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The Rule of Basic Law


Will the Basic Law affect the work of accountants? Eric Li investigates

Some politicians and lawyers claim that Hong Kong has always been governed under the rule of law. The fact is, however, that British governors were actually quite above the laws of the land. Before the handover, Bills passed by LegCo could be vetoed at will by British governors who paid no local taxes and their actions were only answerable to the Queen. Now, for the first time in our history, Hong Kong has its own mini-constitution. Since 1 July, the Basic Law has been all-encompassing, binding the actions of the Legislature, Courts of Justice, the Chief Executive, his Government and all citizens alike. We accountants are of course no exception!

The Basic Law was drafted with the intention of preserving, not changing, the ingredients which make Hong Kong successful. These ingredients, such as liberty, freedom, the right to own property, the right to religious freedoms, are now actually stronger due to being identified and written into the constitution for the first time. The far-reaching implications of our new constitutional framework will probably take years to be fully appreciated.

Drafting Committee

In 1988, I served as a member of the working group of HKSA and helped to draft our submission to the Basic Law Drafting Committee. I believe the working group made a valuable contribution by pointing out many possible ambiguities in the legal interpretation of the Basic Law. The group proposed an evolutionary (rather than revolutionary) approach to political development and provided a critical commentary on the drafting of Chapter Von the economy and some detailed drafting suggestions on Article 150 which deals specifically with professional autonomy. We thought then that these were the most crucial parts of the Basic Law affecting accountants.

When the Financial Secretary delivered the recent Budget he noted that 44 per cent of the Basic Law's provisions were designed to lay down the economic rules of the SAR and to describe how Hong Kong's separate economic system will continue to flourish. This, for us, is most noteworthy.

In brief, the Basic Law pledges that Hong Kong will remain a centre for international financial transactions. It guarantees free flows of trade based on the absence of exchange controls and tariffs; it prescribes financial prudence and a low tax regime; it also clearly defines Hong Kong's future economic autonomy through independent management of its own resources relying exclusively on Hong Kong laws. Hong Kong's trade and investments will also continue to enjoy freedom of movement and freedom of markets.

The near total economic autonomy conferred to Hong Kong by the provisions of the Basic Law has already enabled Hong Kong to qualify for independent membership of international bodies such as the World Trade Organisation, the Bank for International Settlements, the Asian Development Bank, the World Customs Organisation and APEC. The constitutional framework provided by the Basic Law thus enables Hong Kong's independent voice to be heard in the global economy.

As accountants, however, we must also deal with specifics. The specific areas of the Basic Law which affect accountants also pose some pertinent questions. For example, I am often asked about the possible limitations or restrictions of the budgetary process.

The articles of the Basic Law relating to public finances were conceived more as general policy statements describing a guiding role for government, rather than the usual precise legislation capable of withstanding the test of litigation. It will be difficult for such broad policy statements to withstand the test of litigation. Let us look at some examples.

Article 107 states:

The Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits or revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.

The legal interpretation of ambiguous expressions such as `within the limits of revenues' and `commensurate with the growth rate' could prove to be quite problematic.

Article 108 states:

The Hong Kong Special Administration Region shall practise an independent taxation system. The Hong Kong Special Administrative Region shall, taking the low tax policy previously pursued in Hong Kong as reference, enact laws on its own concerning types of taxes, tax rates, tax reductions, allowances and exemptions, and other matters of taxation.

How will the court determine what the `low tax policy previously pursued in Hong Kong' was and how can it be taken as a reference?

Article 109 states:

The Government of the Hong Kong Special Administrative Region shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international financial centre.

Again, how will the court define the attributes of an `international financial centre' and the `appropriate economic and legal environment' to be provided?

These few examples give us a clear message. Broadly speaking, the Basic Law provides a clear understanding that the same financial management policies which Hong Kong has followed for many years should remain intact. However, by using general policy statements rather than specific provisions to define the limitations and restrictions applying to budget matters, it allows a lot of, some would say too much, room for manoeuvre in the actual year-to-year drafting of budgets.

A Budget Impasse

I have also been asked by fellow accountants and legislators whether the Provisional Legislature (PLC) has the authority to reject the 1997-98 Budget? My answer to this is that technically it would be impossible. To understand the whole issue it is necessary to go back to the starting point on how the legislature `passed' a Budget.

The Financial Secretary's Budget speech was actually delivered in the Second Reading Debate of an Appropriation Bill which simply moved to endorse, in one lump sum, the annual expenditure of the Government. This means that it any Legislative changes to revenue measures, such as changes in tax rates, are needed, they will have to be introduced at a later stage by further separate Bills. Once these laws are passed, the Legislature or the PLC cannot unilaterally change them again unless a new Bill is introduced by the Administration.

As the former LegCo passed the Appropriation Bill (and most of the other Revenue Bills except the one which aims to raise the duly on fuel), the Budget was therefore passed after amendment. Once the Budget has been given legislative back-up, the PLC is not in a position to `pass' it again or to reverse it unless, of course, the budgetary laws had been specifically excluded from adoption by the Standing Committee of the National People's Congress (NPC) as a contravention to the Basic Law under art 160. Of course, the NPC took no such decision.

Having studied the legislative procedures, the PLC decided to simply move a motion debate which gave PLC members the opportunity to air their views. The results of a debate like this have no binding effects on the Administration. Furthermore, the Administration cast away all doubts regarding the Appropriation and Revenue Bills passed to enforce the 1997-98 Budget by asking the PLC to again endorse cl 7(2) of the famous Hong Kong Reunification Bill which states that `Legislation enacted in respect of the budget for the 1997-98 financial year is confirmed'. The Bill was duly passed on 1 July 1997.

Some accountants have also correctly pointed out that a Budget impasse could, under the Basic Law, raise new and serious constitutional consequences. Article 48(3) stipulates that one of the main functions of the Chief Executive is `to sign budgets passed by the Legislative Council and report the budgets and fiscal accounts to the Central People's Government for the record'. Article 150 further provides that is `the Legislative Council refuses to pass a budget introduced by the Government, and if consensus still cannot be reached after consultations, the Chief Executive may dissolve the Legislative Council'. Article 51 then provides for measures to obtain provisional short-term appropriations but then, according to art 52(3), the Chief Executive must resign under the following circumstances: `When, after the Legislative Council is dissolved because it refuses to pass a budget the new Legislative Council still refuses to pass the original Bill in dispute'.

These few cases in point have hopefully shed some light on the powerful checks and balances at play and illustrated some possible shortcomings of the Basic Law. Because the `one country two systems' concept is unique and because the people of Hong Kong are not familiar with constitutional laws, the implementation of this important piece of legislation, will no doubt experience some growing pains in the initial stages.

This process, however, is vital if we are to benefit from the full protection of this new legislation, which will eventually provide a solid basis for our freedom and rights as citizens and also protect the SAR from any provincial interference.


Eric Li
Provisional Legislative Council Member

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