KPMG China forecasts the Hong Kong SAR Government will record a consolidated budget surplus of HKD80.7 billion for the fiscal year 2015/16. This is above the Government’s initial estimate of HKD36.8 billion, mainly due to higher than expected stamp duty collection.
KPMG China recently conducted a survey of 303 senior Hong Kong-based business executives on their concerns for business in Hong Kong and expectations from the upcoming Budget. A majority of the respondents (56 percent) indicate high operating costs are having an adverse impact on their business in Hong Kong, followed by the external economic/political environment (33 percent). Further, the survey found that 54 percent of respondents consider Hong Kong’s role as an international financial centre and fund raising platform a major opportunity under the “Belt and Road” initiative, while 16 percent believe that Hong Kong can benefit from providing investment and infrastructure consultancy services for Chinese companies.
To address the current social needs and to increase Hong Kong’s competitiveness, KPMG China proposes the Government introduce various measures including, improving people’s livelihoods and retirement protection, incentives for research and development (R&D) and the “Belt and Road” initiative.
In terms of measures to improve people’s livelihoods, KPMG China proposes the Government waive the stamp duty for Hong Kong residents purchasing a first property valued at HK$4 million or under for their own use. KPMG China expects the Government to provide relief to certain industries affected by the economic downturn, as well as other one off relief measures - such as salaries and profits tax relief - to roll over from last year despite the fact that the money could be used to address other long term concerns such as healthcare and retirement.
Ayesha Lau, Partner-in-Charge of Hong Kong Tax, KPMG China, says: “The upcoming economic environment is expected to remain challenging, therefore we expect the Government will offer relief measures to stimulate the economy and employment in Hong Kong.”
An aging population remains a challenge and action should be taken now. However, opinions are divided as to the best approach. KPMG China believes tax incentives could encourage residents to plan for their retirement needs.
Charles Kinsley, Principal, KPMG China, says: “We suggest the Government issues medium/long-term (5 to 10 year) iBonds and provide tax deductions for voluntary MPF contributions to encourage medium-to long-term voluntary savings.”
KPMG China also recommends the introduction of an enhanced tax deduction and/or to provide subsidies for corporates that hire elderly workers.
Meanwhile, innovation and technology is key to the development of Hong Kong (as the Chief Executive stated in his recent Policy Address). KPMG China believes more can be done on the tax front to stimulate this development, such as providing a 300 percent super tax deduction for R&D expenditure, and allowing R&D expenses paid to group companies and R&D expenses paid to overseas institutions to also be eligible for a super tax deduction.
Lau says: “Currently, Hong Kong lags far behind other major economies in terms of R&D investment. Total R&D investment in Hong Kong is about 0.73 percent of GDP, far below most OECD countries and other Asian jurisdictions. Hong Kong’s closest neighbour Shenzhen has a much higher rate of 4 percent while Beijing is at 6 percent. It is therefore important for the Government to take prompt action on this matter.”
In the longer term, Hong Kong is expected to benefit from its role as a “super-connector” under the “Belt and Road” initiative. KPMG China urges the Government to further broaden its Double Taxation Agreement (DTA) network and promote cross-border consultancy services and trading activities with the “Belt and Road” countries.
“Hong Kong has so far concluded DTAs with 13 countries out of the 65 along the “Belt and Road”, and is negotiating DTAs with a further eight countries. DTAs can provide for favourable withholding tax rates and greater certainty on the tax outcome of cross border trade and therefore increasing the number of DTAs could attract multinational companies to use Hong Kong as a business platform,” Kinsley explains.
Separately, as Hong Kong is expected to serve as a logistics and maritime services hub under the “Belt and Road” initiative, KPMG China proposes the Government further enhance its aircraft leasing tax regime by levying tax on net profits rather than gross profits; this will increase Hong Kong’s attractiveness as an aircraft leasing hub.
Lau concludes: “Revenues from tax collection, investment income and land sales fluctuate significantly with the global economic situation. Despite holding significant reserves in hand, we support the Government to continue with a prudent approach in planning its public spending amid the global economic uncertainty.”
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Key findings from our survey of 303 senior business executives on their concerns for business in Hong Kong from the 2016/17 Hong Kong Budget.