EY estimate a fiscal surplus of HK$39 billion for 2014-15
Hong Kong, 20 January 2015 – EY estimate that instead of the originally budgeted surplus of HK$9.1 billion, the final result for the year 2014-15 will be a surplus of HK$39 billion. The much higher surplus is mainly due to larger revenues from stamp duties and tax receipts. Based on EY’s figures, the estimated surplus would raise Hong Kong’s fiscal reserves to HK$794.7 billion by the end of 31 March 2015.
Agnes Chan, Managing Partner, Hong Kong and Macau at EY, says: “When the Government prepared the budget forecast in early 2014, it did not take into account the effects of the double stamp duty payable on certain instruments dealing with immovable properties, the relevant law only being enacted in July 2014. Coupled with the robust performance of the property and stock markets in 2014, EY estimate that revenue receipts from stamp duties would reach a record level of HK$77.8 billion, exceeding the original estimate byHK$34 billion. In addition, tax revenues collected are expected to exceed the original forecast by HK$15 billion owing to a steadily improving business environment and a nearly full employment labor market in Hong Kong.”
“On the expenditure side, by reference to past trends and based on government expenditure incurred in the first 8 months of the year, we estimate that actual government expenditure for the year 2014-15 will be HK$7.9 billion less than budgeted. On the above basis, we forecast the Government will record a surplus of HK$39 billion for the year 2014-15, even after the transfer of investment returns of HK$27 billion into the new Housing Reserve Fund.” Agnes Chan adds.
Hong Kong’s fiscal reserves
This year's expected budget surplus would propel Hong Kong’s fiscal reserves to HK$794.7 billion as at 31 March 2015, amounting to 36% of Hong Kong’s estimated 2014 gross domestic product (GDP).
Agnes Chan explains: “With recurrent fiscal surpluses recorded in the past decade, Hong Kong’s fiscal reserves have swelled to an enviable level of almost HK$800 billion. While a portion of the fiscal reserves may be reserved to fund counter measures in the event of possible market volatility, EY propose that certain relief measures should be introduced to alleviate the tax burdens of individuals and businesses which may still face tough economic times, in particular businesses hit by the recent events concerning the Occupy Movement. Furthermore, a portion of the fiscal reserves could be employed to enhance the competitiveness of our tax system and Hong Kong's ability to attract overseas investment, thereby facilitating the long-term economic development of Hong Kong and providing opportunities to individuals with aspirations.”
Occupy Movement relief package
EY hope that the Financial Secretary would consider the following relief measures: (i) reduce profits tax for 2014-15 by 75%, subject to a ceiling of HK$10,000; (ii) provide concession on water charges, sewage charges and trade effluent surcharges; and (iii) waive the licensing fees for one year in respect of affected businesses. The aforesaid proposed relief package is estimated to cost the government HK$2 billion in revenue foregone.
Providing opportunities to small and medium enterprises and start-up companies
Agnes Chan says: “While Hong Kong has been the favored destination for multinational businesses, small and medium enterprises remain the backbone of its economy, providing nearly half of all employment opportunities in Hong Kong. This sector, however, is confronting unprecedented challenges such as high rental and labor costs while remaining susceptible to global economic uncertainties. To support entrepreneurship and diversify Hong Kong’s economy, we propose the introduction of a two-tier tax system and tax concessions for start-up companies.”
“Under the proposed two-tier tax system, 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%. As for the proposed profits tax concession, a newly established company that meets the qualifying conditions would enjoy a concessionary tax rate of 8.25% (i.e., 50% of the normal rate of 16.5%) for the first three consecutive years after the company has commenced to derive assessable profits. The above proposed measures will be at an estimated revenue cost of HK$1.9 billion per year.” Agnes Chan adds.
With a view to easing the rental burden of start-up companies, EY further advocate the conversion of existing vacant government buildings to serviced offices, and allowing qualifying start-up companies to rent the same at a discounted rate of HK$10-15 per square feet per month.
