifications, the Government will have to face a very difficult situation in the future. We all know that the Hong Kong SAR pledges to maintain fiscal balance and keep expenditure within the limits of revenue under the Basic Law. So, we have to be very careful with any measure that goes against this pledge or poses any risk that will affect the profits tax revenues of Hong Kong.

Chairman, when the Administration tabled the Bill to the Bills Committee for scrutiny, there was relatively little controversy over the proposal in the beginning because the Bill mainly targeted at offshore aircraft lessors. But then something unexpected took place. The Administration later said that the Organisation for Economic Co-operation and Development ("OECD") suggested after reviewing the Bill again that the Bill should be in line with OECD's latest standards on combating base erosion and profit shifting ("BEPS").

I find it strange. According to a government paper, the SAR Government joined OECD as a member of the BEPS project in July 2016; and in the press release issued by the SAR Government, it stated that the SAR Government has the responsibility to implement Actions 5, 6 13 and 14 under the BEPS project. In fact, the Government should already know, as early as in July 2016, about these Actions. Then why did it only realize in 2017 that it had forgotten to comply with the BEPS Actions when it sought the Legislative Council's approval on the Bill?

LEGISLATIVE COUNCIL ― 22 June 2017 10421

There could only be two reasons. First, OECD did not make this requirement in the first place and only made it later. But this is not a common practice. There is a well-defined working relationship between OECD and the Hong Kong SAR, which is established on the basis of Actions 5, 6, 13 and 14. And this is also the reason Hong Kong joined the BEPS project.

Chairman, in a meeting of the Establishment Subcommittee earlier, we endorsed that a supernumerary post be created to carry out duties relating to the BEPS project of OECD. We thus can see that the SAR Government attaches great importance to the work related to OECD. But was the Government unaware of these requirements when it drafted the Bill and only learned about them later? Or did it actually know about the requirements but did not wish to mention them for fear of stirring up controversy?

Let me cite some earlier reports to describe the strong reaction of the SAR Government at that time. In 2009, the Department of Treasury of the United States listed Hong Kong as a major tax avoidance haven. The SAR Government reacted strongly to the statement, saying that it would not condone acts of avoidance and had never attempted to turn Hong Kong into a tax avoidance haven. In June 2015, the European Union ("EU") published for the first time a list of tax avoidance havens which covered 30 countries and regions, and Hong Kong was on the list. The SAR Government expressed regrets to EU's decision.

Hong Kong is a well-established financial centre and I believe we do not want to be called a "tax avoidance haven". The SAR Government also does not want Hong Kong to be put together with the other places on this list, such as Brunei and Morocco. The SAR Government expressed regrets to this and said that it would make extra effort to combat tax avoidance. I believe this is also the reason the SAR Government joined OECD's BEPS project as an Associate in July 2016, in order to take corresponding actions to remove the stigma of tax avoidance haven from Hong Kong.

In the press release issued in May 2016, it stated specifically that the Commissioner of Inland Revenue would represent Hong Kong to attend a meeting held in Kyoto on BEPS from 30 June to 1 July 2016. More than 80 countries and 82 BEPS Associates attended the meeting. These are the pledges clearly made by the SAR Government. Many of our competitors or business rivals, including China, Macao, Singapore and Japan are also a signatory to this agreement.

10422 LEGISLATIVE COUNCIL ― 22 June 2017

Let us come back to this issue. Regarding the aircraft leasing business under discussion now, it seems that Hong Kong is competing with Ireland and Singapore. But actually we all know that there has been a trend in recent years. State-owned enterprises operated with Chinese capitals are investing billions of US dollars on the aircraft leasing industry. Besides, following Warren BUFFETT's $9.6 billion investment in commercial passenger aircraft in 2012, Hong Kong tycoons followed suit. LI Ka-shing's Cheung Kong (Holdings) Limited spent $2 billion on buying 60 aircraft in 2014, and NWS Holdings Limited formed a joint venture, Bauhinia Aviation Capital Limited, with Chow Tai Fook Enterprises Limited to get a share of the market …

CHAIRMAN (in Cantonese): Dr KWOK, you are repeating yourself.

DR KWOK KA-KI (in Cantonese): I am not repeating myself. You can listen to the recording. I am not repeating myself.

CHAIRMAN (in Cantonese): You have mentioned this point before and you are repeating what other Members have said. This is your second time speaking. Please focus your speech on clauses 4, 8 and 10.

DR KWOK KA-KI (in Cantonese): Chairman, okay. This is about clause 4. You have been listening very carefully. In view of OECD's requests and those from the industry to add a new clause 5A, which seeks to expand the new tax assessment regime to cover onshore aircraft leasing services, the Administration proposed these amendments on clauses 4, 8 and 10 of the Bill at the final stage of the scrutiny in the Bills Committee.

Chairman, you also heard I talk about onshore services, which matches the content of clauses 4, 8 and 10 of the Bill. Moreover, this Council also needs to confirm whether we should pass or accept the amendments proposed by the Government in the second debate. If we disagree with the Government's policy, i.e. to extend aircraft leasing services and aircraft leasing management services to onshore aircraft leasing activities, we will oppose clauses 4, 8 and 10; and clauses 4, 8 and 10 pave the way for the new clause 5A.

LEGISLATIVE COUNCIL ― 22 June 2017 10423

Chairman, as I also clearly said just now, this involves a major change in the direction of our tax policy. I will not give Secretary Prof Anthony CHEUNG a hard time. I already made it clear that he should not be the one to come and answer this question today. During scrutiny of the Bill in the Bills Committee, the SAR Government failed to clearly answer questions on how to maintain fiscal balance, or tell us its view on the tax policy and specific industries, nor did it tell us its justifications on whether different industries should, or should not, accept the tax concessions. We could only get two messages from the Government. First, this is a rapidly developing industry and it will draw in a lot of capital; and second, when the Government first proposed the Bill, I did not have any strong opinion because it said that the Bill only covered offshore aircraft leasing services.

However, when the Government proposed the draft amendments and expanded the coverage to include onshore aircraft leasing services, things changed. Chairman, it is because this will provide an additional option. In the future, aircraft lessors or aircraft leasing managers can choose between two tax assessment options. One is to obtain profits tax concessions in the form of depreciation allowance, which is the traditional approach; and the other is to do so through this new tax concession regime.

Chairman, these companies can avoid quite a large amount of tax through this regime and they may do so year after year. The SAR Government says that these businesses can bring in $10 billion in 20 years' time. But the loss in profits tax revenue can actually be more than this amount of money. The Government often asks us to look forward and urges us not to reject new ideas. But we are precisely being forward-looking that we foresee onshore aircraft lessors may make handsome profits out of this arrangement.

According to latest forecasts, in the coming 20 years, financing business in Asia Pacific … Chairman, I am only talking about the Asia-Pacific region … can reach as much as US$2.2 trillion, which is HK$17 trillion, and this is for Asia-Pacific region only. Chairman, are we not located in the Asia-Pacific region? Is it not where we will be subject to a very vulnerable situation if the amendments are passed?

The Mainland owns 6 330 aircraft of the 14 330 aircraft. This will lead to two possible outcomes. First, Chairman, we know that many Mainland airline companies are listed in Hong Kong and they are now paying Hong Kong's profits 10424 LEGISLATIVE COUNCIL ― 22 June 2017 tax. Their profits have to be assessed for tax payment. At present, more and more companies have changed their structure or mode of service operation. Instead of buying aircraft, they now rent them; and the profits they generate from the leased aircraft account for a large proportion of their profits before cost deduction. If these companies make a huge profit in Hong Kong but a small profit from their parent companies, Hong Kong will have a deficit revenue from this business. This is a critical problem that the amendment to extend the tax concession to onshore aircraft leasing services will bring about.

Hence, I am not saying that a certain group of people can be immediately benefited from these amendments. But if we look ahead to 2034, i.e. 17 years later and the HK$17 trillion business to be generated, we are talking about a huge amount of money and the profits to be generated can be of billions of dollars. Businessmen have a sharp mind and they will choose a way to maximize their profits. However, if the way they make profits will weaken our tax revenue and pose a risk to the fiscal balance of Hong Kong, that should not be the way that the SAR Government opts for.

Hence, we agree with the original intent of the Bill, i.e. the new tax assessment regime which will not affect local or onshore aircraft leasing activities. But the Bill is now different. The Bill has been drastically revised and the amendments are not only talking about offshore aircraft lessors and offshore aircraft leasing managers. The amendments will lead to … I don't know how many billions of dollars … of revenues or profits or profits tax being exempted for tax assessment. Chairman, for this point alone, should we not request the Government to make further explanation to us?

I so submit. Thank you, Chairman.

MR CHUNG KWOK-PAN (in Cantonese): Chairman, I think government officials responsible for financial and monetary affairs should attend the meeting today, because the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") is not only about aircraft leasing business but also about tax concessions. Some Members opined just now that this might set a bad precedent, but I do not agree. Tax concessions have previously been provided in respect of certain trades and industries, such as the red wine trade. We used to levy duty on red wine but this has already been lifted now, thus helping Hong Kong to develop into a red wine centre in the Asia Pacific region and promote the development of a new industry.

LEGISLATIVE COUNCIL ― 22 June 2017 10425

We support the idea of providing tax concessions to attract new trades and industries to come and develop in Hong Kong, because this will help to create jobs and promote economic activities if they are induced to come. This will also help to increase other tax revenues, for example, the additional staff members recruited will be required to pay salary tax. However, aircraft leasing business under discussion is a new industry that only transnational or big enterprises can engage in, and given smooth development of this mode of business operation or the relevant tax concession policy, the measures can definitely be extended to other different trades and industries, and attract various new industries to come and develop in Hong Kong.

In fact, a query was raised by Mr LEUNG Kwok-hung yesterday to ask what benefits can the policy under discussion bring to small and medium enterprises ("SMEs") in Hong Kong when it can only attract big and transnational enterprises. His remarks are not incorrect, and when a Member whose main concern is social welfarism also talks about issues concerning SMEs, I have to stand up today and speak about ways to assist SMEs in obtaining tax concessions. Chairman, as a representative of the industrial sector, you have also mentioned that the sector has been fighting for a fairer treatment under sections 16E and 39E of the Inland Revenue Ordinance, because local enterprises which invest in production overseas are not given any tax allowances for the machinery and plants used. This is indeed a matter of concern for most SMEs.

For SMEs which are doing business overseas, particularly those which have invested and set up factories in the Pearl River Delta Region and Guangdong Province, most of the production equipment are purchased locally with the costs settled in Hong Kong, but no tax allowance is offered. Worst still, over the past few years, actions have been taken by the Inland Revenue Department ("IRD") to recover tax for the past seven years from some SMEs, because they have failed to complete the process of financial consolidation with enterprises in which they have invested. The Government has not only provided no tax concession to local SMEs but has also preyed upon them and tried to recover tax for the past seven years from them. There is one more thing which I consider most outrageous …

CHAIRMAN (in Cantonese): Mr CHUNG Kwok-pan, I feel sorry about it.

10426 LEGISLATIVE COUNCIL ― 22 June 2017

MR CHUNG KWOK-PAN (in Cantonese): Chairman, this is not a matter for you to feel sorry about, but something really happened in the industrial sector you represent.

CHAIRMAN (in Cantonese): However, I have already repeatedly reminded Members that the Council is now in the Committee stage of the Bill, and we are debating on clauses 4, 8 and 10. Since this is the first time you speak, I have given you some time to express your views on other matters. Please now speak on clauses 4, 8 and 10.

MR CHUNG KWOK-PAN (in Cantonese): Chairman, I understand, but with regard to depreciation allowance, when it is offered for machinery and to big enterprises, how come the same treatment is not given to SMEs? Conversely, this is also the case.

Chairman, you may think that I am deviating too far from the question, but it does not matter because my speech is drawing to a close. However, Chairman, I would really like to squeeze some time to talk about the issue now. I want to point out that IRD has not only provided no depreciation allowance but has also tried to recover tax from SMEs. How exactly do Assessors do their job? They did not understand what have really been reported in the financial statements submitted, but have made arbitrary judgment on the accounts and concluded that SMEs has paid less in tax, and I consider this unreasonable. Therefore, if the Bill is passed to provide tax concessions to certain trades and industries, I hope a comprehensive review will be conducted by the Government to explore how tax concession measures should be adopted to attract other trades and industries to continue to develop their business in Hong Kong.

Thank you, Chairman.

MR LEUNG KWOK-HUNG (in Cantonese): Chairman, I will really turn back to the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"), as there are two arrangements at present. Local companies engaging in aircraft leasing business or aircraft leasing management can choose between two options of tax assessment. The first option is tax depreciation. For the other option, it is the low tax rate of 8.25% on the taxable amount of rentals which is equal to 20% of the tax base i.e. gross rentals less deductible expenses.

LEGISLATIVE COUNCIL ― 22 June 2017 10427

That means the companies are being treated differently. We have to bear in mind that at the beginning, local companies were not covered and thus there was no such a problem. We see such an abnormality because local companies are now covered. Chairman, please be patient in listening to me as what I say is really related to the theme. As local companies were not covered when the whole legislation was first drafted, there was no such a regime that I am talking about. At present, local companies can choose between two options, and once a company has made a decision, its choice is irrevocable, whereas offshore companies can only have one option.

There is now another problem. The Organisation for Economic Co-operation and Development ("OECD") will query the Secretary that this is not a platform fair to all. Secretary, I do not know when it will ask this question. Therefore, although Secretary Prof K C CHAN is about to leave his position, he should also attend the meeting. This will give rise to another kind of situation concerning option value, or a difference in value which was mentioned by Dr YIU Chung-yim yesterday. OECD may ask him angrily for an explanation, as we have already signed to support the Base Erosion and Profit Shifting ("BEPS") measures of OECD.

In fact, we want to avoid this situation from happening. There are now two different ways of treating the companies. I want to ask―Chairman, the Secretary can answer later―if OECD sends a letter to Hong Kong and says that we cannot do this as this approach is not fair, what shall we do? Frankly speaking, no matter whether this Bill is passed or not, we all look like dead fish today.

Chairman, I think the Bill will certainly be passed today. My I ask honourable colleagues whether we need to use our brains in considering this initiative? We have already signed to support the measures concerned of OECD. If OECD writes a letter to reprove us, what should we do? Do we have to hastily come back to the Legislative Council to amend the Ordinance? Secretary, please call Secretary Prof K C CHAN. You surely cannot answer this question as you basically do not belong to this trade, right? You are here just to fill in a vacancy of the team.

After discussion of this question, we can see the absurdity of the whole issue. Once the legislative process has started, the Administration has been cautious in every step and answering Members' questions with empty words. 10428 LEGISLATIVE COUNCIL ― 22 June 2017

Chairman, I quote a very simple example. Concerning our aircraft leasing trade and aircraft leasing management business, Mr CHAN Chi-chuen and Dr KWOK Ka-ki have queries towards a situation, in which some aircraft being leased will park near to the Hong Kong airport. The Secretary says that this will not happen as this will not happen overseas. This of course will not happen overseas, as the airport in Ireland is so small―you will understand if you have been there. During the time when I was in Ireland, due to computer failure at the Ireland airport, I was unable to board the plane―However, Hong Kong has an international airport with scale, and we are also―Chairman, there is really a difference―the Secretary has given his answer too swiftly. Ireland has no capacity to take up the business as it is not a transportation hub, whereas Hong Kong is a genuine transportation hub.

Chairman, we approve the funding for the construction of the third runway in future as we hope that Hong Kong can become a transportation hub. This means that the people operating aircraft leasing business may have a chance of parking their aircraft in Hong Kong. Of course, in this aspect, the Government has not told us how many benefits will be brought to Hong Kong, or the benefits may be so substantial that the problems faced by the Airport Authority Hong Kong can be resolved. But on the other hand, the authorities have not taken account of the social cost (i.e. noise, pollution and the like).

Chairman, I am not speaking without thinking. I believe that you also remember the bill related to shipping. You were not the President of the Legislative Council then and you also voted against that bill. Secretary Prof Anthony CHEUNG, that bill related to shipping back then was really absurd. In order to attract more vessels to come to Hong Kong, we went against the international trend by relaxing the restrictions so that vessels using diesel with high lead content could also enter the Victoria Harbour. I remember that opposition started from me and the outrageous bill was vetoed at the end.

Hence, we are really promoting mercantilism. The Environment Bureau as an institution responsible for monitoring the environment of Hong Kong is basically one which makes no profit. Honourable colleagues, do you know what is meant by that? When it does not generate a lot of profits, who will listen to its instructions? In this Chamber today, Chairman, we asked Secretary Prof Anthony CHEUNG whether he has done any estimates on certain aspect. He replied in the negative, but he has done an estimate on another aspect. Chairman, he cannot give an answer to your question but will give you an answer LEGISLATIVE COUNCIL ― 22 June 2017 10429 to the question which you have not asked. He said that with their calculation, when the new initiative is implemented, more than 1 900 jobs will be created. But how are they distributed? We do not know. How many jobs will be in the financial sector and how many in the insurance industry? We do not know. These more than 1 900 jobs will further create 9 times of job opportunities, or 13 000 indirect jobs will be created. He is able to work out this figure. He can surely work that out if he wants to give you this answer.

Secretary Prof Anthony CHEUNG has given us the above reply but is unable to answer our questions. The prospective and existing enterprises concerned which will enjoy the concessions under the new legislation are in our proximity. They will certainly not have their aircraft parked in Ireland, right? In regard to these questions, there is not any estimate at all.

If the Bill is passed, the situation will turn out to be similar to that shipping related bill under which the Government could get profits at the expense of the citizens who had to tolerate the pollution and the noise. However, we should not let this happen, and this is the second point.

Thirdly, it is in fact unnecessary to give them a right to choose between tax depreciation and the ultra-low tax rate of 1.65%. The authorities can say that depreciation allowance is granted under the Inland Revenue Ordinance, but this option will no longer exist. My friends, you emphasize that it has to be innovative. Chairman, he mentions being innovative when giving things to others, but does not mention being innovative when getting things from others.

Chairman, there is one more question. In tax collection, people will not be allowed to pay a lower amount of tax. Do you understand what I am saying? A government will not say that there are now two tax calculation methods and people can choose a method through which they can pay less. What kind of logic is that? A government will of course adopt a method through which people will have to pay more tax, right? This surely is like that. Otherwise, an across-the-board approach shall be adopted so that the low tax rate can apply to all the people concerned.

