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PwC forecasts government 2014/15 surplus to hit HK$58.1 billion

Government should save for rainy days and only use reserves to tackle long-term revenue shortfalls.

Hong Kong, 8 Jan 2015 - PwC Hong Kong forecasts the Hong Kong SAR Government will register a consolidated surplus of HK$58.1 billion for fiscal year 2014/15, compared with the government’s initial estimate of HK$9.1 billion.

PwC says the substantial surplus is mainly due to higher than expected profits tax and stamp duty revenues. The government is forecast to receive HK$152.9 billion in profits tax during the year - HK$35.3 billion more than it had estimated.

At the same time, the Financial Secretary has disclosed that the Treasury will record additional revenue of HK$30 billion this fiscal year through the Double Stamp Duty (DSD) that was introduced as a property-cooling measure. The record high in transactions and volume of new private residential properties during the second half of the year is also expected to contribute total stamp duty revenue of HK$73.8 billion.

“The government is estimated to collect total revenues of HK$494.4 billion in 2014/15. Total expenditure will be about HK$398.8 billion. When we take into account investment income of HK$27.8 billion from the Exchange Fund and bond redemptions of HK$9.7 billion, we expect the government will record a surplus of HK$58.1 billion,” says KK So, PwC Hong Kong Tax Partner. “Despite these ample fiscal reserves, the government has limited sources of revenue and a potential long-term fiscal imbalance due to an aging population. We therefore believe the government should set this money aside and only use its reserves to tackle structural fiscal problems over the long term,” adds Mr So.

PwC expects the government to receive HK$221.1 billion for this fiscal year from profits and salaries tax, of which HK$152.9 billion is from profits tax. This is far more than the Government’s initial forecast of HK$117.6 billion, and is due to overall economic performance during the previous two fiscal years.

Despite measures to curb property speculation, the government still recorded additional DSD revenue of HK$30 billion. Coupled with record high transactions and volumes in new private residential properties during the second half of the year, as well as an active stock market, PwC expects stamp duty revenue will increase from HK$41.5 billion in 2013/14 to HK$73.8 billion in 2014/15.

On the other hand, PwC expects revenue from land sales announced by end-2014 to only reach HK$57.4 billion for the fiscal year, which is lower than the government’s initial estimate of HK$70.1 billion.

“The government should review the Inland Revenue Ordinance to enhance Hong Kong’s competitiveness and encourage business. In particular, we suggest it updates the Departmental Interpretation and Practice Notes (DIPN) No. 21, to clarify the definition of Source of Profits,” says Agnes Wong, PwC Hong Kong Tax Partner. “One way to help SMEs would be to reduce profits tax rate from 16.5% to 10% for companies with an annual turnover of less than HK$5 million.”

PwC also suggests loosening Article 39E of the Inland Revenue Ordinance, so that Hong Kong enterprises with manufacturing machinery and plant can enjoy tax deductions on depreciation. To support the overall operation of the business sector, PwC also suggests introducing group loss relief.

Other suggestions include widening the tax band from HK$40,000 to HK$48,000 and increasing child allowance from HK$70,000 to HK$100,000. To help the middle class, the government should extend deductions for home loan interest from 15 to 20 years and increase the ceiling for annual loan interest deductions from HK$100,000 to HK$150,000. Furthermore, the government should offer a tax deduction for rental expenses of up to HK$150,000 per year to taxpayers who rent private residential flats without receive a housing allowance from their employer.

In recent years the international community has been combating tax avoidance and implementing the OECD's Base Erosion and Profit Shifting action plan. For Hong Kong to play its part, substantial investment in the Inland Revenue Department will be needed. PwC suggests the government increase the department’s manpower to this end.

PwC forecasts a total fiscal reserve of HK$813.8 billion by the end of March 2015 - equivalent to 24 months’ government expenditure. It believes the government should remain prudent when developing the new budget. It should achieve an appropriate balance in responding to the needs of all sectors, tackling the challenge of an aging population and maintaining the sustainable development of Hong Kong.