EY estimates a fiscal surplus of HK$8.6 billion for 2012-13
Hong Kong, 27 November 2012 - EY estimates that instead of the originally budgeted deficit of HK$3.4 billion, the final result for the year 2012-13 will be a surplus of 8.6 billion. This turnaround is mainly due to a reduction of expenditures and higher stamp duty revenues. EY’s estimated surplus would increase Hong Kong’s fiscal reserves to HK$677.7 billion by the end of 31 March 2013.
Agnes Chan, Regional Managing Partner, Hong Kong and Macau at EY, says: “The anti-speculation measures targeting the residential property market announced last month may have an adverse impact on the revenues from land premiums and stamp duty. Nonetheless, EY estimates that revenue from land premiums would still meet the original budget estimate of HK$60 billion in light of the fact that the government has already successfully sold many pieces of land in the first seven months of the year. As regards the collection of stamp duty from property and stock transactions, we expect that the overall revenue will be HK$4 billion more than the original budget estimate. This estimate of stamp duty revenue takes into account the increased trading volumes on the local stock market in recent months which we believe will probably more than compensate for any decrease in stamp duty collected from property transactions as a result of the government’s recent anti-speculative measures targeting the residential property market. On the expenditure side, by reference to past trends and based on government expenditures incurred in the first 6 months of the year, we estimate that actual government expenditures for the year 2012-13 will be HK$8 billion less than budgeted. On the above basis, we estimate that the original estimated deficit of HK$3.4 billion will turn into a small surplus of HK$8.6 billion for the year 2012-13.”.
Hong Kong’s fiscal reserves
This year's expected budget surplus would propel Hong Kong’s fiscal reserves to HK$677.7billion as at 31 March 2013, amounting to 36.7% of Hong Kong’s estimated 2012 gross domestic product (GDP).
Agnes Chan explains: “The year 2012 and the year ahead will both be challenging and it is fortunate that Hong Kong has a substantial level of fiscal reserves upon which to rely. To help Hong Kong face the challenges ahead, EY proposes that a portion of the fiscal reserves should be used to alleviate the tax burden felt by individuals and businesses. Furthermore, another portion of the fiscal reserves should be used to enhance the competitiveness of our tax system and further enhance Hong Kong's ability to attract overseas investments. This is in line with the Chief Executive’s earlier address to the Legislative Council that the new government will adopt a more interventionist approach to the market.”
Relieving the tax burdens of individuals
Grace Tang, Tax and Business Advisory Services Partner at EY, comments that: “In addition to the various measures announced by the new government since July 2012 to make homes more affordable, we propose that the stamp duty payable by first time buyers of properties valued at not more than HK$3,000,000 be charged on a fixed amount of HK$100. Furthermore, we also propose to extend tax deductions for home loan interest from 15 to 20 years. We estimate that these two proposed measures would cost the government around HK$1 billion a year in tax revenue forgone.”
“To ease the tax burden on individuals, we also propose widening the tax band from HK$40,000 to HK$48,000. This proposed measure will be at an estimated revenue cost of HK$2 billion a year. In addition, we further propose a number of other recurring tax relief measures including: (i) introducing tax deductions for medical insurance premiums of up to HK$20,000 a year; (ii) allowing tax deductions for voluntary contributions to recognized retirement schemes of up to HK$15,000 a year; and (iii) granting tax deductions for child education expenses of up to HK$60,000 a year.” Grace adds.
As a one-off measure to relieve the tax burden of individuals, EY further proposes waiving rates for 2013-14, subject to a ceiling of HK$2,500 per quarter for each rateable unit.
Relieving business operating costs
Tracy Ho, Tax Location Leader, Hong Kong & Macau at EY, notes that: “In order to help businesses, especially small and medium enterprises, face the current economic challenges, we propose to introduce a two-tier tax system. Under this proposal, companies with turnover below HK$5 million would have their first HK$300,000 or less of assessable profits taxed at a lower rate of 10%. This proposed measure will be at an estimated revenue cost of HK$1 billion a year. In addition, we further propose the following one-off measures to reduce business operating costs: (i) waiving business registration fees for a year; and (ii) waiving license fees for a year. It is estimated that these proposed one-off measures would cost the government around HK$2.9 billion in revenue forgone.”.
“As a means to improve cash flow, we further propose to allow businesses to immediately write off each eligible fixed asset they bought costing less than HK$30,000 or less.” Tracy adds.
Enhancing Hong Kong’s competitiveness by improving Hong Kong’s tax system
When standing for the Chief Executive election early this year, one of the economic policies proposed by Mr. C.Y. Leung was to establish an inter-departmental agency on economic development. It was further proposed that the agency be led by the Chief Executive with a view to coordinating the efforts of various government departments to formulate long-term development strategies and industry policies. EY looks forward to the establishment of such an agency and hopes that it would devise appropriate tax incentives for targeted industries in order to attract investment to Hong Kong.
In addition, EY proposes the following measures in order to promote the development of innovation and technology industries and to improve the quality of our human capital: (i) allow a super tax deduction of 200% for qualifying research and development expenditure for projects not qualifying for rebates under the “R&D Cash Rebate Scheme”; and (ii) allow a super tax deduction of 150% for employee training costs paid to accredited training providers.
Furthermore, we would like to urge the government to consider setting up a tax policy unit to conduct a comprehensive and in-depth review of our tax laws. The last time such a comprehensive review was done was 36 years ago. Given the passage of time and the tremendous changes which have taken place in the manner in which businesses operate, including substantial changes in accounting rules governing how the results of business transactions are reflected in financial accounts, we consider that conducting a comprehensive review now would help enhance the competitiveness of our tax system.
We would also urge the government to direct more resources toward seeking to negotiate comprehensive double tax treaties with other jurisdictions, since having a wide tax treaty network would also further enhance the competitiveness of our tax system. In addition, a review of how the provisions contained in tax treaties interact with domestic tax laws should also be undertaken.
Green tax measures
Air pollution is often cited as a disadvantage of doing business, or living, in Hong Kong. To help improve the situation, EY proposes the following green tax measures: (i) further raise the duty on motor use leaded petrol; and (ii) increase first registration tax concession for environment-friendly vehicles.
Our above proposed tax measures, some which have a short and others longer-term horizon are aimed at addressing some of the pressing issues identified by the Chief Executive. We believe that these measures can help both individuals and companies in Hong Kong to better face the uncertainties ahead.
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This news release has been issued by EY, China, a part of the EY global network.