There is a conspicuous difference between tax depreciation and the ultra-low tax rate. If a company has a lot of aircraft but does not have good business, it will of course choose tax depreciation, right? It will have some advantages in obtaining depreciation allowance. After providing advantages to 10430 LEGISLATIVE COUNCIL ― 22 June 2017 them in such a conspicuous way, the Government will draw some complaints from OECD as this organization is too smart. Chairman, I repeat that I really have the justifications. Since local companies were not considered in the first place, when OECD suddenly said that local companies had to be taken into consideration, the Government hastily came up with this arrangement. Nevertheless, firstly, OECD may not agree to this arrangement, and secondly, this obviously is providing tax concessions in two options so that the company concerned can choose to pay less tax. I am also not sure whether we are allowed to do this. How could this happen in the Legislative Council? We have to be equal in paying tax. Honourable colleagues, will the Inland Revenue Department ("IRD") say to us that there are two tax calculation methods and we can choose the method through which we can pay less tax? This will not happen. IRD will ask us to pay what we exactly have to pay, no more and no less.

CHAIRMAN (in Cantonese): Mr LEUNG Kwok-hung, this is already your third time to speak and you have been repeating your arguments.

MR LEUNG KWOK-HUNG (in Cantonese): No, I did not mention this argument yesterday.

CHAIRMAN (in Cantonese): Yes, you did. You mentioned this argument already last time when you spoke. Please return to the main theme and speak on clauses 4, 8 and 10. I will not tolerate your beating about the bush anymore.

MR LEUNG KWOK-HUNG (in Cantonese): Chairman, I am not beating about the bush. Yesterday, I did not mention … I will count them one by one. I did not mention that there are two options and the companies can choose between them in order to pay less tax. I did not criticize this arrangement but only said that someone had mentioned their differences. Second, I did not ask what the authorities should do if OECD says that such an arrangement is wrong. I am now asking the Secretary whether Secretary Prof K C CHAN is required to answer this question. All these are new viewpoints, right? Third, many Members have heard Secretary Prof Anthony CHEUNG say that those aircraft will not come to Hong Kong. I highlight that for the two countries offering LEGISLATIVE COUNCIL ― 22 June 2017 10431 these concessions, while Changi Airport can compete with us, the Ireland airport has no capacity to compete with us, and social costs will be incurred by the arrival of more aircraft to Hong Kong. These are three new viewpoints which the Secretary has not answered, and I am now raising some reasonable doubts.

When I was at that point of my speech, Chairman gave me some advice. Chairman, there is a very simple example. The exemption of duties on wine was a political order handed down by Henry TANG, your ex-political party member. He estimated that once the wine duties were waived, Hong Kong would become a wine centre and a lot of benefits would be brought forward. He has given a close estimate and what he envisaged has happened. But this measure under discussion is too vague and insubstantial, right? Another simple example is the insurance and reinsurance businesses which can also enjoy tax concessions, and the tax rate is only half of the profits tax rate. This was initiated because brighter prospects were envisaged. Ping An Insurance (Group) Company of China, Ltd on the Mainland is a large-scale company. It provides insurance services in Taiwan and we offer low tax rate so that it can pursue its insurance and reinsurance businesses there. In fact, the Mainland will be benefited at the end. We have a similar case here. We know that there is such a situation on the Mainland and so I have to ask the Secretary. For the tax concessions provided for the insurance and reinsurance trade, the tax rate was set at that time at half of the profits tax rate. Secretary, was it half of the profits tax rate? Yes, you answered readily yesterday. For this time, the rate is 1.65%, which is even lower. Then what yardstick has been used? The insurance industry is a sizable industry but the government concession is only set at half of the profits tax rate or half of 16.5%, which is 8.25%. Nonetheless, when an insurance company has earned $10 billion, can it obtain an allowance to the amount of $8 billion and only pay tax on $2 billion of its income? This will not happen. Chairman, when such a huge difference is involved, does our Council need to be consulted?

The present situation is that we have loads of businesses, and so have Ireland and Singapore, and I am asking about a comparable tax regime. Chairman, for the total exemption of duties on wine, since it has been passed and implemented, we can discuss the gains and losses from it. The problem that we are now facing concerns the tax rate. In the past, we did offer a total waiver or a concessionary tax rate of half of the profits tax rate. For the present case, we come up with an excuse of offering a low tax rate of 1.65% in addition to tax depreciation. Frankly speaking, Chairman, I find it risky simply by listening to the proposal. If the companies choose tax depreciation rather than the low tax 10432 LEGISLATIVE COUNCIL ― 22 June 2017 rate, that means they are only earning minimal profits, then a full tax waiver should be offered in advance, as in waiving the duties on wine. We just say that Hong Kong has a lot of money and thus offer a full tax waiver, and you can enjoy the concessions only if you operate the business concerned here. This is an unresolved mystery. If a company has a right to choose between two options, one being the tax rate of 1.65% and one being tax depreciation, and it chooses tax depreciation, does it mean that the tax rate of 1.65% is still too high? Such a low tax regime has caused so many problems which the Government cannot explain. A full tax waiver is offered to private equity funds, but I do not know about the result. We cannot see any logic in dealing with these tax affairs.

Chairman, this is why I have to raise criticisms. When the Bills Committee on the Inland Revenue (Amendment) (No. 2) Bill 2017 was seeking views from those deputations, we notice that those deputations are basically from the industry and this kind of consultation is not comprehensive. Were many people absent from the meeting after the Government has called all the people concerned on the full list to attend, or has the Government only invited these few people to attend? I also want the Secretary to respond to this question. Is the consultation of these few people sufficient? Then who are we? And what about me, LEUNG Kwok-hung, right? This approach does not work.

Therefore, Chairman, although what I say is not very pleasant, I am fully justified that the Government is only taking care of its supporters in the whole process. But this established practice is hard to change now. I thus hope that Secretary Prof K C CHAN can explain what is going on and why would the Government go back on its words. After the Government has promised OECD to implement the measures concerned, OECD may tell us tomorrow that we cannot carry out this arrangement. Will this be wasting time? I also do not want to waste any time, and my speaking time is up.

CHAIRMAN (in Cantonese): Does any other Member wish to speak?

(No Member indicated a wish to speak)

CHAIRMAN (in Cantonese): If not, I now call upon the Secretary for Transport and Housing to speak again.

LEGISLATIVE COUNCIL ― 22 June 2017 10433

SECRETARY FOR TRANSPORT AND HOUSING (in Cantonese): Chairman, I have listened to the speeches from Members who might have spoken more than once. In fact, some of them, who perhaps are not members of the Bills Committee, do not have full understanding of certain questions.

First of all, as Chairman has already highlighted, we mainly deal with the few amendments proposed by the Government in this debate session, including the proposal of extending the tax regime originally for offshore aircraft leasing activities to cover onshore aircraft leasing activities. Concerning some questions about the policy, during the resumption of Second Reading debate, we responded to these questions one by one with our explanations. However, some Members still put forward some queries on certain issues. Chairman, I thus ask you to allow me to set the record straight with brief explanations.

Mr LEUNG Kwok-hung mentioned earlier that the authorities have not provided the data. In fact, the data have been provided. I have a paper on hand which is the Legislative Council Brief, and the figures that we have provided are in paragraph 16 of this paper. Of course, Members may ask whether more information on the figures can be provided. As a matter of fact, in the course of deliberation by the Bills Committee, the Government has already given explanation in response to Members' queries. We have mentioned and also highlighted in the paper that with the implementation of the new tax regime, the profits tax paid by aircraft leasing companies will be about HK$1 billion in Year 20, and we estimate that there will be a total of more than HK$10 billion over a 20-year period, together with a cumulative Gross Domestic Product value added of over HK$430 billion over a 20-year period. It is also mentioned in the same paragraph that Hong Kong could gradually capture up to about 18% of aircraft leasing business in the global aircraft leasing market in 20 years' time. We are not bringing up hypothesis ambitiously but there are some bases on which these figures are arrived, including the projection of an increase in job opportunities.

Mr LEUNG Yiu-chung is worried that Hong Kong will suffer a double loss, and he says that the Government has been criticized in the past for underestimating the actual situations. It is, however, exactly because the Government is so conservative that the actual situations will turn out better than expected. I believe that different departments in the Government, including colleagues in the Economic Development Commission, will arrive at the estimated figures cautiously on the basis of some assumptions. Hence, the Government is not putting forward some proposals without the support of certain 10434 LEGISLATIVE COUNCIL ― 22 June 2017 data. We surely understand that the special taxation arrangement for aircraft leasing business is indeed a breakthrough, and this has been mentioned in my concluding speech in the Second Reading of the Bill.

I need to clarify another two points. I made a clarification earlier and now have to clarify again. Firstly, the taxation arrangement for aircraft leasing business is proposed by the Government to encourage these activities, which does not mean that there will be more aircraft landing at and taking off from Hong Kong. The air traffic movements mainly depend on the amount of aviation operations for passenger and cargo flights in Hong Kong. The Hong Kong International Airport will not allow arbitrary parking of aircraft, as the parking spaces at the Hong Kong International Airport are very precious. Hence, with the arrival of any passenger or cargo flight in Hong Kong, our airport will have to satisfy the needs in passenger and cargo operations.

As I also heard last night, some Members are worried that through this kind of new business, offshore companies can utilize the air traffic rights of Hong Kong. This is totally wide of the mark. Under the air services agreements signed between Hong Kong and foreign states or regions, we have mutual arrangements with aviation partners. The air traffic rights of Hong Kong can only be enjoyed by local carriers. We will determine which airlines are qualified to be local carriers in accordance with very strict procedures and criteria, and the assessment will be conducted by an independent air transport licencing institution. Thus, this is irrelevant to such leasing activities.

Indeed, we have originally designed a special taxation arrangement for lessors and managers engaged in offshore aircraft leasing activities. Why do we have to formulate a special policy for such organizations? This is because such organizations, unlike companies engaged in onshore aircraft leasing activities, are not entitled to the depreciation allowance, and the government departments (such as the Financial Services and the Treasury Bureau) do not intend to make any changes to the depreciation arrangement. Hence, the Government thinks that it is necessary to work through another channel in order to attract such companies to operate aircraft leasing business in Hong Kong.

Therefore, under our original plan for offshore business, the tax rate that we would offer is 50% of the prevailing profits tax rate. We would also offer a substantial arrangement on the taxable amount, under which the taxable amount of lease payments derived from leasing of aircraft to a non-Hong Kong aircraft LEGISLATIVE COUNCIL ― 22 June 2017 10435 operator by a qualifying aircraft lessor would be equal to 20% of the tax base, i.e. gross lease payments less deductible expenses. However, unlike what some Members speculated earlier, the actual tax rate would not be just slightly over 1% by multiplying 50% of the prevailing profits tax rate, which is 8.25%, by 20% under the new regime. This is not true.

As I recall, during the meetings of the Panel on Economic Development and the Bills Committee, colleagues from IRD have actually responded to Members' questions with explanations. How do we arrive at the actual tax rate? We will apply a tax rate which is 50% of the prevailing profits tax rate to the actual profits, while the latter will depend on a number of factors including the cost of aircraft. Hence at the Bills Committee meeting, the representative of the Government told Members that according to some kind of estimation, the actual tax rate was about 4%, and was not slightly higher than 1% as envisaged by some Members. The tax computation concerned is of course rather complicated and it is difficult for me to briefly explain here. But in fact, at the Bills Committee meeting, our colleagues have already given an explanation. On such crucial questions, I do not believe that members of the Bills Committee would allow IRD to dismiss the queries so lightly.

When we first introduced the taxation arrangement for companies engaged in offshore aircraft leasing activities, if companies engaged in onshore aircraft leasing activities found it unfair, they would have surely raised their opposition, but they did not voice any opposition back then. Instead, they thought that it did not make any difference to them as they could continue to obtain depreciation allowance according to the original tax regime. Hence, there has not been any opposition from such companies. We could see that under this arrangement, companies engaged respectively in offshore and onshore aircraft leasing activities would not be treated very differently. And also because of this, it has been the view of colleagues from the Financial Services and the Treasury Bureau that this approach has not violated the international requirements on the regulation of tax avoidance. Therefore, we have been promoting and encouraging offshore aircraft leasing activities in this direction in order to attract such companies to develop their business in Hong Kong.

Before mid-March this year, IRD has been in contact with the Organisation for Economic Co-operation and Development ("OECD"). In the past, we had the understanding that this was a very prudent arrangement, as companies engaged in onshore aircraft leasing activities and companies engaged in offshore 10436 LEGISLATIVE COUNCIL ― 22 June 2017 aircraft leasing activities would not be treated differently under the new and special taxation arrangement for offshore aircraft leasing activities. Nevertheless, after mid-March this year, through our usual contact with OECD, we found that the Secretariat of OECD has shown more concern in this regard.

Of course, Members may finally ask: Has the Government changed its original arrangement and plan? This is true indeed, as we have incorporated some amendments so that companies engaged in onshore aircraft leasing activities can also opt the arrangement that we originally proposed for companies engaged in offshore aircraft leasing activities. However, we reckon that they may not opt for this new arrangement. The Government has consulted all local airlines on this amended arrangement, and the latter already have full understanding of it. This is contrary to the remarks made by Mr Nathan LAW last night, who thought that local airlines were totally neglected by the Government and were kept in the dark, and this is absolutely not true.

In the end, what the Government has to take into consideration is OECD's reaction towards our special taxation arrangement originally designed for offshore aircraft leasing activities. If it regards Hong Kong as a place with harmful taxation measures, our image, including the image as an international financial centre, will be tarnished. As mentioned by some Members, in the Government, the Policy Bureau or person responsible for tax policies is not the Transport and Housing Bureau alone, but the Financial Services and the Treasury Bureau and even the Financial Secretary are also involved in our final discussion and assessment. Therefore, the Government thinks that a more proper approach is to move the present amendments so that the special taxation arrangement originally designed for offshore aircraft leasing activities can also be applicable to companies engaged in onshore aircraft leasing activities. With these amendments, the difference in how they are being treated can be completely removed.

In the communication between IRD and the OECD Secretariat concerning the amendment proposal, the latter initially thinks that it is acceptable. Hence, the Government has fully and carefully considered the issue and we are also rather cautious in promoting the development of aircraft leasing business.

Of course, from the perspective of Members, they will surely query the Government for putting forward the amendments only at the final stage of scrutiny by the Bills Committee. Nonetheless, I hope Members can understand LEGISLATIVE COUNCIL ― 22 June 2017 10437 that when we realized OECD's concern in mid-March, the Government needed to consider the issue internally and evaluate how to respond: Should we totally disregard its concern or move amendments to respond to its concern? In moving the amendments, we would have to look at the pros and cons in detail, and have to consider the law drafting matters. Hence, it was not until the final stage of scrutiny by the Bills Committee that we could formally put forward the amendments. I hope that Members can understand the situation of the Government at that time.

Chairman, I think during the Second Reading debate of the Bill, Members already agreed to our approach of promoting the development of aircraft leasing business through the tax arrangement. Hence, the amendments in this session are to facilitate the implementation of the tax arrangement to which Members have agreed.

Thank you, Chairman.

CHAIRMAN (in Cantonese): I now put the question to you and that is: That the amendments moved by the Secretary for Transport and Housing be passed. Will those in favour please raise their hands?

(Members raised their hands)

CHAIRMAN (in Cantonese): Those against please raise their hands.

(Members raised their hands)

Mr CHAN Chi-chuen rose to claim a division.

CHAIRMAN (in Cantonese): Mr CHAN Chi-chuen has claimed a division. The division bell will ring for one minute.

CHAIRMAN (in Cantonese): Will Members please proceed to vote.

10438 LEGISLATIVE COUNCIL ― 22 June 2017

CHAIRMAN (in Cantonese): Will Members please check their votes. If there are no queries, voting shall now stop and the result will be displayed.

Mr Tommy CHEUNG, Mr WONG Ting-kwong, Ms Starry LEE, Mr CHAN Hak-kan, Mr CHAN Kin-por, Dr Priscilla LEUNG, Mr WONG Kwok-kin, Mr Steven HO, Mr Frankie YICK, Mr MA Fung-kwok, Mr Charles Peter MOK, Mr CHAN Han-pan, Mr LEUNG Che-cheung, Mr Kenneth LEUNG, Ms Alice MAK, Dr KWOK Ka-ki, Mr KWOK Wai-keung, Dr Helena WONG, Dr Elizabeth QUAT, Mr Martin LIAO, Mr POON Siu-ping, Mr Andrew WAN, Mr Jimmy NG, Mr LAM Cheuk-ting, Mr Holden CHOW, Mr SHIU Ka-fai, Mr Wilson OR, Ms YUNG Hoi-yan, Ms Tanya CHAN, Mr CHEUNG Kwok-kwan and Mr LAU Kwok-fan voted for the amendments.

Mr LEUNG Yiu-chung, Mr LEUNG Kwok-hung, Ms Claudia MO, Mr CHAN Chi-chuen and Dr YIU Chung-yim voted against the amendments.

THE CHAIRMAN, Mr Andrew LEUNG, did not cast any vote.

THE CHAIRMAN announced that there were 37 Members present, 31 were in favour of the amendments and 5 against them. Since the question was agreed by a majority of the Members present, he therefore declared that the amendments were passed.

CLERK (in Cantonese): Clauses 4, 8 and 10 as amended.

CHAIRMAN (in Cantonese): I now put the question to you and that is: That clauses 4, 8 and 10 as amended stand part of the Bill. Will those in favour please raise their hands?

(Members raised their hands)

LEGISLATIVE COUNCIL ― 22 June 2017 10439

CHAIRMAN (in Cantonese): Those against please raise their hands.

(Members raised their hands)

Mr LEUNG Kwok-hung rose to claim a division.

CHAIRMAN (in Cantonese): Mr LEUNG Kwok-hung has claimed a division. The division bell will ring for one minute.

CHAIRMAN (in Cantonese): Will Members please proceed to vote.

CHAIRMAN (in Cantonese): Will Members please check their votes. If there are no queries, voting shall now stop and the result will be displayed.

