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Proactive efforts to boost Hong Kong’s competitiveness as an international business hub and GBA collaboration to revive economy
Hong Kong, 14 January 2021 – PwC expects the HKSAR Government to record a HKD 331 billion consolidated budget deficit for the fiscal year 2020/21, based on projected fiscal revenue of HKD 515.6 billion and expenditure of HKD 876.6 billion, and the net proceeds of HKD30 billion from issuance of government bonds during the year. In view of the economic recession and prolonged effects of the COVID-19 epidemic, Agnes Wong, PwC Hong Kong Tax Partner, said: “We believe that Hong Kong needs to double its efforts to raise the competitiveness of the city. PwC recommends a more proactive approach for economic recovery and long-term development of industries, supported by tax and business incentives to revive growth.”
Based on PwC’s latest estimate, total revenues from profits tax and salaries tax will stand at HKD 187.0 billion, against the Government’s original projection of HKD 198 billion. Stamp duty is expected to generate HKD 87.6 billion in tax revenue, nearly 17% higher than the original forecast of HKD 75 billion thanks to a booming securities market during the second half of 2020. Depending on the land sales schedule in the last quarter, land sales revenue will likely amount to HKD 67.3 billion, over 40% lower than the original estimate of HKD 118 billion. With series of relief measures including those under the Anti-epidemic fund totaling HKD 317.9 billion, which have been rolled out since last February, PwC expects expenditure to add up to HKD 876.6 billion, nearly 20% higher than the original forecast of HKD 731.1 billion.
With Hong Kong’s economy set for a modest improvement in the fourth quarter of 2020, the Government has further revised its GDP growth forecast to - 6.1% for 2020. “The Government is facing a huge deficit this year. PwC has forecasted a historical high deficit of HKD 331 billion, but noted that a considerable portion of the deficit is attributed to the one-off expenditures related to the COVID-19 relief measures. We encourage a balanced approach to spending, to reserve resources for new challenges and measures to revive the economy in the medium to long term. PwC’s estimated fiscal reserves of HKD 829.2 billion as at 31 March 2021, is equivalent to only around 11 months of total Government expenditure,” said Agnes Wong.
It is encouraging to see the Government has recently put forward a number of initiatives to boost Hong Kong’s competitiveness. An example is the concessionary tax measures for the asset and wealth management industry in the form of 0% profits tax rate on eligible carried interest and exclusion of eligible carried interest from employment income for salaries tax purpose.
Kenneth Wong, PwC Hong Kong Tax Partner, comments: “We welcome the Government’s initiative of offering a preferential tax treatment on carried interest. On the other hand, we believe there is scope to step up Hong Kong’s role as a leading hub for global family offices. One proposal is to enhance the existing tax regime to make Hong Kong a more attractive place for family office businesses. A tax incentive that can strengthen Hong Kong’s role and attractiveness as a regional asset and wealth management centre.”
“We continue to encourage the Government to offer competitive tax and financial incentives to boost the city’s status as a regional headquarters (RHQs) hub, and an intellectual property (IP) hub. Promoting the city as a RHQs hub has a multiplier effect on local economic growth - creating business opportunities to benefit various sectors, and attracting diverse talent to the city,” says Kenneth Wong.
The Regional Comprehensive Economic Partnership Agreement (RCEP) signed in November last year among 15 countries, including China and the 10 ASEAN countries, is the world’s largest trade agreement so far. We look forward to seeing Hong Kong becoming a member of the agreement as soon as practicable, and urge the Government to conclude a tax treaty with more ASEAN countries.
In the recent policy address, the Government outlined initiatives for Hong Kong to capitalise on the opportunities arising from the economic collaboration between Hong Kong and the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). To support the integration, PwC urges the Government to refine some of its existing tax policies (e.g. R&D tax deduction) to align them with the policy objective of encouraging Hong Kong businesses to expand into the bay area. We also propose the Government lobbying with the Mainland authorities to extend the coverage of the current Mainland Individual Income Tax subsidy scheme to Hong Kong young graduates working in cities within the GBA.
“Greater participation in the overall development of the GBA will offer opportunity for enterprises in Hong Kong to play a role in the national strategy of internationalising businesses in the GBA, and share the economic benefits,” adds Kenneth Wong.
Innovation & Technology (I&T) remains a policy priority to build a vibrant I&T ecosystem, and nurture and attract local talent. To support this initiative, PwC recommends introducing tax / financial incentives to create a favourable environment for businesses, investors and talent.
A vibrant local I&T ecosystem is crucial to attracting and retaining technological talent. We welcome the GBA Youth Employment Scheme that encourages young professionals across industries (including the I&T industry) to pursue their career in the GBA cities. It is an impetus to nurture and attract diverse talents to Hong Kong.
“We urge the Government to review the effectiveness of existing tax incentives, in particular in light of the changing global tax landscape brought by the OECD’s BEPS 2.0 project,” said Agnes Wong. As a separate exercise and a longer-term measure, we continue to propose a cohesive and comprehensive review of Hong Kong’s tax system.
With the COVID-19 epidemic still affecting businesses and the public, we propose relieving the financial burden of individuals and enterprises through a number of measures, including a temporary loss carry-back for small and medium enterprises1 and a one-off COVID-19 allowance for individual taxpayers for year of assessment 2021/22.
In terms of salaries tax, our key proposals include (1) increasing the basic, married person’s and child allowances, (2) introducing a deduction for rental expenses on the principal residence, (3) enhancing the current deduction for home loan interest, and (4) providing deduction for health insurance premiums paid under private medical schemes as well as private medical expenses incurred by individual taxpayers and his/her specified dependants.
1: Subject to certain conditions and consider applying a cap on the amount that can be carried back