EY estimates a fiscal surplus of HK$40 billion for 2018-19

Hong Kong, 17 January 2018

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EY estimates that the Government will record a surplus of HK$40 billion for the financial year 2018-19, which is slightly higher than the estimate of HK$34.9 billion made in the budget consultation. Based on EY’s figures, the estimated surplus would increase Hong Kong’s fiscal reserves to HK$1,143 billion by 31 March 2019.

(Left to right) Robin Choi, People Advisory Services Partner, Ernst & Young Tax Services Limited; Agnes Chan, Managing Partner, EY Hong Kong and Macau; Paul Ho, Financial Services Tax and Business Advisory Services Partner, Ernst & Young Tax Services Limited

Agnes Chan, Managing Partner, Hong Kong and Macau at EY, says: “We estimate that the land premiums and stamp duty revenue for the financial year 2018-19 will be HK$116 billion and HK$85 billion respectively, falling short of the original estimates by HK$5 billion and HK$15 billion respectively. This is mainly because of a softening of both the property and stock market amid slower economic growth since the latter half of the year 2018. Tax receipts, however, are not expected to be significantly affected as the Government is now collecting tax revenue based on 2017-18 earnings. We estimate that tax receipts will only be slightly lower than the original budget by HK$1 billion.”

Chan adds, “On the expenditure side, by reference to past trends and based on government’s expenditure incurred in the first eight months of the year, we estimate that actual government expenditure for the year 2018-19 will be HK$26.1 billion less than budgeted.”

Hong Kong’s fiscal reserves to exceed HK$1 trillion by 31 March 2019, amounting to 41.6% of Hong Kong’s GDP

The expected budget surplus this year would propel Hong Kong’s fiscal reserves to HK$1,143 billion as at 31 March 2019, amounting to 41.6% of Hong Kong’s estimated gross domestic product (GDP) in 2018.

Respite for individuals and businesses

In view of the expected bumpy road ahead due to increased economic and political volatility, and given the enviable level of fiscal reserves of over HK$1 trillion, EY agrees with the Financial Secretary that suitable counter-cyclical measures should be taken to utilize part of the reserves to offer short-term relief measures for our people and businesses. In this regard, EY proposes the following one-off relief measures:

  • Reduce profits tax, salaries tax and tax under personal assessment for 2018-19 by 75%, capped at HK$20,000;
  • Waive rates for 2019-20, capped at HK$1,000 per quarter for one rateable property for each owner;
  • Waive business registration fees for 2019-20; and
  • Waive the licence fees for travel agents, hotels and restaurants for one year.

It is estimated that the above one-off relief measures will reduce government’s revenue by HK$30 billion.

Building a better Hong Kong via the “4S” approach

In the past decade, the four pillar industries have contributed close to half of Hong Kong’s GDP and employment, but the six new industries only contributed around 10% of Hong Kong’s GDP and employment. While we need to consolidate and enhance our traditional advantages, we also need to develop new areas of economic growth. Diversifying our economy will provide our younger generation with greater and better career choices. EY proposes “4S” fiscal measures – Stimulating innovation and creativity, Seizing growth opportunities, Sustaining our environment and Supporting our people and households.

Stimulating innovation and creativity

Relaxing the deduction rules for qualifying research and development expenditures

EY welcomes the enactment of the new law that grants enhanced tax deductions for qualifying research and development (R&D) expenditures, which is aimed at encouraging the private sector to increase its investment in R&D.

Based on the Hong Kong Inland Revenue Department’s (IRD) current strict interpretation of the law, where R&D activities are sub-contracted out to be performed by a service provider inside or outside Hong Kong, and the service provider is not an R&D institution as defined, the relevant R&D expenditures would not be tax deductible. However, sub-contracting out R&D activities under cost-sharing arrangements (CSAs) are quite common in a corporate group context. In addition, sub-contracting out to independent service providers outside Hong Kong may also be necessary, given that Hong Kong may currently lack sufficient people with the skills and expertise to conduct certain types of R&D activities.

In this regard, we note that the corresponding regimes of mainland China, Singapore and the UK all appear to some extent to allow expenditures incurred for sub-contracted out R&D activities or CSAs to qualify for super tax deductions.

As such, we urge the IRD to relax the aforesaid interpretation such that sub-contracted out R&D expenditures would also be tax deductible, lest the attractiveness of the new law be undermined.

Introducing a patent box regime

Agnes Chan adds: “Given the new opportunities brought about by global reforms in industrial technologies, we share the Government’s view that re-industrialization is a potential new area of economic growth for Hong Kong. In addition to support through funding, we propose introducing tax support measures by way of a patent box regime. Under our proposed regime, if an intellectual property right (IPR) is created or developed by a taxpayer carrying on a business in Hong Kong, income derived from (i) the sale of products containing the IPR; and (ii) the licensing of the IPR would be eligible for a concessionary tax rate of 8.25%.”