Mr Tommy CHEUNG, Prof Joseph LEE, Mr WONG Ting-kwong, Ms Starry LEE, Mr CHAN Hak-kan, Mr CHAN Kin-por, Dr Priscilla LEUNG, Mr WONG Kwok-kin, Mr Paul TSE, Mr Steven HO, Mr Frankie YICK, Mr YIU Si-wing, Mr MA Fung-kwok, Mr Charles Peter MOK, Mr CHAN Han-pan, Mr LEUNG Che-cheung, Mr Kenneth LEUNG, Ms Alice MAK, Dr KWOK Ka-ki, Mr KWOK Wai-keung, Mr Christopher CHEUNG, Dr Helena WONG, Dr Elizabeth QUAT, Mr Martin LIAO, Mr POON Siu-ping, Ir Dr LO Wai-kwok, Mr Andrew WAN, Mr Jimmy NG, Mr LAM Cheuk-ting, Mr Holden CHOW, Mr SHIU Ka-fai, Mr Wilson OR, Ms YUNG Hoi-yan, Ms Tanya CHAN, Mr CHEUNG Kwok-kwan and Mr LAU Kwok-fan voted for the motion.

Mr LEUNG Yiu-chung, Mr LEUNG Kwok-hung, Ms Claudia MO, Mr CHAN Chi-chuen and Dr YIU Chung-yim voted against the motion.

THE CHAIRMAN, Mr Andrew LEUNG, did not cast any vote.

10440 LEGISLATIVE COUNCIL ― 22 June 2017

THE CHAIRMAN announced that there were 42 Members present, 36 were in favour of the motion and 5 against it. Since the question was agreed by a majority of the Members present, he therefore declared that the motion was passed.

CLERK (in Cantonese): New clause 5A Section 16 amended (ascertainment of chargeable profits).

SECRETARY FOR TRANSPORT AND HOUSING (in Cantonese): Chairman, I move the Second Reading of the new clause 5A, which seeks to introduce provisions to section 16 of the Inland Revenue Ordinance in order to prevent abuses and possible taxation arbitrage in any aircraft leasing transaction which is conducted through a connected person. For instance, if a Hong Kong aircraft operator (the lessee) makes a payment to a qualifying aircraft lessor or qualifying aircraft leasing manager who is entitled to enjoy the 50% concession of the prevailing profits tax rate under the new tax regime, whether directly or through an interposed person, then when the Hong Kong aircraft operator is computing the amount of deduction of its assessable profits, adjustment should be made with reference to the qualifying aircraft lessor's or qualifying aircraft leasing manager's underpayment of tax.

Chairman, the Bills Committee supports the above amendments, I so submit.

CHAIRMAN (in Cantonese): I now propose the question to you and that is: That the new clause 5A be read the Second time.

DR KWOK KA-KI (in Cantonese): Chairman, as I have said earlier, all the earlier amendments are related to clause 5A of the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"). It is clearly stipulated in the clause that the locally (i.e. Hong Kong) operated aircraft leasing services, including the business of granting a right to use an aircraft or the business of managing a corporation, will be eligible for tax concessions. Chairman, if you say the devil is in the details, it is the most significant one.

LEGISLATIVE COUNCIL ― 22 June 2017 10441

Chairman, as you have not joined this Bills Committee, you may not know the current amendment has deviated largely from the original intent. When proposing the initial amendment, the Government has made it clear that the Bills only targeted at non-resident aircraft leasing operators, and local aircraft leasing companies or aircraft leasing managers would not be affected. It is precisely this proposal which is likely to tarnish once again Hong Kong's reputation, making it liable to be stigmatized by the Organisation for Economic Co-operation and Development ("OECD") and others as another "tax haven".

Why do I say so? The aircraft leasing services and airline companies are highly complicated businesses involving huge capital investment. I guess many people may not understand what I mean. To put it simple, a company may engage in a variety of businesses, with some directly relating to the air services. Chairman, when we buy an air ticket from Cathay Pacific or any airline, we probably think that the profit generated from this transaction should simply be taxed at a profits tax rate stipulated under Hong Kong's Inland Revenue Ordinance. Very little has known that it is not the case. The computation process is incredibly complicated. It is because many airlines no longer directly own their aircraft, and the carrier service is provided by leased aircraft through leasing services. In this respect, we do not know or even we will never know the level of services, the content of the agreement, and even the money man behind such an aircraft leasing deal.

Let me cite a simple example. These companies are mostly listed companies. Some of them raised funds in the market by way of listing. Some are managers of aircraft leasing companies, which are not required to disclose the owners of the companies. This is precisely setting a precedent. What worries me most is that some companies may make use of this arrangement to avoid paying normal profits tax.

Chairman, what we are talking about is Hong Kong's tax regime. Though Secretary Prof K C CHAN and Financial Secretary Paul CHAN are not present, we still know that Hong Kong has maintained a simple tax regime, hoping that this helps sustain the city's competitiveness. On the other hand, in the light of the requirements of some international agreements, including the OECD requirement, Hong Kong has to respond to the OECD agreement and implement several actions under the base erosion and profit shifting ("BEPS") package.

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However, the proposed tax concessions may contravene some of the BEPS requirements, including Action 5, Action 6, Action 13, and Action 14. What is more horrifying is that allowing onshore aircraft leasing services and aircraft leasing managers to enjoy the same tax concessions is essentially not the original intent of the Bill. I am reluctant to guess why the Government has not put forward such a substantial amendment until the final stage of our scrutiny work. Perhaps, it is out of good intentions. The Government was originally unaware of the OECD requirement. The truth of noncompliance only dawned on it upon advice from OECD. On realizing this, the Government immediately amended the Bills accordingly.

However, it would be very worrying if this was rather a planned or calculated move. The Government well understood that to address or in response to the OECD requirement, the tax concessions would ultimately be extended to onshore aircraft leasing services at the later stage of the Bill's scrutiny work. If the latter is the case, it is most despicable.

We will definitely not be able to know the truth from today's discussion. I trust Secretary Prof Anthony CHEUNG would not comment whether he has some other views on this. Indeed, I have repeatedly pointed out that this should not be the scope of duties of the Transport and Housing Bureau. Why should it be under the purview of the Bureau if the discussion of the tax regime which includes the forecasts made by the Government on the impact of the services, the usage of the Hong Kong airport, and the aircraft movements is not directly related to the work of the Bureau? Is it not the Financial Services and the Treasury Bureau or even the Financial Secretary who should be responsible for amending the tax regime, as well as initiating or conducting debate on this?

The arrangement of making Secretary Prof Anthony CHEUNG to repeatedly respond to issues out of his purview is unreasonable, far from being open and aboveboard. On the other hand, the expressions of "local" and "Hong Kong" are keywords in the amendment. While the aircraft leasing services in Hong Kong may not be operating in a large scale at present, and the profits and gains arising from the business as set out in clause 5(3)(n) of the Bill are not significant, it is only the situation we can see today. With the passage of time, we should be aware that investment capital is inexhaustible on the Mainland.

According to some documents of the Bills Committee, Premier LI Keqiang pointed out during his inspection visit in 2013 that the aircraft leasing services would be a lucrative business on the Mainland or in Asia, so we had to get LEGISLATIVE COUNCIL ― 22 June 2017 10443 prepared for this. His remark was made in December 2013 when he was in Tianjin, so his audience was of course not Hong Kong people but some Mainland industries. Still, upon hearing the hint from Premier LI Keqiang, I believe that many officials of the SAR Government, the current "689" Government―I do not mean the Secretary―are smart enough and cannot wait to make a quick response. From the hint, they knew that there would be an influx of capital to Hong Kong. In other words, some organizations, companies, or individuals on the Mainland would like to increase their financial investments through this industry.

On the surface, it is all right to have inward investment in Hong Kong. What more can we ask for, right? But in this world, some money can be brought to the light but some cannot. Perhaps, in case someone is looking for a funding arrangement or cross-control business arrangement to whitewash their "black money", investment in the aircraft leasing business is a good option. No due diligence will be conducted on the source of funds. You can earn an fixed income with a return of 8% or as high as 10% in the current low interest rate environment simply by investing a lump sum of money in the leasing companies, which will use your money to buy an aircraft and rent it out. Is it awesome and attractive? Besides, we can whitewash our secret money by openly putting them into an aircraft leasing company.

(THE CHAIRMAN'S DEPUTY, MS STARRY LEE, took the Chair)

In 2009 and 2015, the Government said in a tone of moral righteousness that Hong Kong was not a tax haven as the city could not do so. But with the implementation of these new policies, will Hong Kong be named a "tax haven" again by the European Union or other countries? We can wait and see. Often when we take the first move, it will be no end of trouble in the future. I have cited a simple example just now. Once we set a precedent in the aircraft leasing business, what should we do with the vessels? How about the machinery industry? We can see that Mr CHUNG Kwok-pan of the Liberal Party has openly questioned why the authorities have been so mean to and with no regard for the small and medium enterprise ("SMEs"). This is unjustifiable. When the Government is favouring a particular industry, it is in effect directly discriminating any other industries. Someone asked why the Government gave the wine industry preferential treatment but paid no attention to other industries? 10444 LEGISLATIVE COUNCIL ― 22 June 2017

Why the aircraft leasing can enjoy this special arrangement? Is it the case that the SAR Government cannot wait to follow the remarks of LI Keqiang, and get everything prepared for the industry to establish its presence in Hong Kong? How about if another State leader makes some other remarks, should we have to follow the direction of the "northerly wind" as well? Perhaps the "northerly wind" may ask us to provide other tax concessions. Should we have to tail after them? The "one country, two systems" framework should not be operating this way. Besides, under the Basic Law, it is incumbent upon the Government to maintain the city's financial soundness. These are important.

When we look back on the development in the past 20 years, we can see a worrying phenomenon of the increasingly homogenous source of funds and of investments in Hong Kong. The homogeneity will put the city at risk in two aspects. First, we will lose our sole source of fund when funds from the Mainland are exhausted one day. Second, we are so accustomed to a homogenous investment source that we will lose our competitiveness to investors in other markets. This is not good news to Hong Kong.

The introduction of some strange tax arrangements, including these special tax measures, has made investors consider that the SAR Government has failed to provide a level playing field for all industries to start on. Instead, it will make different arrangements for some special industries particularly mentioned by State leaders. If I were a businessman operating a business outside the favoured industries, I will naturally find a way out. It is not in the interest of Hong Kong if the city has been degenerated to such a state. This is why I have pointed out time and again in various debate venues that the Government should elaborate further on the impact of the measures on the tax regime, in particular the long-term impact on the tax revenue. Regrettably, despite I have shouted out, relevant officials such as K C CHAN and Paul CHAN will not return to this Chamber.

Under the current composition of the Legislative Council, I believe that the Bill will be passed shortly. However, it is all Hong Kong people, not just the industries subject to direct discrimination, will suffer. The tax regime will affect not just a single group of people as the impact covers various kinds of services affected by the forgoing of the tax revenue. In the areas of education, housing, health care, and social welfare, these services may be deprived of their major source of tax revenue as a result of such tax arrangements. This will undermine their financial viability, making them unable to make ends meet. At that time, LEGISLATIVE COUNCIL ― 22 June 2017 10445 the SAR Government can say aloud that it has no money to do anything. Because of the unhealthy fiscal position, the Government can continue to shelve such measures as the universal retirement protection scheme and standard working hours. However, it is our support of this arrangement today that may sow the seeds of the fiscal troubles. I am not saying that this special arrangement will bring about collusion between the Government and business or even the money laundering activities tomorrow. But it will be hard for us to bound back if we introduce tax policies slightly without thorough consideration.

Given the uncertainties, have we though carefully that we are tailgating by following each and every step of State leaders as well as each and every development on the Mainland, including the expanding aircraft leasing services? As remarked by CHEN Zuoer, tailgating would "cause a fatal car crash". No one will feel pity for us. Just for the sake of a handful of people with vested interests, we are going to open the door for the arrangement which will affect the long-term financial situation of Hong Kong. We have to remember what is going to happen today as this arrangement will enable plutocrats, such as LI Ka-shing who is financially capable to set up an aircraft leasing company, to pocket all the gains at the expense of many others. I so submit.

MR JEREMY TAM (in Cantonese): First of all, I would like to declare under Rule 83A of the Rules of Procedure that I am an employee of a local airline company. However, airline companies will in principle not be benefited from the legislative amendments introduced in the current exercise, since only aircraft leasing companies are involved.

I wish to share my thoughts on the proposed amendments with the remarks to be made in this speech. I do not have any background in financial and monetary affairs, and am not a specialist in aircraft leasing business. Nevertheless, I am after all working in the aviation sector, and would therefore like to clarify some misunderstandings which I think would have direct impacts on the current legislative exercise.

First of all, there are actually many things that companies engaging in aircraft leasing business can do even without the proposed Committee stage amendments ("CSAs"), and what do I mean by that? It means that once the amendment legislation is passed, malpractices cited by some colleagues have in fact become possible. For example, some colleagues opined that after passage 10446 LEGISLATIVE COUNCIL ― 22 June 2017 of the proposed CSAs, Mainland airlines listed in Hong Kong can reap profits by leasing aircraft to their own subsidiary companies. However, this can actually be done once we have voted for the amendment legislation when it was read the Second time. Although some Mainland airlines, be they China Eastern Airlines or Air China, are listed in Hong Kong, it does not mean that they are operating their business here in Hong Kong. What does it mean by operating business in Hong Kong? The fact that a company is listed in Hong Kong does not necessarily imply that it is operating its business here.

In order to operate business in Hong Kong, a company has to obtain an Air Operator's Certificate ("AOC") issued by the Civil Aviation Department. As fellow Members may recall, an attempt was made by Jetstar Airways a number of years ago to obtain an AOC in Hong Kong but its application was not successful, and the application for the issuance of an AOC was submitted with a view to making Jetstar Airways an airline company operating business in Hong Kong. Therefore, regardless of whether the CSAs in question have been proposed, and even without these CSAs proposed to the three clauses, it would still be possible to adopt the practice mentioned above under the principal legislation as amended. This is a point which I have to clarify, because a company listed in Hong Kong does not necessarily operate its business here.

Secondly, some colleagues pointed out that as such companies intended to domicile their business in Hong Kong anyway, we should charge them profits tax at the standard rate of 16.5%, rather than offering tax concessions for the only purpose of attracting them to come and operate business in Hong Kong, since these were businesses that big consortia would like to do and they intended to operate business here anyway. In this connection, we need to have a clear understanding that some aircraft leasing companies listed in Hong Kong are operating their business in Singapore, and may as well try to figure out the logic behind. If it is considered perfectly fine for such companies to raise fund in Hong Kong and pay tax to the Singaporean Government, how come it will conversely be unacceptable when more tax concessions than those offered in Singapore are granted in Hong Kong, so that they will pay tax to the Hong Kong Government?

Therefore, another point which I would like to make is, if such companies would domicile their business in Hong Kong anyway, they should directly build up their business base here in Hong Kong at the outset, instead of having their operations domiciled in Singapore and Ireland. Why did they not do so? It is LEGISLATIVE COUNCIL ― 22 June 2017 10447 exactly because they are not provided with tax concessions here. Businesses operated by such companies are global in nature, and there is indeed no need for them to have their operations domiciled in Hong Kong. Online shopping is a similar example, and there is no need for companies engaging in online shopping business at a particular place to set up a business base or an office there. There are a lot of online shopping companies operating in South Korea without setting up a main office in the country, and business can go on as usual as long as they can domicile their business in a place with the lowest operating costs and the most favourable operating conditions. Hence, there is no question of introducing tax concession measures to benefit companies which will definitely domicile their business in Hong Kong.

Moreover, we should refrain from making a direct comparison. Some colleagues queried why the same arrangements could not be made for the leasing of machinery, but I give my support to the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") because it involves a type of tax that is currently not charged in Hong Kong. If the Bill covers a sort of tax which has all along been levied in Hong Kong, be it in the real estate, industrial or any other sector, the concession measures proposed will certainly bring about a reduction in tax revenues and thus deviate from the original intention of the Bill.

Finally, I would like to add that there is only one question which I have been examining over and over again and that is: What is the meaning of "connected person"? The issue of current concern is that aircraft leasing companies may be set up to lease aircraft to their own subsidiary companies. However, it is already set out very clearly at Annex B to a paper (reference number: THB(T)CR 1/44/951/08) that after detailed computation, the companies thus established will not be benefited since they will not be entitled to any depreciation allowance.

That aside, people may still query what is meant by "connected person"? The term "connected person" has actually been defined in the proposed section 14G to mean "a person over whom the corporation has control", "a person who has control over the corporation", or "a person who is under the control of the same person as is the corporation", and the key word used in that section is "control". However, clear provisions have not been laid down in the proposed section to define further the meaning of "control". Does it mean that control must be exercised by the major shareholder, by more than 50% of the shares of the corporation, or by a minor shareholder to whom the management rights have 10448 LEGISLATIVE COUNCIL ― 22 June 2017 been entrusted, and who is therefore the person in control even though he/she only has a very small proportion of shares? In this connection, I do not think the exact meaning of "connected person" has been set out in the Bill, and apart from the general description contained in the proposed section 14G, I am not sure about its concrete definition. Therefore, with regard to the question I raised just now, I hope the Secretary will respond in his speech later by explaining the meaning of "connected person" and the ways to ensure that the relevant provisions will not be abused.

Lastly, let me reiterate that once the Bill has been passed when it was read the Second time, it has already become possible for Mainland airlines to take advantage and make the arrangements mentioned just now even without the proposed CSAs. I have to state it clearly once again that although an airline company is listed in Hong Kong, it does not necessarily imply that its business here in Hong Kong can be benefited, because as I have clearly explained earlier, a company has to obtain an AOC issued here before it can be defined as operating its business in Hong Kong. This is exactly what Jetstar Airways have tried to obtain years ago but without avail.

This is all I want to say. I so submit.

