KPMG forecasts that the Hong Kong SAR Government will record a consolidated budget surplus of HKD77 billion for the fiscal year 2016/17, exceeding the government’s initial estimate of HKD11.4 billion. This is due to higher than expected revenues from land sales and stamp duties.
Ayesha Lau, Partner and Head of Hong Kong Tax, KPMG, says: “With an estimated fiscal reserve totalling HKD920 billion, we believe the government is able to do more to enhance Hong Kong’s competitiveness in the longer term. This includes tax incentives to encourage the private sector’s investment in research and development and to attract multinationals to set up their regional or global headquarters in Hong Kong.”
KPMG recently conducted a survey of 212 senior Hong Kong-based business executives on their expectations of the upcoming Budget. A majority of respondents (54 percent) believe strengthening Hong Kong’s position as an international business centre is a key priority for the upcoming Budget. Almost half of the respondents (46 percent) said the government should consider introducing a tax incentive for regional headquarters.
To improve people’s standard of living, KPMG proposes the government waive the stamp duty for Hong Kong permanent residents purchasing a first property (valued at HKD5 million or below) for their own use. The government could also adjust existing salaries tax rate bands and allowances to align with any fluctuations in the consumer price index, to help relieve the tax burden on the middle class.
As an ageing population may increase financial pressures on society, KPMG recommends a financial subsidy of HKD1,000 per person for middle-aged residents (40-65) for health checks, in a bid to identify health problems at an early stage and help to alleviate public expenditure on healthcare in the long term. At the same time, tax deductions could be provided for voluntary health insurance expenses, with a maximum of HKD20,000 per household per year, to mitigate demand for the public healthcare sector.
Another key area of focus for the upcoming budget is Research and Development (R&D). Lau says: “R&D expenses as a share of GDP in Hong Kong is much lower than other jurisdictions in Asia. It is also driven mainly by the government and related organisations rather than from the private sector. We believe an advanced and updated tax policy could encourage private sector R&D investment in Hong Kong.”
KPMG recommends a super deduction on qualifying R&D expenses and an extension of the scope of deductible items related to R&D capital expenditure. In January 2017, the Hong Kong SAR Government signed a landmark deal with Shenzhen to develop a technology park at the Lok Ma Chau loop. An accelerated depreciation allowance on capital expenditure incurred on buildings and structures should be studied as a means to attract the right investors in the hub.
In terms of further strengthening Hong Kong’s role as an international financial centre, the government could offer tax incentives to attract regional headquarters and funds to Hong Kong, complementing the preferential tax policies for corporate treasury centres and offshore funds introduced in past years. KPMG suggests to lower the profits tax rate to 8.25 percent for certain income derived by qualifying regional headquarters and extend the current tax exemption to onshore funds.
Almost half (45 percent) of the survey respondents think that Hong Kong’s tax system will lose its competiveness to other jurisdictions in the future. Hong Kong should review its tax system in order to maintain its competitiveness.
Lau says: “In terms of public finance, Hong Kong should study how the principle of a balanced budget should be applied. Tax policy is an effective tool for the government to use in support of social and economic goals. We suggest that the government adopt competitiveness as the new value proposition for Hong Kong’s tax system and set up a Tax Policy Unit with full-time specialist resources for the research, recommendation and monitoring of tax policies.”
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