KPMG forecasts a budget surplus in the range of HKD 150 to 180 billion in FY2017/18 and record high fiscal reserves, highlighting a significant opportunity for the government to introduce more targeted tax incentives and review its fiscal philosophy
KPMG’s recent survey of over 300 senior business executives finds that while 92 percent of respondents indicated that Hong Kong’s tax system is currently competitive, only 38 percent believe that Hong Kong’s tax system can remain competitive, down from 52 percent a year ago. This shows that the business community has become more pessimistic regarding the future competitiveness of Hong Kong’s tax system.
Ayesha Lau, Managing Partner of KPMG Hong Kong, says: “There is a global trend in terms of countries and territories reducing Corporate Tax rates and making use of their tax systems to support local businesses and attract foreign capital and investment. For Hong Kong to remain competitive, the government needs to act more quickly in its review of the tax system and in introducing more targeted tax incentives to support economic growth.
”This is especially the case as the 16.5 percent Corporate Tax rate in Hong Kong may no longer be ‘low’ when benchmarked against latest international developments.
According to the survey, respondents indicated that introducing a tax incentive for regional headquarters would be effective in enhancing the competitiveness of Hong Kong, followed by introducing group tax loss relief.
KPMG suggests introducing a regional headquarters tax incentive – halving the Profits Tax rate to 8.25 percent for qualifying income – to attract multinationals to set up regional headquarters in Hong Kong. This would complement the measures introduced in 2016 for corporate treasury centres.
Alice Leung, Tax Partner, KPMG, says: “A simple tax incentive providing certainty is the key priority for implementing an effective and efficient tax measure. Over 50 percent of survey respondents said they would not consider taking advantage of the corporate treasury centre tax incentive. Complexity or uncertainty of the incentive, high implementation and operating costs are indicated as major hurdles.”
Separately, in order to support technological advancement and innovation in Hong Kong, KPMG proposes that the government allow tax losses for R&D activities to be cashed out, and introduce group tax loss relief. The introduction of group tax loss relief, which permits the transfer of tax losses from one group company to be offset against the taxable profits of another group company, would bring Hong Kong in line with other major international financial centres, and encourage investment, innovation and risk-taking.
Additionally, to facilitate international R&D collaboration, the government can consider including a personal tax exemption clause in the Double Taxation Agreement (DTA) for scholars and researchers.
KPMG also recommends expanding the DTA network to ‘Belt and Road’ countries – especially ASEAN countries – in order to avail of the business opportunities arising from the ‘Belt and Road’ Initiative. The government should also consider introducing personal tax exemption under the DTA with mainland China to enhance movement of people within the Greater Bay Area with reference to the tax exemption provision for frontier workers contained in some DTAs of European countries.
In terms of improving the standard of living for the general public, the government could consider adjusting Salaries Tax rate bands and allowances with reference to the Consumer Price Index. Leung says: “We propose waiving the Stamp Duty for Hong Kong permanent residents purchasing their first residential property (valued at HKD 6 million or below) for their own use. Furthermore, allowing a tax deduction for medical insurance premiums paid (capped at HKD 20,000 per household per year) could encourage residents to plan for their health needs.”
Higher revenue from stamp duties and land premiums are expected to boost the accumulated fiscal reserves to exceed HKD 1.1 trillion by 31 March 2018. KPMG believes the government may have been overly prudent in the past by limiting its long-term investment and should take the current opportunity to review its fiscal philosophy.
Lau concludes: “While it is understandable and appropriate for the government to strive for a balanced budget, given the principle of keeping expenditure within the limits of revenue, the government should also think from a different perspective – taking a longer term view to allow for short-term deficits, in order to invest in a better future.”
A long-term approach can be adopted when managing public finances – allowing for deficits during initial years of investment for long-term benefits, and offset by the surpluses within the cycle. This will allow more room for increases in recurrent expenditures and help maintain stability.
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KPMG China operates in 16 cities across China, with around 12,000 partners and staff in Beijing, Beijing Zhongguancun, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Tianjin, Xiamen, Hong Kong SAR and Macau SAR. With a single management structure across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 154 countries and territories and have 200,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG China was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong office can trace its origins to 1945. This early commitment to the China market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in the Chinese member firm’s appointment by some of China’s most prestigious companies.