MR LEUNG KWOK-HUNG (in Cantonese): Deputy Chairman, the crux of the issue lies in the sudden need to incorporate the changes. As OECD wrote to us demanding that tax concessions be provided to local operators, we have to act accordingly, thus giving rise to the problem which I have pointed out just now, that is, an unclear legislative intent. I am not sure if you have heard me say so. It was until the final stage of the scrutiny of the Bill that OECD demanded us to let local operators benefit from the tax concessions as well which they deemed a must. However, local operators have already been offered two types of tax concessions, one being the depreciation allowance, and the other concerns the scheme of tax assessment that works this way: {(gross lease payments―outgoings/expenses) x 20%} x ½ profits tax rate. After doing some calculation on this, one will see that Hong Kong definitely has a competitive edge in this regard. The profits tax rate in Singapore is 8.25% while that of Hong Kong is 16.5%, how can Hong Kong be regarded as having no competitive edge, buddy? Hence, foreign enterprises will certainly come to invest in Hong Kong. In fact, those enterprises have been operating in Hong Kong, such as the ones which I have named just now, including the six major Mainland-funded and Hong LEGISLATIVE COUNCIL ― 22 June 2017 10449

Kong-owned aircraft leasing managers. It is most certain that they are entitled to the tax concessions associated with the discount to the tax rate of 16.5%. My question is: Given that the big discount to the profits tax rate of 16.5% under such significant tax concessions, why not grant them full exemption on profits tax straight ahead, eh?

Actually, people do not really understand the crux of the issue which I had already briefly explained yesterday, but Mr Kenneth LEUNG probably knows that double taxation had been revoked since 2008. That means a company having paid income tax in Hong Kong is not required to pay tax in the Mainland, and the door of the "Paradise of tax evasion" had since opened. That tells us why Hong Kong is given that name. When singing the national anthem of China as its nationals, people project manly, robust looks; when they come to invest in Hong Kong, they are entitled to low tax rates. Anyway, a precedent had already been set in 2008 and we are only repeating a similar thing today. And so, will Dr YIU Chung-yim please say a few words later in his speech on some of his research work done in the past? Back then in 1986 during the British Hong Kong era, we were already worrying that situations similar to the following scenario would emerge: Someone lease out an item that he has bought to another person either at a lower or higher price aiming to evade taxes. It is exactly the same as the current situation.

I repeat once again, Deputy Chairman. The State bulk-buy aircraft for distribution to various airlines, but those airline companies will become debt-ridden afterwards because they have to borrow loans for purchasing those aircraft. Nowadays, we adopt a new method of finding several large …

DEPUTY CHAIRMAN (in Cantonese): Mr LEUNG Kwok-hung, please indicate that what you are now saying is relevant to the new clause 5A.

MR LEUNG KWOK-HUNG (in Cantonese): Certainly it is relevant.

DEPUTY CHAIRMAN (in Cantonese): Please show that both are relevant.

10450 LEGISLATIVE COUNCIL ― 22 June 2017

MR LEUNG KWOK-HUNG (in Cantonese): Clause 5A entitles the connected persons to the tax concessions, but Mr Jeremy TAM has pointed out just now that "connected person" is not clearly defined. This problem will probably grow bigger as something has not yet happened at this moment may happen in the future. For example, aircraft leasing company A leases to China South Airlines ("CS Airlines") the aircraft leased from aircraft leasing company B. Do not interrupt me, Deputy Chairman. I will certainly explain to you. When CS Airlines makes huge lease payments to its subsidiary (i.e. company A) for leasing instead of purchasing aircraft, where company A is managed by an aircraft leasing manager, a business chain is formed. This means that CS Airlines can avoid paying tax by means of paying huge amount of lease payments to the aircraft leasing company (i.e. its subsidiary), and in this case, even the depreciation allowance can be spared. For example, when $10 billion is spent on making lease payments, then this sum will not be taxed as it is counted as outgoings. This way, the lessor or the leasing manager can enjoy low tax rates. And since both of them belong to the same group of companies, the amount of corporate tax paid in Hong Kong by the group will become smaller. It is just as simple as ABC.

Why do they not operate their business in other places then? It is because they will be subjected to regulatory investigations in other places, buddy. Can you find those persons called LI Siu-ka, TONG Ka-shing, CHAN Ka-keung or CHAN Mau-po in Ireland? Obviously, despite that much efforts we have made, the results are just contrary to our expectations. This is something forbidden during the British Hong Kong era, or those companies would be taxed accordingly. However, people no longer have to worry about the problem of double taxation since 2008 as they will only be taxed either in China or Hong Kong and this had created a loophole that gave rise to the aforesaid problem. Therefore, I consider clause 5A unreasonable. Instead, it should be stipulated in the provisions: First, such a practice is an offence; second, the authorities have the right to pursue the offenders for the tax unpaid. Am I overanxious? Not at all. This has something to do with LI Keqiang's actions taken in response to Warren BUFFET's moves. In fact, XI Jinping and LI Keqiang have been purchasing aircraft all over the world in anticipation that some people will be able to, just like the wife of Wang Qishan, afford to spend the money and time travelling overseas by flight for property viewing as China's national strength grows, thus greatly pushing up the demand for aircraft. This will bring business opportunities for sure. Having got business to do, people will naturally think of how to evade taxes, and it is precisely the problem that I have raised here, understand? I repeat once again …

LEGISLATIVE COUNCIL ― 22 June 2017 10451

DEPUTY CHAIRMAN (in Cantonese): Please focus your speech on the new clause 5A, Mr LEUNG.

MR LEUNG KWOK-HUNG (in Cantonese): That is why I pointed out the necessity of providing clear definitions in clause 5A, as Mr Jeremy TAM has also mentioned just now about defining clearly what is meant by "connected person", right? How can the ordinance be enforced without clear definitions? If it so happened that new types of tax-evading bodies called "Cartel", "Trust" or "Cartrust" do emerge one day, how should we respond then?

My argument is very clear, Deputy Chairman. First, I am speaking in the interest of the State because I am Chinese, I pay taxes as a Chinese, right? If we open the door for tax evasion, is it fair to the State? Allowing enterprises to constantly evade tax will, so to speak, incur "capital punishment executed by firing squad", buddy. At present, companies dedicated to help people default or evade taxes are doing a thriving business. And why will 1 900 will be offered employment then? Excuse me, Mr Kenneth LEUNG, I am not making any reference to you. The 1 900 people will engage exactly in such dealings, buddy, that is, exploiting legal loopholes. They have not committed any offence indeed―well, Mr Kenneth LEUNG will not be deemed having committed an offence even if he engages in such dealings, and neither will you, Deputy Chairman, as you are an accountant and doing so is in no sense illegal―all because we are now providing a legal platform for them to do so, buddy. It is similar to playing mahjong in the sense that a player makes every move to win and will try his best to win as much as he can especially when he stands a good chance of winning the game. And similarly, we are now putting in place a platform in the legislation for people to win as much as they can. And so, Deputy Chairman, I must declare in the first place that, even some will regard me as unpatriotic, I still think that a huge loophole has already emerged following the signing of the Comprehensive Double Taxation Agreement between the State and Hong Kong in 2008, and what we are doing now will only enlarge the loophole …

DEPUTY CHAIRMAN (in Cantonese): Please pause for a while, Mr LEUNG. The Bill has been debated by this Council for a long time and you have repeatedly elaborated …

10452 LEGISLATIVE COUNCIL ― 22 June 2017

MR LEUNG KWOK-HUNG (in Cantonese): There is no guilt in loving one's home country.

DEPUTY CHAIRMAN (in Cantonese): … this argument. Please focus on whether you support the new clause 5A or not.

MR LEUNG KWOK-HUNG (in Cantonese): I am speaking on the new clause 5A right now. I demand that the meaning of "connected person" be clearly defined. Actually, the problem can be properly dealt with if we have anti-trust law or anti-cartel law in place, but unfortunately, both are absent here in Hong Kong. You must know what a "cartel" is. It refers to a kind of monopoly formed along a production chain. Capitalism is like the protean "Monkey King" (the main character in "Journey to the West") that takes many different forms, one being lowering prices to achieve monopoly in the market, but now the proposed provision of tax concessions is just the opposite to that because aircraft lessees will be looking for ways to make huge lease payments to aircraft lessors so that the latter can enjoy low tax rates. It is a loophole indeed, right …

DEPUTY CHAIRMAN (in Cantonese): You have already repeatedly indicated that such an arrangement may have loopholes, Mr LEUNG. Please elaborate your new argument.

MR LEUNG KWOK-HUNG (in Cantonese): Yes, I am now making it clear that it should be regarded as an offence if companies belonging to the same group are found to be operating this way and the group concerned should be liable to a fine (i.e. as punitive interest) or being pursued for taxes unpaid. Yet, has the law so stipulated? Certainly not! It is indeed a huge loophole involving the some 1 000 people, buddy, because they will engage precisely in that sort of dealings in future. If company A, having borrowed loans from the bank at an interest rate of 2% for leasing aircraft, leases out the aircraft to an airline company at a rate of 10%, where both company A and the airline company belong to the same group of companies, then 8% out of the 10% will neither be taxed in the Mainland nor in Hong Kong, OK? And I do not know if he can come to Hong Kong. This way, the Hong Kong-based aircraft leasing company or aircraft leasing manager will be able to enjoy the world's lowest tax rates. I must reiterate here that we LEGISLATIVE COUNCIL ― 22 June 2017 10453 are not talking about the 8.25% in Ireland or the 8.25% in Singapore, but the discounted 8.25% here in Hong Kong, that is, 80% of the taxable base will be tax-exempt with a discounted tax rate offered. This is a super-attractive deal indeed. Honestly, even Warren BUFFET will become so interested and wants to engage in the business then on learning this, right? But is such a nice bargain for real?

Deputy Chairman, you studied economics … Oh no, you are an accountant, and I trust that you must know the meaning of "deregulation". The United States made the attempt to rid herself of regulations in the economic sphere back then in the 1980s that resulted in her markets flooded with capital, and Hong Kong's current situation is similar to this. I want to say something more. Just as what Mr CHUNG Kwok-pan has told, there was once a small-and-medium enterprise owner headed northwards to invest in the Mainland out of patriotism. As the machinery that he bought had become obsolete and his business in Hong Kong could no longer survive, he went back to the Mainland. After spending seven years there, he still could not manage to seal any deals in the end. Worse still, he was pursued by the Mainland Government for taxes unpaid over the past seven years and ended up in bankruptcy. So why do we do the opposite instead? I hope that Dr YIU Chung-yim will also discuss this in his speech later. It was stipulated in the legislation that tax evasion was forbidden, but this was nullified later in 2008 and avoidance of double taxation subsequently came into effect. From then on to this present year 2017 (i.e. nine years later), we find the loophole much too big indeed. Is that right, Deputy Chairman? It is really too big …

DEPUTY CHAIRMAN (in Cantonese): Mr LEUNG, I remind you once again …

MR LEUNG KWOK-HUNG (in Cantonese): You listen to me first …

DEPUTY CHAIRMAN (in Cantonese): I remind you for the very last time that you are still speaking on the same argument. I think you have already made clear your such an argument.

10454 LEGISLATIVE COUNCIL ― 22 June 2017

MR LEUNG KWOK-HUNG (in Cantonese): You will not be able to guess right on what I am going to say next since former legislator Mr WONG Kwok-hing had once remarked that he could not read my mind.

Well, it is so simple. In my opinion, here provides a political arena for people from all walks of life to fight for their own interests. I consider it necessary for the Government to collect taxes for the purpose of entitling the elderly to universal retirement protection. It should collect taxes from the rich. To be exact, taxes should be collected from the super-rich since those who are able to make money through airline companies must be super rich. Thus, our Government should never allow them to avoid paying taxes in any case, right? China's current situation is quite tough, but still, her tax income is spent on the Chinese people. Deputy Chairman, actually we are not dealing with the matter of fact in this regard, and you have allowed me to debate the premises. However, among the various premises, one is invalid. What is the purpose of offering tax concessions? Are there any policy objectives? A long title without mentioning the policy objectives is meant to "dupe" people, right? It is a pure tautology.

Hence, as far as myself is concerned, even if you expel me from this Chamber today, I will still continue with my speech. In the face of such a huge loophole in the tax net, I am really surprised to learn that not any emergency response has been made in the legislation in spite of all the strenuous efforts made. Yet, since I am not sitting on the Bills Committee, I was not in a position to demand for reasonable arrangements to this end. There is a sunset clause of course, buddy, which requires that the legislation be submitted to the Legislative Council for review within two years. Similar to purchasing insurance, putting in place the sunset clause is intended to impose the requirement of review by the Legislative Council after one to two years. On this issue, I can say that I am in the minority, and on the issue of Link, I am also in the minority. But even if I am in the minority, it does not mean that I must be wrong, right? Let me tell you: If today's incentive (i.e. the tax concessions to be offered) is a hidden agenda which is not set out in the long title as an incentive, then once it is established in our legislation to which we are still chanting the praise, this Council will definitely be affected by such a hidden agenda in future both as a political platform and the city's legislature. If we still give the green light to the proposed tax concessions today to spare those enterprises in the face of such a huge loophole and turn a blind eye to the collusive dealings involved in the aircraft LEGISLATIVE COUNCIL ― 22 June 2017 10455 leasing business, then we should stop serving as legislators and become football players instead, I mean those football players who engage in "match fixing" in football matches.

I so submit, Deputy Chairman.

DR KWOK KA-KI (in Cantonese): Deputy Chairman, I will speak on clause 5A.

When discussing clause 5A, it is most important to note that clause 5(3) proposes to add 15(1)(n), so as to specify the business operated in Hong Kong by the relevant corporation includes (i) and (ii), that is "(i) its business of granting a right to use an aircraft to another person …, even if the aircraft is used outside Hong Kong; or (ii) its business of managing a corporation carrying on an aircraft business or of managing an aircraft business, even if the aircraft concerned is used outside Hong Kong."

Deputy Chairman, looking back, we had an omission during the Bills Committee stage. The Government proposed to amend clauses 4, 8 and 10 and to add a new clause 5A, and these amendments constituted a radical departure from the original Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"). When putting forth new amendment proposals, the Government should fulfil its responsibility by consulting afresh and sufficiently. Earlier, the provisions covered only offshore aircraft leasing services. But the Government suddenly skewed and included onshore domestic aircraft leasing services into the provisions. At that time, the Government should have acted fairly and launched a consultation. And I may also have been derelict in my duty in this regard. As a member of the Bills Committee, I have not requested a new consultation on the Bill to allow more Members to participate. I am sorry about this.

(THE CHAIRMAN resumed the Chair)

The most crucial point in clause 5A, also the most important point about the Bill, is that the provision of service is not confined to offshore but also extended to onshore. Chairman, actually a consultation paper prepared by PricewaterhouseCoopers ("PwC") was provided for discussion in the Bills 10456 LEGISLATIVE COUNCIL ― 22 June 2017

Committee. I would like to quote the paper to explain our worry about the term "Hong Kong". The paper points out with clarity that the right of use of many aircraft around the world is now obtained with aircraft leasing service. In China alone, there will be 6 000 aircraft in the next 20 years. How can this be a mere coincidence? While the Government estimates the tax revenue to be received in 20 years' time at $10 billion, PwC says that in the next 20 years, the Mainland is going to have 6 000 new aircraft. Coincidences are way too many in the world. Those who are clear-headed should know that the businesses generated by these 6 000 aircraft are now targeted by the Government who wants to get $10 billion in 20 years.

Some Members said just now that these businesses were actually additional bonuses to us as they could have gone to Singapore or Ireland instead. But Members may not be fully mindful of the situation we are in today. Chairman, we are now a special administrative region where special arrangements are made for a lot of special cases, and many cases are considered special and warrant special arrangements under the enormous influence of the Mainland. We have been changing our listing rules time and again, and lately the Hong Kong Exchanges and Clearing Limited has even been considering the launch of a new listing and trading board which targets at the emergent information technology industry in the Mainland. To make it plain, the initiative aims at making possible the listing of Alibaba in Hong Kong. And for such a justification, the time-tested and tightly upheld financial principles of ours are to be relinquished. This is the source of our worries.

In this connection, all papers are in fact pointing towards the same direction: the service needed by these 6 000 new aircraft in Mainland China in the next 20 years. Coincidentally, at least one third of aircraft business is now conducted with aircraft leasing. What does this imply? It reveals the inbreeding trait of this aircraft leasing business as most of its clients are airlines in China, and a forthcoming US$780 billion business deriving from 6 000 aircraft. Some said that the money could otherwise be earned by Ireland or Singapore. But we belong to different systems and we use different approaches and criteria for tax assessment. For instance, will Ireland take a look at the record and then ask for the names of the owners of those aircraft, the identity of the behind-the-scene paymasters and whether senior government officials or dirty money are involved? Ireland will do this, Singapore may also do this and, on the surface, I think the Special Administrative Region Government will also do this. But in reality, we keep seeing policy changes in the last 20 years, as they LEGISLATIVE COUNCIL ― 22 June 2017 10457 want to cope with one single market and target at the massive amount of capital from the Mainland. Our regulatory framework and direction are altered out of the wish to earn such money and capital. This is the issue which worries us and the query which necessities the response from the Government today.

Though Mr LEUNG Kwok-hung is neither a member of the Bills Committee nor an expert in economics, he has rightly pointed out that in case where any public policy, and especially a tax regime, causes an impact onto Hong Kong's long-term financial arrangement, any public figure and particularly a Member of the Legislative Council, should stand up to it. We have read in the paper in which PwC gave a clear account of the root of the policy. It began in 2012―the paper did make it very clear―when LEUNG Chun-ying said in his Policy Address that Hong Kong had to outperform Singapore, especially under the context of global economic development. We all know that after a mere span of about one year, as I have said a moment ago, the Chinese Premier LI Keqiang delivered a speech in Tianjin in 2013 …

CHAIRMAN (in Cantonese): Dr KWOK Ka-ki, you are repeating your argument.

DR KWOK KA-KI (in Cantonese): Chairman, I will stop dwelling on this argument.

CHAIRMAN (in Cantonese): This argument has been raised by you repeatedly. You are a member of the Bills Committee concerned and you have spoken for a number of times in the Committee Stage. Please focus on the newly added clause 5A in your speech.

DR KWOK KA-KI (in Cantonese): Sure, Chairman, no problem. About the newly added clause 5A, when it talks about the definition of aircraft leasing business in Hong Kong, we are in fact not on the same page. Any corporation registered under the relevant legislation in Hong Kong is a Hong Kong corporation. Chairman, that is to say, the Mainland capital amounting to tens of billions of dollars, which may like to engage in aircraft leasing or other services, can easily become a Hong Kong corporation with a registration done under the 10458 LEGISLATIVE COUNCIL ― 22 June 2017 relevant legislation in the Companies Registry. By now, how many shell companies have been registered in Hong Kong? How much money is hidden from us? This is the scenario we see in Hong Kong nowadays.