Designating Hong Kong/Shenzhen ¬Innovation and Technology Park as a preferential tax zone

Chan continues, “To attract top-notch high-new technology or creative enterprises, as well as professionals to establish and work in the Hong Kong/Shenzhen Innovation and Technology Park, Hong Kong may need to introduce certain new tax incentives. In addition to granting rent concessions, we propose the following preferential tax treatments: (i) a concessionary profits tax rate of 8.25% (i.e., half of the normal rate of 16.5%) for qualifying enterprises; (ii) only 50% of the assessable income of individuals employed as high-new technology or creative professionals by enterprises in the Park to be subject to salaries tax; and (iii) preferential salaries tax treatment for stock rewards and stock option gains awarded to such individuals.”

Nurturing high-new technology and creative start-ups by offering profits tax concession and attracting angel investors by providing tax relief

Chan explains, “In terms of nurturing high-new technology and creative start-ups, we propose the introduction of a profits tax concession for qualifying high-new technology and creative start-ups and a tax relief for angel investors. Under the proposed profits tax concession, a newly established company that meets the qualifying conditions would enjoy a concessionary tax rate of 8.25% for the first three consecutive years after the company has commenced to derive assessable profits.”

Chan further elaborates, “As for the proposed tax relief, corporate and individual taxpayers who can commit a minimum of HK$500,000 in a qualifying start-up would enjoy a tax deduction of 50% of the amount of the investment in the year they made the investment, subject to a cap of HK$1 million for each year of assessment. However, if the holding period is less than three years, any deduction previously allowed will be assessed to tax in the year the investment is sold. We believe that the proposed measures can encourage more private investors, especially business veterans, to invest in start-ups that have high growth potential, and help start-ups overcome difficulties in accessing capital. Furthermore, the start-up companies may also benefit from the guidance and mentorship provided by the angel investors.”

Other proposed tax measures

Allowing a super tax deduction of 200% for employee training costs paid to accredited providers of training services to encourage employers to groom talents.

Seizing growth opportunities

Paul Ho, Financial Services Tax and Business Advisory Services Partner at Ernst & Young Tax Services Limited, says: “The Belt and Road (B&R) initiative and development of the Greater Bay Area (GBA) create opportunities for Hong Kong over the medium term, given its unique position as the gateway to mainland China and as a global financial center with renowned professional services.”

EY suggests Hong Kong seize the opportunities presented by the B&R and GBA initiatives through the following tax measures:

  • Introducing regional headquarters (RHQ) tax incentive to enhance the attractiveness of Hong Kong’s tax system to multinational corporations (MNCs). Under the proposed tax incentive, profits derived by a qualifying RHQ from qualifying RHQ activities are taxed at a concessionary tax rate of 8.25%. MNCs typically situate their regional financing and management hubs in the same location to enable group resources to be more effectively managed on a regional basis. Introducing an RHQ incentive to cover regional management and coordination activities would complement the corporate treasury centre tax regime that covers group financing activities introduced in 2016. This would help attract more MNCs to set up their regional headquarters in Hong Kong.
  • Supporting and enhancing the development of high value-added maritime services by (i) establishing a concessionary tax regime to provide tax concessions to ship lessors to compensate for their non-entitlement to depreciation allowance on relevant ships; (ii) granting concessionary tax rate of 8.25% on profits derived by qualifying ship lessors and qualifying ship leasing managers from qualifying activities; and (iii) providing concessionary tax rate of 8.25% on profits derived from the provision of qualifying shipping-related support services, such as ship broking and ship financing.
  • Providing concessionary tax rate of 8.25% in respect of profits derived from the business of marine insurance and underwriting of speciality risks to promote the development of marine insurance and the underwriting of specialty risks in Hong Kong.
  • Enhancing the tax incentives for funds by amending the definition of “specified transactions” such that bond funds whose principal income is interest would also be tax exempt.
  • Directing more resources toward the negotiation of comprehensive avoidance of double taxation arrangements (CDTAs) with other jurisdictions, especially the jurisdictions along the B&R.
  • Relaxing section 39E to grant tax depreciation allowances in respect of plant and machinery used overseas to facilitate offshore equipment leasing and infrastructure projects along the B&R.

Sustaining our environment

To facilitate the implementation of municipal solid waste charging, the Government must strengthen its support of waste reduction and recycling. In this regard, EY proposes the following tax measures: (i) providing a 200% tax deduction for the acquisition cost of plant and machinery employed in recycling businesses in the year of purchase; and (ii) offering a concessionary tax rate of 8.25% on qualifying recycling profits.