Relieving the tax burdens of individuals
Grace Tang, Tax and Business Advisory Services Partner at EY, comments that: “Faced with challenges brought about by an ageing population that will require increased public expenditure on medical and health services, it is imperative for the Government to seek to reduce future pressure on the public healthcare sector by promoting a private alternative and thereby maintain Hong Kong’s fiscal balance. We therefore welcome the Government’s proposed introduction of tax deductions for premiums paid under schemes that qualify as a Voluntary Health Insurance Scheme (VHIS). To induce more young and healthy individuals to join a VHIS where their participation will help support the viability of the scheme as a whole, we propose to further enhance the tax deductions by: (i) raising the ceiling of deductions to HK$30,000 a year; and (ii) providing an extra 100% tax deduction for three consecutive years if a taxpayer joins the scheme within the first three years of implementation of the VHIS regime. These proposals will cost the government around HK$0.8 billion in revenue forgone a year.”
To ease the tax burden of individuals, EY propose a number recurring tax relief measures including: (i) widening the tax band from HK$40,000 to HK$48,000; (ii) granting tax deductions for child education expenses of up to HK$70,000 a year; (iii) allowing tax deductions for voluntary contributions to recognized retirement schemes of up to HK$18,000 a year; and (iv) extending home loan interest deductions from 15 years to 20 years. The above proposed measures will be at an estimated revenue cost of HK$4.6 billion a year.
Relieving the operating costs of businesses
Tracy Ho, Tax Managing Partner, Hong Kong & Macau at EY, says: “As a means to improve cash flow, we propose allowing businesses to immediately write off each eligible fixed asset they purchase which cost HK$30,000 or less.”
Enhancing Hong Kong’s competitiveness by improving Hong Kong’s tax system
“To promote the development of innovation and technology industries and to improve the quality of our human capital, we propose the following measures: (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 providers of training services.” Tracy Ho adds.
Recently, the government set up the Economic Development Commission and Financial Services Development Council with a view to exploring an overall strategy and policies for broadening Hong Kong's economic base and bolstering Hong Kong's financial services industry. EY hope that both institutions will devise appropriate tax incentives for targeted industries in order to attract investment to Hong Kong.
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 performed was 39 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 it appropriate to perform a further comprehensive review. Such a review would help identify areas where enhancements could be made to our tax system in order to make it more competitive.
We would also urge the government to direct more resources toward the negotiation of comprehensive double tax treaties/arrangements with other jurisdictions; a wider tax treaty network would further enhance the competitiveness of our tax system. In addition, a review of how the provisions contained in tax treaties/arrangements interact with domestic tax laws should be undertaken.
Green tax measures
To contain the growth in vehicles which are the major sources of air pollution in Hong Kong, EY propose the following green tax measures: (i) increasing the First Registration Tax by 20%; (ii) increasing the Annual License Fee (ALF) by 100%; and (iii) further raising the duty on motor use leaded petrol. A substantial increase in ALF is proposed as the Report on Study of Road Traffic Congestion in Hong Kong recently released by the Transport Advisory Committee revealed that the ALF has not been adjusted for over 20 years. EY believe that the above green tax measures would help to reduce air pollution and make Hong Kong a better place to live and do business.
Table A – Proposed Occupy Movement relief package
|Estimated cost HK$ billion|
|1||Reduce profits tax for 2014-15 by 75%, subject to a ceiling of HK$10,000.||2|
|2||Provide concession on water charges, sewage charges and trade effluent surcharges.|
|3||Waive the licensing fees of affected businesses.|
Table B – Proposed fiscal measures
|Estimated cost HK$ billion|
Start-up companies concession
Introduce a two-tier tax system
Widen the tax band from HK$40,000 to HK$48,000.
Allow tax deductions of up to HK$70,000 a year for “Child education expenses”
Allow tax deductions of up to HK$18,000 a year for voluntary contributions to recognized retirement schemes
Further extend home loan interest deductions from 15 years to 20 years
Table C – Proposed fiscal measures (measures not quantifiable)
Convert existing vacant government building to serviced office for qualifying start-up companies
Allow immediate write-off of small assets valued at HK$30,000 or below
Allow super tax deduction of 200% for qualifying research and development expenditure for projects not qualifying for rebates under the “R&D Cash Rebate Scheme”
Allow super tax deduction of 150% for employee costs paid to accredited providers of training services
Introduce appropriate tax incentives for targeted industries
Set up a special unit to conduct a comprehensive review of our current tax laws
Allocated more resources to expedite the expansion of HK’s tax treaty network and a review of how the provisions contained in tax treaties are to interact with domestic tax laws should also be undertaken
Increases First Registration Tax by 20%
Increase Annual License Fee by 100%
Raise the duty on motor use leaded petrol
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