Chairman, I spell these out, as my concern is not only about the so-called tangible benefits which may amount to $10 billion in 20 years or $500 million in a year, as forecast by the Government. Whereas the intangible loss, if we have to distort our government policies, financial revenue, tax regime and perhaps the regulatory system in the future, this will cause us losses that we have no way to recover, our irreversible permanent losses. While at present we can still compare ourselves with London and New York, in the hope of becoming part of "Nylonkong" and becoming one of the top three financial centres in the world, are we aware of the risk facing us? Our trajectory, including our tax regime, has all along been under the influence of various new economic activities which come from Mainland China. An example is the tax concessions under debate today which, we find out, will eventually benefit people other than the pure locals. How many local companies and local people are capable to participate in aircraft leasing service? Not many, of course. Even those who are as wealthy as LI Ka-shing or the New World Development Company Limited, the wealth they have is only a drop in the ocean when compared with the 6 000 aircraft in Mainland China. Those who have 60 aircraft have to step aside as the Mainland has 6 000 aircraft. We are not raising objection to the Government's attempt to revise the existing tax regime. Chairman, the addition of clause 5A this time, which forces the coverage of the Bill to expand from offshore aircraft leasing companies to onshore aircraft leasing companies, makes a huge difference to the Bill. When the provisions cover local companies, our situation will be different from that of Ireland or Singapore. A Mainland aircraft leasing company will basically not register in Ireland or Singapore as it would not like to subject itself to their systems, alien systems that readily scrutinize its account. This may bring about a lot of trouble as no one would like to make known to the public its scandals and no one would like to expose its "black money" that may amount to hundreds of millions of dollars. But Hong Kong is different. The history of Hong Kong tells us that many of our core values, including those on the financial side, have been shattered. Such an impact comes from Mainland capital which amounts to billions, 10 billions or trillions of dollars. Hong Kong has to modify itself in order to adapt to their operation principles and this is our pathetic story. This also explains why some of us said: Why do you speak so much on a thing as small as amending the Bill? Aircraft leasing is certainly a profitable business. What you are doing is just wasting your time and energy.

LEGISLATIVE COUNCIL ― 22 June 2017 10459

But, let us give this a careful thought. I do feel the chill when the Government alters our tax system to appease China, under the control of some principle leaders, for instance a former Chief Executive a month from now. All these not only matter today but also herald a new era. That is like saying: shall we join hands to make money? We need not care about anything else, only the profit. We shall not mind whether it is "black money" or "white money"; it is "good money" so long as we can earn $10 billion in 20 years. However, we have to forgo our system which is unrecoverable …

CHAIRMAN (in Cantonese): Dr KWOK Ka-ki, you are now discussing the relevant policy. Please focus on the new clause 5A, which is very simple and straight-forward.

DR KWOK KA-KI (in Cantonese): … Certainly, I will focus on clause 5A. Chairman, the company that grants the right to use, that is the locally registered Mainland company which I have been talking about repeatedly. This corporation refers to a Mainland corporation which can be registered in Hong Kong. This is related to clause 15(1)(n) as the Bill has not clearly excluded capital from any area to register as corporation or beneficiary under the Companies Ordinance in Hong Kong. I think I have the responsibility to point this out and let all Members know what they are doing when voting for or against this amendment.

Chairman, just like what I have said at the beginning of my speech, this Bill is less controversial before the addition of clause 5A, as the Bill without clause 5A covers only offshore companies. But the situation is now different, with the Government's addition of clause 5A, the coverage of the Bill has expanded beyond its original intent. I have failed to do something that I should have done, but if the Government has turned a blind eye to the issue or refused to do it intentionally, this Government is really lousy. It may even compromise the important step to be taken by Hong Kong, of advancing continually under a fair and just tax regime, a financial system subject to regulation. When we focus only on the small sum of profit, I hope that we are not going to lose the core values which are most important to Hong Kong. While many consider Hong Kong the most competitive or most economically vibrant place, we should not 10460 LEGISLATIVE COUNCIL ― 22 June 2017 only look at these sources of capital. I believe that the maintenance of a good legal system, good governance, clear and transparent tax regime and the denial of "black money" have always been our goal.

Chairman, I will stop here. I so submit.

MR LEUNG YIU-CHUNG (in Cantonese): Chairman, I actually have nothing special to say in relation to new clause 5A. I only wish to express my opposition to this amendment. The main reason is that, as Dr KWOK Ka-ki has said, new clause 5A is the summary of the amendments we said in the two debate sessions just now. This clause will enable both onshore and offshore aircraft operators to become a beneficiary of this tax reform. Actually, I am wrong in describing it as a "reform". It should be described as a change in the tax regime.

I do not think this is a good approach. The original focus of the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") is offshore aircraft operators. The SAR Government officials suddenly realized that they had omitted something … actually I called this a dereliction of their duty just now, not an omission … They realized that onshore aircraft operators should also be entitled to the tax concessions. However, as Dr KWOK Ka-ki has said, and I have also pointed in the two debate sessions just now that there are hidden concerns with this approach since other countries will also compete with Hong Kong, making Hong Kong suffer a double loss.

The Government surely says that this will not happen, explaining that it has done a lot of preparation and forecast before proposing this change in the tax regime. But the point is that even if the policy will succeed, like what the Government has said, things will only become more unfair then. Although these aircraft operators will come and register as operators in Hong Kong, contrary to what the Government has been telling us, it does not mean that these aircraft operators will bring economic benefits and job opportunities to Hong Kong.

I have a genuine concern that these aircraft operators will come and register their companies in Hong Kong and then go back to their countries, rather than staying here, to carry out their aircraft repair and maintenance. If so, can Hong Kong still benefit from this arrangement? This is a big question. My second concern, which worries me even more, is about the admission of professionals. LEGISLATIVE COUNCIL ― 22 June 2017 10461

This problem is even more frightening. These aircraft operators, after registering in Hong Kong, will say that they have insufficient manpower or professional staff, and the Government will then admit more professionals to address their concern. This will deal a blow to our economy or job market.

Hence, the change in the tax regime rendered by the Government is inconsistent with the intent of the Bill. The Bill seeks to provide tax concessions to offshore aircraft operators, but now the concessions are extended to onshore aircraft operators. Has the Government actually taken an in-depth look into the potential impacts of this change? Has the Government studied and analysed the extent of the impacts to be brought by this change?

I will not repeat what many Members and I have talked in the previous debate session about how great the extent of the impacts will be on the local community. But the change to be introduced by the Government on the tax regime will indeed bring far-reaching and enormous impacts on Hong Kong. Besides, the Government has been emphasizing only the positive impacts of the change. I did not hear any negative impacts mentioned by the Government. I am thus very concerned whether the impacts to be brought by the tax concessions are really so positive and whether there will really not be any negative impacts.

The change will also cover onshore aircraft operators, but the Government has not laid down any definition on onshore aircraft operator, except that these operators are required to make a registration. As many Members said just now, since there are only a few aircraft operators in Hong Kong which are able to compete with other countries in this business, one can imagine whether it is possible that these few aircraft operators alone can bring enormous economic benefits to Hong Kong. So we must count on offshore aircraft operators. This preferential tax arrangement may be able to attract offshore aircraft operators to register their business in Hong Kong. But even so, as I said just now, I am not confident that the economic benefit they will bring to Hong Kong is as positive as the Government has described.

Hence, since the new clause 5A is a summary of all of the above amendments and is also the most important amendment, and that now is also the last debate session, I need not say much because I have already made my points in the previous two sessions. I mainly wish to point out that Dr KWOK Ka-ki has made a very good point, and that is if all 6 000 aircraft in the Mainland are move to Hong Kong to operate, we will definitely not have the manpower to 10462 LEGISLATIVE COUNCIL ― 22 June 2017 handle these aircraft. For instance, Chairman, there will definitely not be enough repair and maintenance professionals. If so, can we supply the shortfall and refuse to admit foreign professionals? This is my major concern. Admitting professionals can have a big impact on our employment market. I hope that the Government can later brief us on this repercussion and how far reaching the negative impacts will be after this new clause 5A is enacted.

Chairman, I so submit.

CHAIRMAN (in Cantonese): Does any other Member wish to speak?

(No Member indicated a wish to speak)

CHAIRMAN (in Cantonese): If not, I now call upon the Secretary for Transport and Housing to speak again.

SECRETARY FOR TRANSPORT AND HOUSING (in Cantonese): Chairman, first of all, I would like to point out that contrary to what Members have suggested in their speeches just now, there are really not so many issues covered in the new clause 5A. The clause actually seeks to ascertain the computation of chargeable profits under the new tax regime, and as I have said when the Committee stage amendment ("CSA") was proposed, the whole purpose of introducing the clause is to outlaw tax avoidance. Hence, if Members do not support the proposed CSA, tax avoidance through certain means will become possible under the new regime.

Since we are talking about tax avoidance arrangements made for aircraft operators and connected aircraft lessors or leasing managers, in the absence of clause 5A, tax avoidance will become possible if the sum concerned is paid to a connected aircraft lessor, the lessor is eligible for the half rate concession under the proposed tax regime, and the airline company concerned in Hong Kong can enjoy a waiver of the total lease payment through other arrangements. Therefore, with the addition of the new clause, the above loophole can be plugged, and it actually has nothing to do with the issues raised by Members just now. Such issues have in fact been raised in the previous debate sessions, and LEGISLATIVE COUNCIL ― 22 June 2017 10463

Members who brought them up are basically against the proposed tax regime. In this connection, I find it hard to convince them because we have already explained very clearly the objectives of the proposed tax regime.

Mr Jeremy TAM has enquired about the definition of "connected person", which has in fact been included in the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"). In the proposed section 14G under the Bill, it is stipulated in subsection (1) that "connected person" means an associated corporation of the corporation concerned and a person (other than a corporation) over whom the corporation has control; who has control over the corporation; or who is under the control of the same person as is the corporation; or a partnership in which the corporation or its associate is a partner.

It should also be noted that the elaboration does not end here, and further explanation is specifically given in subsection (2) of the same section for the definitions of "connected person", "associated corporation" and "associate" in subsection (1). Chairman, I will not go into the details here, but some very clear illustrations have indeed been given to provide expressly that a company could not make use of persons or corporations connected with that company to engage in tax avoidance practices through certain arrangements.

Chairman, I would also like to respond to one more point. Some Members consider that it would be possible for any companies registered in Hong Kong to take advantage of the Bill and engage in tax avoidance practices. As pointed out by Mr Jeremy TAM just now, for the present case, businesses undertaken by companies registered in Hong Kong, especially offshore aircraft leasing activities under discussion, are in fact not conducted in Hong Kong but overseas. Hence, there will actually be limited benefits for Hong Kong in the process. In order to make it possible to include offshore aircraft leasing activities conducted in Hong Kong under the proposed tax regime, a premise is adopted to ensure that such activities are conducted substantively in Hong Kong. The proposed tax concessions would thus only apply to lessors and managers which are corporations with central management and control in Hong Kong, and the activities that produce its qualifying profits should also be carried out substantively in Hong Kong.

Therefore, the Inland Revenue Department would conduct an analysis to determine whether such corporations have set up offices in Hong Kong, how many employees they have employed, and what commercial activities they have 10464 LEGISLATIVE COUNCIL ― 22 June 2017 carried out. For example, there should be substantial business presence in Hong Kong, such as assessing their investment on aircraft, project financing, procurement of aircraft, solicitation of leases, and so on. Hence, such corporations would not be eligible for the proposed tax concessions simply by establishing a shell company in Hong Kong.

Chairman, I so submit.

CHAIRMAN (in Cantonese): I now put the question to you and that is: That new clause 5A be read the Second time. Will those in favour please raise their hands?

(Members raised their hands)

CHAIRMAN (in Cantonese): Those against please raise their hands.

(Members raised their hands)

Mr CHAN Chi-chuen rose to claim a division.

CHAIRMAN (in Cantonese): Mr CHAN Chi-chuen has claimed a division. The division bell will ring for one minute.

(After the division bell had been rung for one minute, the Chairman noted that a quorum was not present at the meeting)

CHAIRMAN (in Cantonese): Will the Clerk please ring the bell to summon Members back to the Chamber.

(After the summoning bell had been rung, a number of Members returned to the Chamber)

LEGISLATIVE COUNCIL ― 22 June 2017 10465

CHAIRMAN (in Cantonese): Will Members please proceed to vote.

CHAIRMAN (in Cantonese): Mr CHAN Chun-ying, do you wish to cast your vote?

(Mr CHAN Chun-ying did not cast any vote)

CHAIRMAN (in Cantonese): Will Members please check their votes. If there are no queries, voting shall now stop and the result will be displayed.

Mr WONG Ting-kwong, Ms Starry LEE, Mr CHAN Hak-kan, Mr CHAN Kin-por, Dr Priscilla LEUNG, Mr WONG Kwok-kin, Mrs Regina IP, Mr Paul TSE, Mr Steven HO, Mr Frankie YICK, Mr YIU Si-wing, Mr CHAN Han-pan, Mr LEUNG Che-cheung, Mr Kenneth LEUNG, Dr KWOK Ka-ki, Mr Christopher CHEUNG, Dr Helena WONG, Dr Elizabeth QUAT, Mr Martin LIAO, Mr POON Siu-ping, Dr CHIANG Lai-wan, Ir Dr LO Wai-kwok, Mr Alvin YEUNG, Mr Andrew WAN, Mr Jimmy NG, Mr LAM Cheuk-ting, Mr Holden CHOW, Mr SHIU Ka-fai, Mr Wilson OR, Ms YUNG Hoi-yan, Ms Tanya CHAN, Mr LAU Kwok-fan, Mr KWONG Chun-yu and Mr Jeremy TAM voted for the motion.

Ms Claudia MO, Mr CHU Hoi-dick, Dr CHENG Chung-tai and Dr YIU Chung-yim voted against the motion.

THE CHAIRMAN Mr Andrew LEUNG and Mr CHAN Chun-ying did not cast any vote.

THE CHAIRMAN announced that there were 40 Members present, 34 were in favour of the motion and 4 against it. Since the question was agreed by a majority of the Members present, he therefore declared that the motion was passed.

10466 LEGISLATIVE COUNCIL ― 22 June 2017

CLERK (in Cantonese): New clause 5A.

SECRETARY FOR TRANSPORT AND HOUSING (in Cantonese): Chairman, I move that new clause 5A be added to the Bill.

Proposed addition

New clause 5A (see Annex I)

CHAIRMAN (in Cantonese): I now propose the question to you and that is: That new clause 5A be added to the Bill.

CHAIRMAN (in Cantonese): I now put the question to you as stated. Will those in favour please raise their hands?

(Members raised their hands)

CHAIRMAN (in Cantonese): Those against please raise their hands.

(Members raised their hands)

Mr LEUNG Kwok-hung rose to claim a division.

CHAIRMAN (in Cantonese): Mr LEUNG Kwok-hung has claimed a division. The division bell will ring for one minute.

CHAIRMAN (in Cantonese): Will Members please proceed to vote.

CHAIRMAN (in Cantonese): Will Members please check their votes. If there are no queries, voting shall now stop and the result will be displayed.

LEGISLATIVE COUNCIL ― 22 June 2017 10467

Mr Tommy CHEUNG, Prof Joseph LEE, Mr WONG Ting-kwong, Ms Starry LEE, Mr CHAN Hak-kan, Mr CHAN Kin-por, Dr Priscilla LEUNG, Mr WONG Kwok-kin, Mrs Regina IP, Mr Paul TSE, Mr Steven HO, Mr Frankie YICK, Mr WU Chi-wai, Mr YIU Si-wing, Mr CHAN Han-pan, Mr LEUNG Che-cheung, Mr Kenneth LEUNG, Ms Alice MAK, Dr KWOK Ka-ki, Mr Christopher CHEUNG, Dr Helena WONG, Dr Elizabeth QUAT, Mr Martin LIAO, Mr POON Siu-ping, Dr CHIANG Lai-wan, Ir Dr LO Wai-kwok, Mr Alvin YEUNG, Mr Andrew WAN, Mr Jimmy NG, Mr LAM Cheuk-ting, Mr Holden CHOW, Mr SHIU Ka-fai, Mr Wilson OR, Ms YUNG Hoi-yan, Ms Tanya CHAN, Mr LAU Kwok-fan, Mr KWONG Chun-yu and Mr Jeremy TAM voted for the motion.

Mr LEUNG Yiu-chung, Mr LEUNG Kwok-hung, Ms Claudia MO, Mr CHAN Chi-chuen, Mr CHU Hoi-dick, Dr CHENG Chung-tai, Mr Nathan LAW and Dr YIU Chung-yim voted against the motion.

THE CHAIRMAN Mr Andrew LEUNG and Mr CHAN Chun-ying did not cast any vote.

THE CHAIRMAN announced that there were 48 Members present, 38 were in favour of the motion and 8 against it. Since the question was agreed by a majority of the Members present, he therefore declared that the motion was passed.

CHAIRMAN (in Cantonese): Council will now resume.

Council then resumed.

Third Reading of Government Bill

PRESIDENT (in Cantonese): Government Bill: Third Reading.

10468 LEGISLATIVE COUNCIL ― 22 June 2017

INLAND REVENUE (AMENDMENT) (NO. 2) BILL 2017

SECRETARY FOR TRANSPORT AND HOUSING (in Cantonese): President, the

Inland Revenue (Amendment) (No. 2) Bill 2017 has passed through the Committee stage with amendments. I move that this Bill be read the Third time and do pass.

PRESIDENT (in Cantonese): I now propose the question to you and that is: That the Inland Revenue (Amendment) (No. 2) Bill 2017 be read the Third time and do pass.

Does any Member wish to speak?

MR LEUNG KWOK-HUNG (in Cantonese): President, we finally proceed to the Third Reading debate of the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") when we have to make up our mind and cast our votes. Whatever our views are on the amendment, we have to decide to vote in favour of or against it. By the way, I ask colleagues to walk slowly or they may fall over easily. Honourable colleagues, after a long debate, I have made a last-minute proposal in my last speech. I am sorry that it is impossible for me to join all the bills committees to scrutinize every bill. I just do not know the shadow clone technique. I propose that a sunset clause be added to the Bill. What I mean to say is after every sunrise, there is a sunset, so ultimately everything will come to an end. With everything coming to an end, this Council …

PRESIDENT (in Cantonese): Mr LEUNG Kwok-hung, this Council is now debating the Third Reading of the Bill. Hence, you should only state the reasons for your support of or opposition to the Third Reading of the Bill, and should not repeat the views you have raised during the Second Reading debate. If you wish to propose a sunset clause, you should have done so by moving an amendment for this purpose.

