PwC forecasts a Government deficit of HKD 38.3 billion

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Bold and effective measures crucial to revitalising the economy and supporting Hong Kong’s long-term development

Hong Kong, 15 January 2020 – PwC expects the HKSAR Government to record a HKD 38.3 billion1 consolidated budget deficit for the fiscal year 2019/20, based on projected fiscal revenue of HKD 572.7 billion and expenditure of HKD 617.3 billion. As Hong Kong is on course for its first deficit in 15 years since the fiscal year 2003/04, PwC recommends that the Government not only step up short-term support for enterprises and residents, but also continue to foster a diversified economy through the further enhancement of tax policies in the longer term.

Based on PwC’s latest estimate, total revenues from profit tax and salaries tax will stand at HKD 212.7 billion, against the Government’s original projection of HKD 232.3 billion. Stamp duty is expected to generate HKD 61.5 billion in tax revenue, nearly 20% lower than the original forecast of HKD 76 billion. Depending on the land sales schedule in the last quarter, land sales revenue will likely amount to HKD 127.1 billion, over 10% lower than the original estimate of HKD 143 billion. Notwithstanding the series of relief measures costing over HKD 25 billion2 rolled out since last August, PwC expects expenditure to add up to HKD 617.3 billion and still be in line with the original forecast of HKD 607.8 billion, thanks to the Government’s consistent adherence to the principle of fiscal prudence.

Jeremy Choi, PwC Hong Kong Tax Partner, said, “Lower than expected revenues from land sales, profit tax and stamp duty are the main contributors to the first budget deficit in 15 years. As Hong Kong faces an economic downturn, the Government has further revised its GDP growth forecast to -1.3% for 2019, which would mark the first annual decline since 2009. Hong Kong’s fiscal health remains very strong though, with an estimated fiscal reserves of HKD 1,132.5 billion by the end of March 2020, equivalent to 22 months of total Government expenditure. Looking ahead, we believe that Hong Kong needs to strengthen its competitiveness to retain and attract businesses, investments and talent, with a view to revitalising the economy and achieving greater success in the future.”

To promote a diversified economy and foster the development of new industries, the Government has introduced a number of industrial-specific tax incentives throughout the last few years including the concessionary tax regimes for captive insurance, corporate treasury centres and aircraft leasing, as well as the enhanced profits tax exemption for funds and R&D tax deduction. More recently, the Government is working on the concessionary tax measures for the ship leasing industry and the insurance sector.

Agnes Wong, PwC Hong Kong Tax Partner, said, “PwC believes that these tax policies being pursued by the Government have set the stage for the development of a more diversified and resilient economy. Equally important is adopting a business-friendly approach to designing and implementing tax measures, while evaluating the effectiveness of existing tax incentives, in order to achieve the policy goals. Going forward, we propose a cohesive and comprehensive review of Hong Kong’s tax system in view of the changing international tax landscape and emerging business models.”

With Innovation & Technology (I&T) being one of the policy priorities for Hong Kong, PwC suggests introducing tax incentives to create a favourable environment for businesses, investors and talent. These proposed measures include:

  1. Extending the R&D tax deduction to cover subcontracted R&D activities in the Greater Bay Area (GBA),
  2. Providing refundable credits for R&D expenditure and I&T investments for start-ups,
  3. Expanding the tax treaty network, and
  4. Offering competitive tax incentives for Intellectual Property (IP) hubs in Hong Kong.

Jeremy Choi added, “A vibrant local I&T ecosystem with good career prospect is crucial to attracting and retaining technological talent. To build up such ecosystem, the Government needs to do more to attract high-tech enterprises, venture capital funds and overseas technological talent to Hong Kong, PwC proposes offering tax and non-tax incentives to attract overseas talent to work and stay in Hong Kong. In the longer run, Hong Kong needs to nurture local I&T talent for driving sustainable development of the industry.”

To further develop Hong Kong’s pillar industries, PwC encourages the Government to offer competitive tax or fiscal incentives for Regional Headquarters (RHQs), trading hubs, family offices and the asset management industry, as well as extend the profits tax exemption for privately held funds to institutional asset owners.

In the current difficult economic environment, PwC recommends relieving the financial burden on individuals through the following support measures with regards to salaries tax:

  1. Increasing the basic allowance and single parent allowance to HKD 150,000, and married person’s allowance to HKD 300,000,
  2. Increasing the child allowance to HKD 150,000 per child,
  3. Providing salaries tax deduction for rental expenses on the principal residence, subject to certain conditions and a deduction cap of HKD 150,000 per year of assessment,
  4. Increasing the deduction cap for home loan interest to HKD 150,000 per year of assessment and extending the maximum deduction period to 25 years,
  5. Increasing the deduction cap for individual self-education expense to HKD 120,000 per year of assessment,
  6. Expanding the scope of tax deduction for health insurance premiums to cover premiums paid under private medical schemes other than the VHIS,
  7. Providing tax deduction for private medical expenses incurred by individual taxpayers and their specified dependents, with a deduction cap of HKD 8,000 per person per year of assessment.

Meanwhile, to further support businesses, “We propose introducing group loss relief and allowing tax loss to be carried backward for three years, which would help companies improve their cash flow,” said Agnes Wong.

For more information on Hong Kong Budget 2020/21, visit https://www.pwchk.com/hkbudget.html.

Note:

1: Including other investment items, e.g. net proceeds of HKD 7.8 billion from issuance of green bond, and the HKD 1.5 billion for repayment of bonds and notes

2: Not including spending involved in the ten relief measures announced on 14 January 2020

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Ashley Leung

Senior Marketing Consultant, PwC Hong Kong

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Senior Manager, PwC Hong Kong

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