PwC: Budget surplus prediction is almost spot on

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PwC’s surplus prediction of HK$46.1bn hits close to Government’s original HK$46.6bn estimate; Calls for a comprehensive review of tax regime

Hong Kong, 29 January 2019 - PwC expects the HKSAR Government to record a HK$46.1 billion consolidated budget surplus for the fiscal year 2018/19, based on projected fiscal revenue of HK$576.1 billion and expenditure of HK$530 billion.

The estimated surplus is closely in line with the HKSAR Government's original estimation of HK$46.6 billion for 2018/19.  PwC expects the fiscal reserves to stand at HK$1,149 billion by 31 March 2019 – equivalent to around 26 months of total Government expenditure.

Jeremy Choi, PwC Hong Kong Tax Partner, said: “The 2018/19 projected out-turn is closely aligned with the Government’s original budget estimation. Additional reserves is a healthy outcome and gives scope to further invest in Hong Kong’s future that is economically diverse and drive innovation. To lift Hong Kong’s competitiveness, we can capitalise on the city’s pillar industries on one hand, and develop Hong Kong as a global innovation and technology (I&T) hub on the other hand.”

Although Hong Kong’s fiscal health remains stable, the Government's revenue is increasing at a slower rate than its expenditure. To achieve a sustainable and diversified economy, we urge the Government to consider measures that bolsters industries like innovation and technology as new drivers of growth.

At the same time, PwC expects revenue from stamp duty to amount to HK$89.7 billion, 10.3% lower than the Government's original forecast of HK$100 billion. PwC’s stamp duty forecast was calculated based on lower transaction volumes of the stock market and property sales, to reflect the slowdown in the global economy.

In Carrie Lam’s last policy address, she shared her vision of a diversified economy and a roadmap to boosting Hong Kong’s competitiveness through revitalising existing businesses and fostering new industries. The economic blueprint included earmarking investments towards research and development and to promote the innovation and technology sectors.

“For enhancing the competitiveness of the tax regime, PwC urges the Government to conduct a comprehensive review of the existing tax system to ensure it keeps pace with Hong Kong’s economic progress and outlook.  To make tax incentives more effective, we suggest the Government to take a holistic and forward looking approach that caters to the commercial needs of industries today when formulating incentives. This will ensure tax measures remain industry-inclusive and competitive within the region,” says Jeremy Choi.

One example of making the proposed unified tax exemption for privately offered funds to be more competitive and attractive, is to extend it to institutional asset owners like pension funds and endowment funds.

Meanwhile, we applaud the Government for taking the first step of offering super tax deduction of research and development (R&D) expenditure, and to boost the development of I&T in Hong Kong. Taking this one step forward, PwC recommends four tax measures to strengthen Hong Kong’s position as an intellectual property (IP) hub in the region:

  1. Provide refundable credits for R&D expenditure and investment costs in I&T to support start-up businesses in the I&T sector.
  2. Concessionary profits tax rate of 8.25% for IP hubs to be set up in Hong Kong.
  3. Expand Hong Kong’s tax treaty network with major trading partners to relieve potential double taxation. 
  4. Offer unilateral tax credits for overseas withholding tax paid on royalties by Hong Kong IP hubs.

In addition, PwC proposes two tax incentives to instill competitiveness and promote the development of the Guangdong-Hong Kong-Macau Bay Area (GBA): introduce concessionary profits tax rate of 8.25% to attract the establishment of regional headquarters in Hong Kong; liaise with the Mainland Government on a reduced Mainland Individual Income Tax (IIT) rate of not more than 15%, or offering IIT tax rebate if certain criteria are fulfilled. 

Agnes Wong, PwC Hong Kong Tax Partner, said: “To enable businesses to capitalise on opportunities from the GBA, we have been advocating to the HKSAR Government, for more than two years, to liaise with the Mainland Government for either lower or the same level of Hong Kong profit tax for Hong Kong businesses in the GBA. We believe forging competitive tax policies that are favourable to Hong Kong companies doing businesses in the GBA will facilitate the flow of people, capital and goods.”

PwC continues to support the growth of maritime services in Hong Kong. Our proposed tax measure to revive the maritime leasing and shipping industry is to offer tax incentives for shipping and maritime-related management services (e.g. ship broking, ship agency, freight forwarding etc).

“Revitalising Hong Kong’s maritime and ship leasing industry would reinforce Hong Kong’s competitiveness as a maritime hub from regional ports. Similarly, a review of the tax incentive for aircraft leasing is necessary to ensure it remains competitive and effective in enhancing Hong Kong’s position as an aviation leasing hub.” says Agnes Wong.

For salaries tax measures, we propose the Government to introduce a tax deduction for medical expenses incurred by individual taxpayers, with a deduction cap of HK$8,000 per person per year. The deduction is to relieve the financial burden on individuals. 

Contact us

Julia In

Senior Manager, PwC Hong Kong

Tel: +[852] 2289 8687

Ashley Leung

Senior Marketing Consultant, PwC Hong Kong

Tel: +[852] 2289 8785

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