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MR LEUNG KWOK-HUNG (in Cantonese): I understand, President.

PRESIDENT (in Cantonese): Please speak on the Third Reading of the Bill.

MR LEUNG KWOK-HUNG (in Cantonese): President, I have offered my apologies as I …

PRESIDENT (in Cantonese): Please put aside your apologies and speak on the Third Reading of the Bill. For other issues, please deal with them in other venues.

MR LEUNG KWOK-HUNG (in Cantonese): If you have a little bit of patience with me, you will understand that I just wish to call on Members not to support the Bill if it does not include a sunset clause. I am not in the position to propose the inclusion of this clause in the Bill. President, you may say: "Mr LEUNG Kwok-hung, you have made things difficult for us. You did not join the Bills Committee, nor did you notify us of your intention to include a sunset clause in advance." Actually, I would like to tell all colleagues that it is possible to block the passage of the Bill by abstaining from voting. We can then apply the sunset clause when the Bill is resubmitted to the Legislative Council. Given that the current Government is an expertise of pushing through bills which had once been negatived, it is not impossible to do so, especially as the current-term Government will expire in 10 days. If the Government resubmits the Bills to the Legislative Council for scrutiny, we can deal with it by the sunset clause. Hence, I am here to call on Members to decide whether they should vote for it or to abstain from voting. For me, I will vote against it as I hope to incorporate a sunset clause in it.

President, I understand that you are annoyed by my long-windedness. My proposal will bring about three advantages. First, the proposed sunset clause can serve to regulate the excessive low tax rate, meaning that when we adopt the world's lowest tax rate, if we do not apply depreciation …

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PRESIDENT (in Cantonese): Mr LEUNG Kwok-hung, I have already reminded you that during the Third Reading debate, you should speak on your voting intention, instead of shifting to discuss other issues.

MR LEUNG KWOK-HUNG (in Cantonese): Right, I am exactly discussing this.

PRESIDENT (in Cantonese): You should no longer devote your time on the sunset clause; otherwise I will stop you from speaking. Please speak on the Third Reading of the Bill.

MR LEUNG KWOK-HUNG (in Cantonese): Honourable colleagues, while you are not physically present now, your spirits are still here. I call on all of you not to support the Bill. I would vote against it. For Members who do not wish to negative it, they may take the middle course and abstain from voting. What will be the consequence if Members abstain from voting? The Government will introduce some last-minute amendments. The proposed amendments on clauses 4, 8 and 10, as well as the new clause 5A, which we have taken a lot of time to discuss, are full of questions.

The amendments on clauses on 4, 8 and 10 are contradictory in that our observation of the instructions of the Organisation for Economic Co-operation and Development ("OECD") will lead to another injustice. As far as this problem is concerned, we have to seriously consider the consequences of the need for further amendment after the passage of a bill. On the other hand, if we vote against the Bill, we will have more time to consider it, thus preventing possible pratfall that OECD may consider the Bill passed unenforceable. So, one of the reasons for not supporting the Bill is to avoid causing embarrassment to the Legislative Council.

Second, from a longer-term perspective, we should also not vote in favour of the Bill. With the total absence of any objective assessment, it would be very dangerous for us to cut our tax rate to an extremely low level in an attempt to attract foreign capital. If we do so and introduce such regulations, the entire Government policy would be bound to provide incentives to cartels, or chain-style businesses, which have obvious advantage in different industries. LEGISLATIVE COUNCIL ― 22 June 2017 10471

This policy is undesirable for it is not in line with the global value so superficially advocated nowadays. Besides, the policy will have significant impact on the tax revenue of Hong Kong. The relevant tax revenue is estimated to be merely several billions dollars at most, as compared with $2.4 billion in Ireland. Still, the Secretary, while expecting an accumulated revenue income of only $10 billion after certain years, foresees $300 billion-worth economic activities derived from the industry. I am not sure how he could come up with this projection. I am interested to listen to his explanation.

After we have gone over so many documents, now at this crucial juncture, should we take on board the Government's explanation that if we simply reduce the tax rate to a particular level, it will be able to attract enterprises to do business in Hong Kong? I do not think we should accept this explanation. What we should consider is, when we … President, you have to understand that to the Treasury, the proceeds from land sales and tax payment …

PRESIDENT (in Cantonese): Mr LEUNG Kwok-hung, I understand your argument. However, you are not speaking on the Third Reading of the Bill. Please indicate if you support the Bill be read the Third time.

MR LEUNG KWOK-HUNG (in Cantonese): I am now precisely saying that I do not support the Third Reading of the Bill.

PRESIDENT (in Cantonese): The comments you have just made should have been raised during the Second Reading debate.

MR LEUNG KWOK-HUNG (in Cantonese): I am precisely saying that I do not support the Third Reading of the Bill.

PRESIDENT (in Cantonese): Please focus your speech on the Third Reading of the Bill.

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MR LEUNG KWOK-HUNG (in Cantonese): President, let me reframe my point. I do not support the Bill due to the arrangements the Government has made to the local tax regime. President, you have just interrupted my speech. Unlike in the past when the tax revenue was insignificant and we relied heavily on proceeds from land sales, the two revenue sources have been more or less even since the year before last, with tax revenue outstripping land sale proceeds. As tax revenue is our major economic source, there is no room for harping on the same tune of reducing the tax rate to attract businesses and using land sale proceeds to fill the Treasury. Besides, proceeds from land sales should be credited to the Capital Works Reserve Fund. Therefore, in the long run, our discussion today … Honourable Members, let me repeat this. Do not vote in favour of the Bill. Mr Wilson OR and Mr LEUNG Che-cheung, do not vote for it. You may abstain from voting at best. As a norm of the Council, we should absolutely not adhere to the Government's sudden change to the taxation principle.

President, I understand your point. We did try to stimulate the local economy by way of tax concessions. We did also introduce tax concessions to facilitate the development of new industries in Hong Kong, such as the insurance and reinsurance business as well as the wine industry. Unlike the concessionary measures provided to the two new industries which were backed by sufficient justifications, the provision of tax concessions under the Bills are without grounds. The benefits of the setting up of the insurance and reinsurance business, such a sizable industry, in Hong Kong are quantifiable, not to mention that the industry is monitored by an independent Insurance Authority. In respect of the so-called aircraft lessors and aircraft leasing managers, the roles of the two are already overlapping. Does Hong Kong have a dedicated authority in place to monitor them? President, I am sorry that according to the reply from the Government, all of the relevant issues are only subject to review by the Commissioner of Inland Revenue ("the Commissioner").

I understand that certain elements in the Inland Revenue Ordinance will not be changed by the Bill. Still, as a responsible Government, it should grant the Commissioner more powers on top of his general powers. Another option is for the Commissioner to delegate some powers to an official to take up the work. The legislative origin and the legislative meaning have already been lost during the process. Hence, I call on Members not to vote for the Bill. They should abstain from voting at best.

LEGISLATIVE COUNCIL ― 22 June 2017 10473

The reason for this is we are unable to examine the knock-on effect of the problem. Let us cite an example. As Hong Kong does not implement double taxation, after paying tax here, Mainland companies will not need to pay tax on the Mainland. The current loophole is a mainland or Hong Kong airline registered in Hong Kong can pay high rents to lease aircraft, so that both the airline and the company it conspires with or companies under the same group can enjoy a low tax rate. In other words, the airline can pay a lower tax bill while the lessor can also enjoy the low tax rate. But this is done at the expense of the Mainland Treasury and Hong Kong Treasury as two places will see their revenue income reduced. This will do us no good but harm.

Therefore, we have to recognize the gravity of this issue, which may not only reduce the tax revenue of our surrounding region or China, but such process also deprives us of the things we should have obtained originally. The incentive behind this is the excessive low tax rates of Hong Kong. Hence, President, I am not shooting aimlessly. President, although you cannot cast your vote, I hope colleagues in the pro-establishment camp will give some thought on this because they love their Motherland and regard themselves as Chinese, so when they pay taxes, they should remain to be Chinese. On this premise, I particularly appeal to those colleagues sitting on my left, i.e. Members of DAB and HKFTU to consider this matter from a holistic perspective rather than a one region concept. They may not understand the whole mechanism. What I mean is, first, reduction in tax revenue brings no benefit to the general public of Hong Kong, and thus I express my objection. Second, our losses do not benefit others―the people in China get less tax revenue as well. Since the damages to the majority merely contribute to the gains of the minority, such measures should not be implemented.

President, I am going to finish my speech. There is one more incentive. I think what Secretary Prof Anthony CHEUNG has said is misleading. He says that global aircraft leasing services do not necessarily form a linear relationship between the place where the lessor is located and the use of airports or parking of aircraft. That is right. However, even though the relationship is not a linear one, we still need to give consideration when formulating policies. Have the authorities taken this into account in their assessments? Members of this Council may have filtered this point and anticipate that if the measures are implemented, the utilization rate of Hong Kong's airport may be boosted. However, being the host, Hong Kong's airport may be unable to cater to the requirements of other airports for the opening of air routes or transhipment. We have spent so much money on establishing the Airport Authority and constructing 10474 LEGISLATIVE COUNCIL ― 22 June 2017 the Airport Railway. An additional $145.1 billion has also been forked out to build the third runway. Yet all these may possibly be distorted and their full capacity crippled due to the plan to charge such a small amount of tax. In the long run, apart from the said money spent, costs have to be paid by the entire society. I have cited some examples, so I will not explain further. In the past, the same problems have been identified in the Shipping and Port Control Ordinance. Of all the ports in the world, we are the only one who does not impose any control on ships using low-grade diesel, just for the purpose of collecting a small sum of fee. I would like to ask, as you have done this before, how can I know if you will not do this again in the future?

President, one more thing: we say that the Lantau development under the "Hong Kong 2030+: Towards a Planning Vision and Strategy Transcending 2030" involves huge investments in building a new town to house 1 million people …

PRESIDENT (in Cantonese): Mr LEUNG Kwok-hung, you have strayed from the question.

MR LEUNG KWOK-HUNG (in Cantonese): I have strayed from the question? Then I will stop. Of course I respect you. When you say I have strayed from the question, you must be right. I mean, based on cost-effectiveness―because the President does not want me to explain further. If you have listened to this before and studied this, you will understand what I am intending to say. Now, the President prohibits me from reiterating the things you have not listened to before. If you have listened to this before, you should not cast your votes.

President, not each and every one of the Members has listened to the speech content of the entire debate. Since you prohibit me from reiterating my past views during the Third Reading, I can no longer share them with Members. Sometimes, even you might not be able to listen to all my speeches either as Ms Starry LEE would take your place occasionally. Therefore, I think your prohibiting me from reiterating my previous views will minimize the effect of my 15-minute speech. This is such a prolonged discussion.

President, I do respect your ruling very much. This really makes me feel what this Council is, a rubber stamp and teahouse. Thank you.

LEGISLATIVE COUNCIL ― 22 June 2017 10475

DR KWOK KA-KI (in Cantonese): President, the scrutiny of the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") has finally reached the Third Reading stage. Some said that the Bill is a simple piece of legislation to slightly relax the tax regime in a bid to generate $10 billion tax revenue over 20 years.

I notice that the Under Secretary for Financial Services and the Treasury has at last appeared for the first time. President, in fact, the Bill aims to amend the Inland Revenue Ordinance which is enforced by the Inland Revenue Department ("IRD") under the purview of the Financial Services and the Treasury Bureau. Yet, regrettably, the Under Secretary has never present during the discussion of the Bill until the Third Reading stage. This is deeply regrettable. Perhaps he does not know that many Members have expressed during previous debates their concerns not about the sector in particular, but the effects and impacts of the tax concessions. We especially worry about Hong Kong's fiscal stability in the long run.

As far as I have noticed, the original texts of the Bill have unequivocally stated that it is introduced for the purpose of meeting the ever flourishing offshore aircraft leasing businesses. Members may have noted a major―I repeat―major change in the Government's policy in the latter stages of discussion on the Bill. The coverage has since been expanded from offshore to onshore aircraft leasing activities, supported by only some confusing explanations. Unfortunately, the Bill is indeed too complicated. President, for example, I am not sure how many Members who have voted earlier can really understand the formula mentioned in the Bill, such as the one in section 14I, including A=(B-C)×D, that is, the amount of net lease payments is equal to the aggregate amount of the gross lease payments earned by a corporation during the basis period for the year of assessment less deductible outgoings and expenses, then multiplied by one-half of 16.5%, or 8.25%; or do Members know that the Bill not only covers aircraft, but engines as well. President, I mean aircraft engines, indicating that even aircraft components are possibly …

PRESIDENT (in Cantonese): Dr KWOK Ka-ki, I remind you that during a Third Reading debate …

10476 LEGISLATIVE COUNCIL ― 22 June 2017

DR KWOK KA-KI (in Cantonese): President, I will return to the question. I have my justifications for making these remarks …

PRESIDENT (in Cantonese): … Members should illustrate whether they support the Bill in general. You should not repeat your remarks made during the Second Reading debate or the Committee stage. Please continue with your speech.

DR KWOK KA-KI (in Cantonese): I have not repeated my remarks. Never mind, President …

PRESIDENT (in Cantonese): You do have repeated your remarks.

DR KWOK KA-KI (in Cantonese): All right, I will try my best to stick with the question. President, why do they force Members to support the Third Reading of the Bill? The passage of the Bill will not only affect an individual sector. One should not regard any amendment to the tax laws as affecting a particular sector only, though certain Members have mentioned the abolition of the duty on wine, and so on, with a view to proving that there were past examples of changes in taxation arrangements applicable to a particular sector only.

I do not wish to talk too much about this, but in fact the wine duty issue did spark off heated debates then. As a doctor, I believe the Government finally sees the harm of drinking today, and it has further restricted the sale of wine. The authorities have learnt the lesson that some policies are actually costly despite the hefty tax revenue on the surface.

So, President, should we support the Third Reading after all? This depends on the impact on future tax yield. Tax yield comprises two parts. The first is the tax payable but not yet paid, and another is the "bonus" predicted by the Bill to be payable in the future, which means the extra amount of future tax revenue.

President, with regard to this extra source of tax revenue made possible under the Bill, this is like someone trying to reap some profits at first, but subsequently suffer losses in the end. Why do I say so, President? At the LEGISLATIVE COUNCIL ― 22 June 2017 10477

Third Reading stage, the Bill has actually been substantially modified to the extent that it is no longer the same as the one proposed in the beginning. The difference originates from new clause 5A passed just now and amended clauses 4, 8, and 10 passed before, which have expanded the scope of the Bill to onshore aircraft leasing activities and aircraft leasing managers.

President, this is important. The Third Reading of the Bill is not only about aircraft leasing activities, but also relates to whether this will open the floodgates to other relevant businesses or even certain other sources of capital … I quote an example. I cannot quote all the information made available to the Bills Committee every time I speak on this. President, in fact, the information clearly reveals some congruent increasing trends in the amount involved here, as well as the rises in aircraft numbers and the money generated in the Mainland. So, is it not just natural that we connect this discussion with economic activities in the Mainland?

President, suppose the Bill is read the Third time, does it mean that we will have to make preparations whenever any state leaders, like incumbent Premier LI Keqiang or other state leaders, happen to remind Hong Kong people in future that certain industries will grow. If our tax regime does not fit those industries, we can just modify it a bit in order to earn some lavish tax revenue.

President, sometimes we have to carefully deal with this kind of revenue on paper. With regard to tax concessions, when we time and again offer concessions without proper justification or thorough consideration, and if such moves draw criticisms or lead to demands from other sectors for similar treatment based on the same principle, then we will get ourselves into a corner, especially when the Government does not respect its own principle very much. It is because, without much respect for principle, the Government may casually assert that certain other sectors are not particularly valuable and attractive. Why has the Government not devised a clear plan? Apart from aircraft leasing, is there any other sectors to which the tax concessions are applicable? Or, can the authorities take this opportunity to remind the public that they can consider extending the coverage to some other sectors? This will be a fine move. Otherwise, the Government will simply be seen as working to meet the preference of state leaders and plutocrats.

President, the more important question is whether this will be regarded as a fundamental shift in Hong Kong's fiscal and financial policies after the Third Reading. It is because any local policies have to adhere to the principles of 10478 LEGISLATIVE COUNCIL ― 22 June 2017

"keeping the expenditure within the limits of revenues" and "fiscal stability" enshrined in the Basic Law. Frankly, Hong Kong must rely on its own. When we are devoid of any means to create wealth, that is, when we have no money, no one will bother to pity us. Never shall we expect the state to have the means to save us when it is troubled by its own financial problems. Therefore, we must act prudently and think twice before we modify the tax regime. We must not make any mistake in this regard.

President, the Third Reading of the Bill will exactly leave a gap in our regime, letting everyone knows that the SAR Government does allow certain specific sectors to enjoy special favours. Though Mr CHUNG Kwok-pan of the Liberal Party has not been allowed to continue his speech earlier, he has pointed out the Bill's many defects, such as not covering investment expenses on machinery actually borne by small and medium enterprises ("SMEs"). IRD even tries to recover the charges from them. Why is IRD or the Government's tax policy so unfair? While they grant special favours to some people, local SMEs have not received any compassionate treatment. When the Government replies us later, I expect Under Secretary for Financial Services and the Treasury, or the next Secretary, can give us an account of these issues, on top of the response to be given by Secretary Prof Anthony CHEUNG.

The current change in tax regime has drawn some comments internationally on a fundamental basis. President, interrupt me if I am wrong. Oxfam, a non-governmental organization, has issued a report explaining the latest situation. Twenty biggest banks in the Eurozone registered one fourth of their profits in tax havens Luxembourg and Ireland in 2015. The two places have become the first choice for tax avoidance. The estimated amount of profits registered by these 20 banks in tax havens was as high as €25 billion, accounting for 26% of these banks' total profits. When these banks shift their profits to Luxembourg and Ireland, tax revenue of countries where these profits were made in the first place will decrease. In other words, if the world regards money making as a zero-sum game, an increase in tax revenue in a place means a loss in another. Therefore, OECD devises measures to tackle base erosion and profit shifting and requires governments everywhere to adopt them. However, I am wondering if Hong Kong will soon become another tax haven after Ireland and Luxembourg, as mentioned in the Oxfam report, and even be put on the blacklist as in 2015.

