There are several policy implications. First, it is necessary to determine asset lives carefully. In particular, the 30 percent annual allowance is applicable to a wide range of assets with different durability. For a five- year asset, this allowance plus the 60 percent initial allowance is not sufficient under current inflation expectations. Also, it makes some difference whether a nonindustrial building lasts for 50 years or indefinitely. Second, for inventory valuation, the last-in-first-out method should be adopted to avoid the excess tax due to price changes. However, the elimination of distortions due to interest deductibility involves changes to the tax system that may not be readily acceptable by the tax authorities. 31
Though the calculation of effective tax rates involves simplifying assumptions and complicated theoretical issues, it is useful in summarizing the various provisions of the profits tax. Such calculations have gone beyond academic interest, and estimates have appeared in such publications as the Economic Report of the President in the United States and OECD Economic Surveys. Apart from their analytical value, they are useful in comparing the profits tax in different countries.
Finally, it may be noted that because apart from the profits tax, there are no other charges on corporate income from plant and machinery and inventories in Hong Kong, the estimates of effective corporate tax rates presented in this chapter are also effective total tax rates. However, for buildings there is an additional tax, called rates, which is a form of property tax in Hong Kong, and this has to be taken into consideration in calculating effective total tax rates. It may be of interest to compare the estimates for Hong Kong with the following effective total tax rates for other countries for 1980 based on actual rates of inflation and depreciation and sources of finance: 32
After this chapter was written, the 1990-1991 budget increased the annual rebuilding allowance for nonindustrial buildings to 2 percent, effective from April 1, 1990. Also, the salaries tax rate would start at 2 percent.