In addition, EY proposes the following green tax measures to facilitate sustainable development of Hong Kong and make Hong Kong a better place to live and do business: (i) waiving first-time registration tax on electric vehicles; and (ii) further raising the duty on motor-use leaded petrol.

Supporting our people and households

Stamp duty relief for first-time home buyers and allowing rental deductions

Robin Choi, People Advisory Services Partner at Ernst & Young Tax Services Limited, says, “First-time home buyers are generally more cash constrained than other buyers and stamp duty can represent an upfront cash burden on top of a down payment and legal fees. As such, we propose to waive the stamp duty for a Hong Kong permanent resident in respect of the first-time purchase of their principal home of not more than HK$6 million. As regards renters, we propose, as an interim measure, to allow tax deductions for rental payments of up to HK$100,000 a year in respect of a taxpayer’s principal home (excluding public housing) for a maximum of five years.”

Enhancing the dependent parent and grandparent allowance

Robin Choi adds, “Currently, taxpayers may claim dependent parent and grandparent allowance (DPGA) in respect of each dependent parent/grandparent maintained by them/their spouse. In general, the dependent must meet the following conditions in the relevant year of assessment: (i) ordinarily resided in Hong Kong; (ii) aged 55 or more; and (iii) maintained by the taxpayers. Taxpayers will be eligible for an additional DPGA if they resided with the dependent parent/grandparent continuously throughout that year of assessment.

We consider that the qualifying conditions for DPGA should be adjusted over time to meet new social and economic realities. Taxpayers may not be able to reside with their dependents due to small living space. On the other hand, the availability of improved health and senior care may encourage more Hong Kong elderly to retire in mainland China, in particular the GBA. As such, we propose removing the differentiation between basic and additional DPGA. So long as a dependent is aged 55 or more, ordinarily resided in Hong Kong or the GBA, and is maintained by a taxpayer in a relevant year of assessment, the full amount of DPGA would be granted to the taxpayer. It is estimated that this proposed measure will cost the Government HK$3.2 billion a year.”

Relieving the tax burden of individuals

To ease the tax burden of individuals, EY proposes the following recurring tax relief measures including: (i) introducing caregiver allowance of HK$20,000 to taxpayers, allowing them to claim in respect of one of his/her parents or parents-in-law, who is not employed and is looking after any children of the taxpayer who are not more than 12 years old; and (ii) allowing taxpayers to defer the claim for deduction of self-education expenses for up to three years from the year of assessment in which they took the course. The above proposed measures will be at an estimated revenue cost of approximately HK$800 million a year.

-Ends-

About EY

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This press release is issued by the EY China practice, a part of the Ernst & Young global network.

Appendix 1

Table A – Proposed one-off relief measures

 

 

Estimated cost HK$ billion

1

Reduce profits tax, salaries tax and tax under personal assessment for 2018-19 by 75%, capped at HK$20,000

19

2

Waive rates for 2019-20, capped at HK$1,000 per quarter for one rateable property for each owner

8

3

Waive business registration fees for 2019-20

2.8

4

Waive the licence fees for travel agents, hotels and restaurants for one year

0.2

 

Total

30

Table B – Proposed fiscal measures

 

 

Estimated cost HK$ billion

1

Enhancing the DPGA

3.2

2

Introducing caregiver allowance

0.8

 

Total

4

Table C – Proposed fiscal measures (measures not quantifiable)

1

Relaxing the R&D deduction rules

2

Patent box regime

3

Hong Kong/Shenzhen ¬Innovation and Technology Park preferential tax zone

4

High-new technology and creative start-ups profits tax concession


5

Tax relief for angel investors

6

Super tax deduction for employee training costs paid to accredited providers of training services

7

Concessionary tax regime for qualifying ship lessors and qualifying ship leasing managers

8

Providing concessionary tax rate of 8.25% on profits derived from the provision of qualifying shipping-related support services

9

Providing concessionary tax rate of 8.25% in respect of profits derived from the business of marine insurance and underwriting of specialty risks

10

Enhancing the tax incentives for funds

11

Regional headquarters incentive

12

Directing more resources toward the negotiation of CDTAs with other jurisdictions

13

Relaxing section 39E to grant tax depreciation allowances in respect of plant and machinery employed overseas

14

Allowing a 200% tax deduction for the acquisition cost of plant and machinery employed in recycling businesses in the year of purchase

15

Offering concessionary tax rate of 8.25% on qualifying recycling profits

16

Waive the first-time registration tax on electric vehicles

17

Raise the duty on motor-use leaded petrol

18

Waive the stamp duty for a Hong Kong permanent resident in respect of the first-time purchase of their principal home of not more than HK$6 million

19

Allow tax deductions for rental payments in respect of a taxpayer’s principal home of up to HK$100,000 a year, for a maximum of 5 years

20

Allow deferral of self-education expenses claims