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President, I do not particularly worry about a particular sector, but the effect of reading the Bill for the Third time, as this will show the entire world that Hong Kong actually is open to altering some of its policies. It can easily shift its policies the other way around within a short time, even if these are important policies. Are we not telling everyone that we can casually expand the scope to cover onshore activities without much thinking? Can the Government just always give excuses and blame legislators for being unable to understand its intention that everything is done for the sake of Hong Kong? President, a reasonable policy means a policy which is beneficial to Hong Kong in the long run, regardless of whether we are looking at benefits in terms of fiscal income, tax yield or some intangible benefits, such as confidence in Hong Kong's status as an international financial centre, or even the ability to stay competitive as shown in the rankings assigned by international rating agencies, as well as the rule of law, transparency in governance and our ability to keep going forward.

My primary concern is not the Third Reading of the Bill … President, you know well that, under the composition of the Legislative Council today, many legislators will just vote for any motions moved by the Government, so much so that they may not even know the contents of the motion. This is really bad. I realize that these Members mostly come from the business sector. After all, their actions will backfire one day. When the business environment changes eventually, these local businessmen, not the people, will be the ones to suffer most. I hope they will remember then that it is their votes today which hurt them in the end.

So, President, they can effortlessly get the Bill read for the Third time. After the division bell rings for one minute, we will decide if the Bill will pass. Afterwards, the Bill will become a reality, incorporated into Hong Kong's tax regime. I believe these tax measures will not easily be reversed. Highly unlikely, I mean. Today, the Government can, somehow unreasonably, grant such favourable concessions to the aircraft leasing sector, but if it subsequently realizes the problems that will follow, it will not be possible to return, or to rectify the situation. The Government cannot possibly alter the system for a second time. If a large vessel has changed course, it takes many nautical miles of travel before it can switch back on track.

President, what I would like to point out is that, from my perspective, the Government has been sloppy and unreasonable in proposing such an important amendment to the Bill. With regard to such an substantial alteration, the 10480 LEGISLATIVE COUNCIL ― 22 June 2017

Government should not have just consulted a particular sector. Why has it not consulted SMEs, marine sector, machinery leasing sector and other sectors not receiving this tax concession? Why have the authorities not given access to other stakeholders to voice their opinions on such a major policy like this, a policy regarded as providing direct interests to the aircraft leasing sector? The Government has failed them. I do not represent the business sector, nor do I have the capability to do so, but I believe if the Government cannot courageously and clearly explain this extraordinary and far-reaching policy change to all stakeholders, it does fail its duty to them. All in all, the business sector have been paying taxes for years, and the tax yield has been crucial for sustaining various public services in Hong Kong, so I hope the Government can properly respond to all these queries.

I so submit. Thank you, President.

MR CHU HOI-DICK (in Cantonese): President, today is the first time I speak throughout the entire debate. I have not spoken at all during the Committee stage. As described by the Secretary, I am among those Members who oppose the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") fundamentally. The Secretary seemingly has no plan to persuade me. I therefore express my comments only at the Third Reading, hoping they can serve as reference to colleagues and the Government.

President, the reasoning behind the entire debate on the Bill is that we have to draw in business, for a very lucrative business is now standing right in front of us. We see that Ireland and Singapore are making money happily and we want to partake in it. This is the crucial idea dominating the psychology of the Government. Conversely, the contents of the debate today and yesterday have been amazingly rich, much richer than what I had expected. Members from the pro-democracy camp in particular, have been examining the issue from a variety of perspectives, including whether the business is actually so lucrative, will the measure bring benefits only to some Chinese-financed companies, and will it open a large tax loophole. While the discussion is on aircraft leasing business today, will other businesses take advantage of this loophole later?

President, I have no wish to discuss these issues. Rather, I want to point out that while we subjectively envisage certain economic gains to be brought to Hong Kong by the Bill, we have failed to call attention to a major oversight on LEGISLATIVE COUNCIL ― 22 June 2017 10481 the part of the Government. After listening to the debate for two days, I have only found Ms Claudia MO briefly touching on it, and that is the environmental impact of the Bill.

In one of the papers provided to this Council, the Government says that the Bill "has no civil service, competition, environmental, family, gender or productivity implication." President, this precisely is what I want to comment on today: Is the government decision or the proposed tax concession for aircraft leasing companies under the Bill really free of environmental impact? I think the Government has yet to expound on this clearly. Alternatively, the paper has actually assumed that we can ignore the environmental impact resulted from the decision if it is not going to be seen locally in Hong Kong.

However, I would like to lay bare to you a bigger picture. At present, in fact …

PRESIDENT (in Cantonese): Mr CHU Hoi-dick, this Council has proceeded to the Third Reading of the Bill. Members should simply say whether they support the Third Reading of the Bill without dwelling on the Second Reading debate or other agenda items concerning the Bill. Hence, please speak with regard to the Third Reading of the Bill and let us know the reason for your support of the Third Reading or otherwise.

MR CHU HOI-DICK (in Cantonese): Thank you, President. I am now giving my reason for objecting the Bill. The reason for my objection is that the Government has lost sight on the Bill's environmental impact. Why do I say so? I want to spell out its environmental impact which the Government has failed to make known to the people. What exactly is this environmental impact? The underlying logic is simple. The Government now believes that many airlines will choose to rent aircraft and the aircraft leasing industry will thus prosper. Hence, we have to join the competition and contribute to the industry's growth. Following such an expansion, the operating costs of airlines will decrease, and as indicated in the papers provided by the Government, the entire aviation industry will then grow continually.

Therefore, the development of the aviation industry as promoted by the Bill is a trend made up of both an incessant upward movement and an incessant sideward expansion of network. President, this trend is precisely the issue that 10482 LEGISLATIVE COUNCIL ― 22 June 2017 we would like to interrogate. Since the 1970's, the global aviation industry doubles every 15 years. In fact, governments all over the world are now subsidizing the aviation industry. Under the Convention on International Civil Aviation, a fuel tax exemption was granted in 1944 and it remains valid till this very day. Hence, the price of plane tickets nowadays cannot reflect the magnitude of its environmental cost.

According to a report by the International Civil Aviation Organization released in 2007 …

PRESIDENT (in Cantonese): Mr CHU Hoi-dick, you have strayed from the question.

MR CHU HOI-DICK (in Cantonese): President, I am expounding on its environmental impact, and this cannot be a digression from the question, right? The case goes like this: the tax measure concerned will promote the growth of the aircraft leasing industry and such a growth is related to the expansion of the global aviation industry. The Government now says that the Bill will not bring about any environmental impact but I want to point out that the present expansion of the global aviation industry is precisely a highly important part of the climate change. President, no one is paying heed to this question now. The European Union wanted to put in place a carbon tax. However, as the aviation industry, or more importantly some major countries do not want to see a stall in the development of the aviation industry, an alternative discourse has been adopted. The International Civil Aviation Organization then put in place a paper tiger option, settling for the Carbon Offsetting and Reduction Scheme for International Aviation.

But, President, under the Scheme, only 40% of air passengers will actually be regulated. The trend we see is very serious. In the eyes of the Government, the aviation industry is only about generating revenue for us. We have totally neglected that the expansion in aviation deepens the pressure on climate change in Hong Kong and in the rest of the world. Which are the public officers present today? I do not think the presence of those from the Transport and Housing Bureau or the Financial Services and the Treasury Bureau are sufficient, those from the Environment Bureau should also be here. President, without the LEGISLATIVE COUNCIL ― 22 June 2017 10483 presence of the officers from the Environment Bureau, how can the question be considered from the environmental perspective of the Hong Kong Government? Hong Kong has released a climate change report …

PRESIDENT (in Cantonese): Mr CHU Hoi-dick, let me remind you once again that you have strayed from the question. This Council is now proceeding with the Third Reading debate of the Inland Revenue (Amendment) (No. 2) Bill 2017. If you have other comments to make, you may like to discuss them with public officers on other occasions.

MR CHU HOI-DICK (in Cantonese): President, I will continue with my speech.

PRESIDENT (in Cantonese): Please focus on the question and tell us why you support or object the Third Reading of the Bill.

MR CHU HOI-DICK (in Cantonese): Let me continue with my speech. President, the second point I would like to make is that, as what I have said at the beginning, the entire logic here is a kind of international competition, a scramble for business. This logic has been pointed out by some Members and I would like to speak further on it. In the past, it has been reported in Hong Kong from time to time news on tax havens. The Panama Papers, for instance, have revealed that our Secretary also engaged in financial adjustment―let us not call it tax evasion―with the establishment of an offshore company.

President, to the Hong Kong people, this is not a proper way to develop our economy. But now, contrary to our views, the Bill actually encourages these companies not to operate in Hong Kong, not to develop real connections with the people nor the territory of Hong Kong, as these globe-flying aircraft need not park here. That is to say, they just make use of the identity and tax regime of Hong Kong, so as to enjoy a lower tax rate, on top of telling others that: I am entitled to do this as I have paid Hong Kong tax.

President, I do not think this is the right direction to go when considering the economic development of Hong Kong, and especially when developing the economy with special means. Which direction should we go? We now ask: 10484 LEGISLATIVE COUNCIL ― 22 June 2017

What targets do we have other than making money when we do this? For instance, what is our employment target? The Government has mentioned employment target, but without going into details.

President, colleagues from the Innovation and Technology Bureau came to this Council earlier to talk about reindustrialization and let us know more about the issue. We also wanted to have a similar arrangement this time. But the debate we now have is in fact very much cut off from reality as we talk about taxation. And the debate, just like what Mr CHAN Chi-chuen has said, is also about a price war, one which goes along with the flow of international capital perfectly. It is like birds gliding in the sky and we should try catching one for our own good.

President, such a consideration is highly disconnected from life, given that the Government has not asked in a practical way whether this very special policy is supported by deliberations on relevant industries. What are the considerations on employment? Is it grounded in the relevant education policy? I have seen none of these. What I have seen is that we dovetail and think along the line with the so-called neo-liberalism, on how to jump on the bandwagon upon seeing trickers in the global capitalist market.

President, in my opinion, when we have to grant such a special concession in terms of taxation―let me sidestep the issue of our fundamental tax system for a moment―we do need a special reason to justify this very special act. I think we have to make this special reason known to the Hong Kong people clearly and let them know if we are using this special policy to handle the most pressing issues in Hong Kong.

President, with regard to the present session, the most pressing issues in Hong Kong to me are: first, climate change. Can the Government convince this Council that this tax concession goes hand in hand with global carbon reduction? Or does it run contrary to the reduction? When this industry flourishes, carbon emission increases and thereby worsening the climate change. The Government must clearly explain how this measure addresses this problem which faces not only Hong Kong but also the whole world.

Second, the wealth gap. The Gini Coefficient now stands at 0.539. If the Government wants to convince me or the people of Hong Kong when launching this special tax arrangement, it must tell us whether this concession LEGISLATIVE COUNCIL ― 22 June 2017 10485 allows the Hong Kong people, especially the common grass-roots citizens, to live better and suffer less from the wealth gap. If not, I cannot see why we have to turn away from the so-called low and simple tax regime. It is now the Government who is departing from this low and simple tax regime.

President, the Government is now complicating the tax system. And the direction of this complication runs contrary to the two goals I mentioned just now. First, this direction does not tackle the climate change. Second, it does not close the wealth gap. On the contrary, this complication of the tax system allows transnational consortium to use Hong Kong's name, not this place but our name only to … let me borrow an analogy from our colleagues: to allow those who have earned too much, those who are too fat to put on socks themselves, to earn further.

President, I consider the entire measure a deviation from the simple, fair and low tax regime that the Hong Kong Government has been publicizing to the people over the years. If we take such a step, like what our colleagues have said, an irreparable loophole will be created. Therefore, I oppose this Bill.

Thank you, President.

MR JEREMY TAM (in Cantonese): President, as I have declared before, I am an employee of a local airline, but the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill") should give no direct or indirect interest to me whatsoever. I reiterate my support for the Bill and all the amendments.

Before I speak, I would like to tell that, apart from studying the documents and discussing with my fellow Members concerning the entire legislative procedure, I have also discussed the issue with members of the airline trade, from which I have heard no objection. Of course, they have raised certain questions like the possibility of using the Bill for tax evasion, as mentioned by numerous Members earlier. Therefore, I have studied the Bill with great caution.

President, I am a member of the Bills Committee. Considering the attendance record, I truly have devoted much time in the deliberation. I believe the time I have spent is more or less similar to that of Mr Kenneth LEUNG, the Chairman of the Bills Committee. True, I may not have spent the same amount of time as he has, as he is the Chairman, but I trust that I am very close behind in terms of time spent on attending meetings of the Bills Committee.

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I wish to figure out a few issues. First, I thank the Secretary for having clarified the definition of "connected person" just now. Right, I have found the definition in sections 14G(1) and (2). I would like to bring up a point. Despite having spent much time on the Bill, I do have missed certain matters. I thank the Government for helping me on this omission and on resolving one of my major queries regarding the issue of connected person. So, I am fine with this now.

President, after all these discussions, I believe there are two points of misunderstanding. To start with, we have to distinguish two questions. First, the leasing companies. Then, the lessees, regardless of whether they are airlines or aircraft operators. We have to be clear about these two first.

The existing tax system in Hong Kong does not prohibit anyone from setting up any companies in Hong Kong. As far as the Bill is concerned, without regard to whether such prohibition is in place, the biggest controversy surrounding our discussion is the Government's latest amendments to propose expanding the scope of aircraft leasing to include activities concerning local airlines in Hong Kong. Let us put this aside by now. First, we need to have a concept that the issue here involves two different kinds of companies. As a matter of facts, airlines can have Hong Kong as the base. But in order to operate in Hong Kong, an airline must be a holder of an Air Operator's Certificate ("AOC"). One can never get an AOC by casually registering a company in the Companies Registry.

President, the Civil Aviation Department has published the CAD360 document which contains over 100 pages. I cannot remember the exact number of pages, just that it is really a voluminous document listing all the prerequisites for an AOC. For example, Jetstar Airways wished to register in Hong Kong in the past, yet it was denied an AOC eventually. The judgment then stated that the airline did not conduct all business or management activities in Hong Kong. As an Australian enterprise, the airline's management or ultimate owners were based in Australia, thereby it was not issued an AOC. This demonstrates the high threshold involved, which is not the cases as described by some Members that any companies registering an airline in Hong Kong will be issued with an AOC. Moreover, we cannot easily register and operate an airline. I have to make this clear.

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Having just spoken on issues concerning airlines, I will talk about aircraft leasing companies then. Equally, we cannot stop anyone from establishing an aircraft leasing company in Hong Kong. As I have said earlier, existing companies in Hong Kong do not conduct business in the city. I must reiterate: not in Hong Kong. If this is the case, why do we allow listed aircraft leasing companies in Hong Kong to raise funds here, so that they can collect Hong Kong people's money? Of course, this include the money of foreign investors too. These aircraft leasing companies are chargeable to tax in Singapore. So, if we intend to compete with Singapore in terms of taxation, we may probably attract these businesses to Hong Kong. In fact, we are turning something non-beneficial before into something beneficial. A moment ago, I have explained the situation relating to airlines, now I am referring to issues concerning aircraft leasing companies. While certain Members have pointed out that one can operate a leasing company simply by getting it registered in Hong Kong. Actually, this is not possible. It is true that the Bill has conferred the Commissioner of Inland Revenue ("the Commissioner") with enormous powers to decide if a company is carrying actual business or having Hong Kong as the base for operation. This is the tasks we delegate to the Inland Revenue Department ("IRD") for its judgment. However, if one examine the overall mechanism, one will find many checks and balances in the provisions. Companies with business difficulties can even enjoy a graceful period. But the duration is very brief, and the conditions extremely strict. Therefore, it is never possible that anyone can merely register a company in Hong Kong, operate the business and make profits via a shell company. Indeed, a clear concept with regard to these issues can facilitate our discussion.

Why do I keep saying that I support the Bill? President, the reasons are simple. We have long been complaining about the lack of new stuff in Hong Kong, that the Hong Kong Government is conservative and unimaginative. That said, as I have pointed out just now, Ireland is the world leader in this sector, and Singapore comes second. If Hong Kong becomes the third largest player, we can gain access to business which may worth hundreds of billions or thousands of billions of dollars. Why do we not pursue this? First, if we pursue this business, I do insist on one thing: we must not allow existing operators in Hong Kong with vested interests to earn extra concessions. This is my principle. As I have explained, the sector to which the Bill relates does not exist at the moment. At present, no one in Hong Kong is conducting the business. Therefore, the tax concessions will not result in someone paying less tax. Right, certain giant corporations have been operating this business, but they do not target the Hong 10488 LEGISLATIVE COUNCIL ― 22 June 2017

Kong market. In fact, their profits are chargeable to tax in Ireland or Singapore. Without the proposed tax concessions in Hong Kong, they will simply not move their businesses here. In this case, we simply will not be able to develop this sector in Hong Kong. This is the first point, that is, the tax concessions will not be applicable to people with vested interests or existing businesses in Hong Kong and lead to a reduction in public income. This is my first principle.

Second, will this contribute to an unbalanced investment in infrastructure in Hong Kong? For example, after investing $100 billion, we have to wait 20 years before we will recover $10 billion. This is absolutely not acceptable. However, the current proposal involves neither infrastructure nor land in Hong Kong. Furthermore, this is not related to aviation rights, the Three Runway System or even the question of having the fourth runway for aircraft parking. We do not need these at all. So, Hong Kong merely needs to make minor investment in this regard. Some may say that their staff will rent office spaces in Hong Kong. We surely understand this. But this requires no large scale infrastructure project, and this is why I support this very much. Therefore, this will not cause problems relating to emissions and the environment, and so on, as those aircraft basically will not fly to Hong Kong. They may just temporary stay here. However, given the crowded airspace in Hong Kong, the Airport Authority Hong Kong does not prefer to accommodate many so-called small aircraft with low carrying capacity, and it will not permit the Civil Aviation Department to do so. Moreover, the Hong Kong International Airport does not have the parking space too. So, we will never have 6 000 aircraft landing here. We are not talking about the Aeroplane Chess. Aircraft will not fly to Hong Kong for no reason. We cannot perceive the business like we perceive a shop with physical commodities. The sector does not run this way.

Looking at the question in some depth, we may wonder if operating this business in Hong Kong will mean that we are fine environmentally, while worsening the emission problem, for instance, in other countries? I have to point out that aircraft leasing, instead purchasing, is the prevailing trend. Why? It is because of the flexibility. Airlines can deploy the right types of aircraft depending on business trend, adjusting the composition of their fleets, which may include private aircraft or commercial aircraft for long-haul or short-haul flights, without having to maintain a fixed number of a particular type of aircraft. This will enhance flexibility, which helps to reduce the total number of aircraft globally. If Members can interpret the picture this way, why is this not a good LEGISLATIVE COUNCIL ― 22 June 2017 10489 development? Should aircraft leasing keep expanding with increased flexibility in this direction, the business will become something similar to car sharing frequently discussed nowadays.

Furthermore, what kind of people in Hong Kong can enter the sector? The number given by the authorities is 1 600 persons. So, does it mean that the sector is exclusive to these 1 600 persons only, while others are not allowed to join? Putting the calculation aside by now, I believe the sector will certainly generate a group of high income earners in Hong Kong, without regard to whether they are employees from Hong Kong or from abroad.

The Hong Kong International Aviation Academy is established this year. Having checked the list of courses offered, I notice that there is probably only one course about aviation laws that will teach practical knowledge related to the aircraft leasing business. Actually, aviation academies or general teaching institutions are unlikely to be able to provide courses on financial business at this level. Therefore, in order to sustain the development of the aviation industry, Hong Kong may have to think about ways to offer more related programmes. They do not even have to stick with this aviation academy, as other universities can also consider organizing these programmes for people interested in this professional field.

If we go even further and consider the issue of the wealth gap, after the SAR Government receives the tax that it should not have received without the sector, it will then look into different ways to spend the extra money. We will not simply put the money aside, but study the possible uses of the additional funds for the benefit of the people. Regarding the points I have mentioned above, Members may have a misunderstanding in which they have confused aircraft lessors and airlines with those so-called charter flight businesses, which are companies renting an aircraft for one or two flights. Because of the misunderstanding, Members believe the legislative amendment will allow Mainland airlines mentioned above to set up companies in Hong Kong and lease aircraft to companies owned by them. As I have said before, even if the proposed amendments do not exist, those airlines are still able to do so after the Bill comes into force. It is because the definition of local airline does not depend on whether the company is listed or registered in Hong Kong. This is not the case. On the contrary, it is an issue at the level of whether the company concerned is issued with an AOC. I repeat. One cannot casually set up an 10490 LEGISLATIVE COUNCIL ― 22 June 2017 aircraft leasing company. It requires real business activities in Hong Kong, including operation, management, and so on. So, IRD's gatekeeper role is crucial here.

Therefore, I really have to repeat time and again why the Bill will bring us more merits than harm. We certainly have to be cautious about some people exploiting the Bill for tax evasion or tax avoidance. In fact, we conducted continuous studies out of such a worry. Mr Alvin YEUNG, leader of the Civic Party, mentioned Cape Town Convention yesterday. In fact, we must re-examine this matter. I do not mean that we must sign the Convention in order to enact the legislation, but we must connect with the world. How come Hong Kong is the only one left behind when the entire world has signed the agreement on aircraft leasing? Perhaps some people may use this as an excuse to blame Hong Kong for being a tax haven. This is not desirable.

Therefore, this is probably the next task for us. After the passage of the Bill, it will still take some time before companies will start registering in Hong Kong. They will not just all arrive overnight. This will not be possible. So, during this period, I really hope the authorities will consider my suggestion, and seriously deal with the Cape Town Convention pointed out yesterday by us. All in all, as I have stated earlier, I support the Bill and the above mentioned amendments.

I so submit. Thank you, President.

MR LEUNG YIU-CHUNG (in Cantonese): President, Mr Jeremy TAM just raised many viewpoints to explain why he supports the Third Reading of the Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"), and there are three aspects which I would like to follow up with him.

First of all, he said that he could not hear any voices of opposition from the industry, and that some Members opposing the Bill might have misunderstandings and thus he could not see any special reasons to oppose it. I would like to highlight that what Mr Jeremy TAM has consulted is the industry concerned. To the industry, I cannot see that the Bill will bring any harm to it, why? It is impossible that the Bill will have any impact on the existing operation. Besides, it will only increase instead of reduce the existing benefits, why? This Bill is exactly asking for a tax deduction instead of a tax increase. LEGISLATIVE COUNCIL ― 22 June 2017 10491

What harm will it bring to them? I really think he is right in saying that it is absolutely not easy for the industry to find a reason to oppose the Bill. The only possible reason will lie in whether the 1 600-odd people of direct employment are local people or the talents imported from places outside Hong Kong, or in other words, whether their job opportunities will be jeopardized. However, it seems that this possibility is very low, why? It is because they are newly created jobs instead of some manpower arrangements on the existing positions. Hence, I really cannot see any harmful effect. In fact, from the perspective of the industry, the reasons of opposition will basically not be justified.

However, the question is that our opposition is not on the basis of the industry concerned but the industries as a whole. President, let us look at the title of the Bill. Only when this title is mentioned, we will think that this is related to people of all sectors in Hong Kong. Nevertheless, it is a pity that the scope of the Bill is not that extensive but very narrow, as only the taxation affairs of some leasing operators are concerned. It is thus very narrow indeed. As I said earlier, only a very small number of operators are involved. Apart from having a narrow scope and targeting at a small number of operators, there is one more feature, i.e. this Bill aims to reduce the tax or lower the existing tax rate.

People will not have bad feeling towards tax reduction. Tax reduction is always a piece of good news, and people will be so happy about paying less tax. However, the problem is that tax reduction has to be done at the expense of changing the existing tax regime. It is not lowering the tax rate from the original profits tax rate of 16.5% to 15%, 13% or 12%, but changing the existing regime and mechanism through legislation. This is a special approach, which the Government also says is a breakthrough. It is still fine to have a breakthrough, but why is it only benefiting a small number of organizations instead of covering a wide scope of sectors? This is where the problem lies. Some Members strongly query why other industries cannot be benefited, as this is unfair and unjust. Why is it only taking care of a certain industry but disregard other industries? This is where the problem lies. Why do we think that the Bill is problematic? It is because the Bill is unfair, unjust and not universal, and this is where the problem lies.

A Member just mentioned that the Government has indeed conducted a consultation, but only the people in the industry and those with vested interests were consulted. They should be consulted for sure, but what about the people engaging in other sectors? Other enterprises may also ask why their sectors 10492 LEGISLATIVE COUNCIL ― 22 June 2017 cannot be benefited. Has the Government asked for their views? The Government should try to consult the people in other sectors and see what the results will be. This is the first question that I want to raise.

Second, Mr Jeremy TAM said that this was a new trade and needed a breakthrough in development. It is true that Hong Kong certainly needs more competition from various aspects and among different industries, and a diversified economic development. This direction will not meet opposition by people as in fact, Hong Kong will be running a risk with the absence of new industries in the future economic development. Why? It is because Hong Kong is currently experiencing an economic bubble as it attaches too much importance to financial, real estate and service industries. Apart from being a bubble economy, it is also a dependent economy. In case of economic depression in other countries, Hong Kong will bear the brunt of it, as financial, service and tourist industries are dependant of people coming from other places, otherwise, they cannot be developed. This is a problem. Hence, it is desirable to develop new industries.

I am not sure about other Members' reasons of opposing the Bill, but I am personally not against this industry. It is all right with the development of one more industry as this can bring about economic benefits to Hong Kong. This is fine and how damaging will that be? As the Government says, this can bring about an increase in job opportunities and how harmful is that? This is certainly not a bad idea but a good initiative. However, how does the Government promote this industry? This is where the problem is. It is through taxation incentive that the authorities are going to promote this industry. It is still all right, but the crux of the problem is why this economic industry alone is given the taxation incentive while other industries are not provided with the same treatment. This is my other question, and is also the question of fairness and justice as I said earlier.

As Members mentioned earlier, only if the Government had provided assistance, many industries could have positive development and employment opportunities could have increased in Hong Kong, but the Government has not done so. Besides, when we are talking about a new industry, this surely is a new attempt. I just asked the Secretary how to estimate whether the result can be up to expectation. Take the Cruise Terminal proposal as an example. Everyone thought that it was a kind of new development back then. But unfortunately, how is the current development of the Cruise Terminal? We can see the result LEGISLATIVE COUNCIL ― 22 June 2017 10493 with our own eyes, and this is obvious to all. Of course, this kind of leasing service industry under discussion is more advantageous than the Cruise Terminal, why? It is because the Cruise Terminal requires investment from the authorities, whereas this leasing service does not require their investment and is definitely better. At present, the result of investment in the Cruise Terminal is rather miserable and is appalling indeed.

The leasing service under discussion is better as it does not require investment from the authorities, but we have to pay the price. What is the price? We have to change the tax regime, or change our usual tax regime. In our opinion, even changing the tax regime is not a big deal only if this is fair, just and reasonable. However, the present approach is unfair and unjust, and this is another problem.

Third, as Mr Jeremy TAM said, if the economic development of this industry is desirable, it can bring forward substantial benefits. The Government also says that if the development of this industry is smooth, it is estimated that in 20 years' time, Hong Kong can capture up to 18% of aircraft leasing business in the global aircraft leasing market. And this will bring about the following: financing for aircraft with an asset value of over $700 billion, which is very profitable indeed; profits tax of about $10 billion; and a cumulative Gross Domestic Product value added of over $430 billion. With the above substantial economic benefits, this initiative is very promising indeed. But the problem is: Can the grass roots certainly get a share of the substantial economic benefits? No one knows. Can anyone assure us that the grass roots will certainly be benefited?

Over the years, we have saved a lot of money and our surplus reserve is now over $10 billion. But what has our Financial Secretary done? How did he invest the money on the grass roots? There are not enough homes for the aged. The Comprehensive Social Security Assistance System has not been improved and the level of allowance has not been increased. How can the grassroots' livelihood be improved? If there had been any improvement, the Gini Coefficient would not have soared to 0.539 today. Over the years, for the lots of money that we have earned, where has it gone? It has been kept in the coffers. If not being kept in the coffers, it would be channelled to other white elephant projects. Is the Cruise Terminal not a white elephant project? With the money being wasted, how many people are benefited? No one is benefited. Are these not the problems?

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If the future Financial Secretary acts like Mr Scrooge just like the previous Financial Secretaries, how can people's livelihood be benefited? No one can guarantee unless the Secretary will tell us later that the money earned will surely be used on people's livelihood and will tell us very clearly which projects will be funded. However, who knows about it now? None of us is the Financial Secretary and this position has already been entrusted to someone. Does anybody know whether he will really do that? Hence, I think the question is the lack of assurance that the grass roots can be benefited if there are really some economic benefits. This is unknown to us.

Besides, as I said earlier, can this project really be developed successfully? Again, no one knows. No one can really know for sure. Who will know about it? As I said earlier, the Government lavishly boasted about the economic benefits brought by the Cruise Terminal. What happen now? At present, the Cruise Terminal is on the verge of closure. Who can give assurance for such things?

We have to understand that this is a kind of global economic activities. If this business is well developed, will other places not try to get a share of the pie? As we see that nowadays, Ireland and Singapore are doing well in this business, we also want to get a share of the pie by offering tax concessions to attract aircraft lessors to come to Hong Kong. Our success in attracting them will mean failure on the part of our opponents. Who will suffer losses? Ireland and Singapore will suffer losses because aircraft lessors do not go there but come to Hong Kong instead. Likewise, if other countries see that Hong Kong is successful in this business, will they not consider snatching our business? This is a vicious cycle, a feature of capitalism. If you can do it, other people will follow suit. Can anyone give assurance to us? Besides, this Secretary is about to leave his position after this term of office, and we have no idea how the business will develop in the future. Who can be so sure about that?

I asked the Government earlier how the basis was set and how the estimates would turn out as it expected. I described just now that it would be throwing the helve after the hatchet, meaning that it would suffer a double loss. The Secretary said that it would not turn out like this as the Inland Revenue Department had already done a lot of work to arrive at the figures. I also mentioned an argument earlier. In the past, the Financial Secretary also prepared the budgets on the basis of actual figures, but why were his annual estimates always inaccurate? Was it due to the problem of his personal capacity LEGISLATIVE COUNCIL ― 22 June 2017 10495 or the fact that things were unpredictable? According to the previous Financial Secretary, many economic developments are not easily predicted, as a lot of changes will be involved and many factors will cause the sudden change in development without people knowing why. By the same token, the rosy picture of this development is only what the authorities predict and no one can be sure about that.

Hence, no one knows whether such a desirable development as envisaged today will come true. However, at the end, we have to pay a high price of changing our tax regime. As I have mentioned, a change in the tax regime is not the biggest question, but is the change fair and reasonable? Is it universal to the effect that all industries can enjoy the benefits? No, it is a pity that this is not the case. If anyone who pays profits tax can enjoy the benefits brought by this tax regime or this mechanism, the situation will be different. But it is another picture in reality, as the business concerned is narrowly defined, and it is thus difficult for me to support this proposal. Although I am not against promoting the aircraft leasing business, I find that this reform in the tax regime is very problematic and is very unfair. Hence, I will not give my support to it.

President, I so submit.

MS CLAUDIA MO: I am afraid I am fairly strongly and actually suspicious of this Inland Revenue (Amendment) (No. 2) Bill 2017 ("the Bill"). I suspect there are official toadies led by LEUNG Chun-ying to adopt this out of the ordinary policy measure to please their masters in Beijing and I am afraid I just cannot bring myself to vote for this Bill. You may query that I am politicizing a mere taxation issue. I will try to give you a catalogue of happenings to see how my thoughts have been formed.

I am fairly convinced this is part of some "Mainlandization" campaign here, "Mainlandization" with a capital "M", which is conducted by the Government. This is to make sure that Hong Kong will become even more dependent on China, which is now apparently the world's number one economic powerhouse, and tiny Hong Kong should learn to eat crumbs of the master's table, to learn its place where it stands in a big scheme of things, and to learn the ropes.

I said I would give you a little catalogue of happenings, so let us start with this little background: Globally, do we not all know and say that about one third of aircraft are now being financed through leasing and China alone would need 10496 LEGISLATIVE COUNCIL ― 22 June 2017 up to 6 000 new planes in the next 20 years? I have come to learn about Beijing's thoughts on this aircraft financing and leasing industry back in December 2013, when Chinese Premier LI Keqiang was in Tianjin, which is one of the Chinese hubs for this particular industry. The leader was saying things like the Government, meaning the Chinese Government, must foster growth of this industry that would make significant contributions to the Chinese economy.

At around the same time, there was this Chinese State Council Circular No. 108 stating that the country must accelerate the development of the aircraft leasing industry. That Circular stated a three-point strategy including the last bit, which said that from 2020 to 2030, that is, within a 10-year period, China must strive to build an aircraft leasing industry cluster so as to help China become an important cluster again for the industry. Does it include Hong Kong? It did not actually say so in that statement but that Circular of the Chinese State Council also stated a seven-policy measure/plan, including of course to promote the ways to help thrive this particular industry, such as exploring the international market and enhancing supporting environment. What supporting environment is better than using Hong Kong, is that right? It did not say so but that was clearly being implied there.

So you would wonder what the Hong Kong Government is trying to do, not just to say we are introducing this taxation measure in order to help Hong Kong to earn just a bit more revenue, to enhance our international status in this aircraft and aerospace financing and leasing trade, and so on and so forth. Not just that. They are talking about job creation, they are talking about international image, and what they are not being very honest or not being honest at all is that they are trying to please the "Big Brother".

They would not admit it, and this is dishonesty, profound dishonesty. You would query what is wrong with Hong Kong/China economic integration? Anyway, quite true, nothing fundamentally wrong, but under "one country, two systems", we are operating under capitalism in a capitalist society, and the rich usually would have the final say. For example, in land auction, the highest bid will always be the winner, so you can see all the "red capital" coming down to Hong Kong to buy up practically everything here, especially in housing and land market …

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PRESIDENT (in Cantonese): Ms Claudia MO, let me remind you that we are now debating on the motion for the Third Reading of the Bill. Please focus your speech on the motion.

MS CLAUDIA MO: I was! I was telling you why I cannot bring myself to vote for this Bill, because I am very suspicious of it. And I am telling you all of my suspicions are based on this and that and other observations. I do not know what you are complaining about. I am telling you why! I do not think this Bill hidden behind some taxation facade is actually not good, if not really bad, for Hong Kong.

Hong Kong is already one of the most unliveable cities in the world, and Hong Kong is one of the most expensive places in the world, we have the most expensive parking lot or car parking space globally, how about that …

PRESIDENT (in Cantonese): Ms Claudia MO, you are digressing from the subject. If you do not focus your speech on the motion for the Third Reading of the Bill, I have to stop you from speaking.

MS CLAUDIA MO: In this Third Reading debate, I am supposed to talk about whether or not, as you were instructing other people just now, I would vote for or against the Bill. Can I repeat that I will vote against this Bill? Why? Because I think there is political motivation, if not motives, behind the Bill, and the Government would refuse altogether to address the problem, and they would not and have not been even honest about what has been happening.

All these financing complications, all these leasing difficulties, and why the original spirit of the Bill was not being protected, why they had to apparently listen to the OECD's recommendations in the last minute to make CSAs? All these charades could be just political exercises in the end that Hong Kong is all dependent on China's economic development, and this time is all about aerospace financing and leasing, about buying, leasing and financing aircraft and new planes.

How this is really for the benefit of China? Will Hong Kong be benefited? We do not know, probably a tiny bit, but as I was explaining, they are trying to teach us a lesson that China is the world's number one economic 10498 LEGISLATIVE COUNCIL ― 22 June 2017 powerhouse, and we need to learn to eat crumbs of the master's table, we need to learn the ropes, we need to learn our place. Is that the message? They are trying to make Hong Kong disappear. We used to be independently on our own, standing on our feet, and this is the international finance centre, but it is now all China-related, and you need to make sure that without the China factor, Hong Kong just cannot survive on. That is the message.

Thank you.

NEXT MEETING

PRESIDENT (in Cantonese): I now adjourn the Council until 11:00 am on Wednesday 28 June 2017.

Adjourned accordingly at 12:56 pm.

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Annex I

Amendments moved by the Secretary for Transport and Housing

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