Press release

13 Jan 2021 Hong Kong SAR

EY estimates a fiscal deficit of HK$363 billion for 2020-21, equivalent to 13.5% of Hong Kong’s estimated GDP in 2020

HONG KONG, 13 JANUARY 2021 – EY estimates that the HKSAR Government (the Government) will record a fiscal deficit in the financial year 2020-21 of HK$363 billion, the highest deficit recorded to date.

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EY estimates that the HKSAR Government (the Government) will record a fiscal deficit in the financial year 2020-21 of HK$363 billion, the highest deficit recorded to date.

Agnes Chan, Managing Partner, Hong Kong and Macau at EY, says, “The COVID-19 pandemic has plunged the global economy into a severe contraction. The Government has dedicated over HK$300 billion to support our people and businesses in this crisis and these relief measures have swollen the budget deficit. The pandemic-induced recession has also reduced the Government’s receipts related to major revenue items.”

This level of budget deficit will reduce Hong Kong’s fiscal reserves to HK$797.3 billion as at 31 March 2021, amounting to 29.6% of Hong Kong’s estimated GDP in 2020. This level of fiscal reserves is equivalent to 11.3 months of government expenditure and is close to the level reached in 2003-04 when Hong Kong was hit by the SARS outbreak.

The path forward in the new normal is challenging and requires support

The global economy remains very weak and the path forward in the new normal is challenging. In these circumstances, EY is proposing one-off relief measures should be provided by the Government to support people and businesses.

Chan said, “We are proposing a one-off relief package totaling HK$100 billion to support our people and businesses. One of which is the distribution of HK$5,000 e-consumption vouchers, which is expected to bring about a 1.4% GDP growth by encouraging local consumption.”

These relief measures are detailed in the Appendix to this news release. They cover HK$77.5 billion in care and support packages for our people, and HK$22.5 billion in support to businesses in the near term.

Building on Hong Kong’s strengths to support GBA’s development

To take forward the key policy initiatives announced in the 2020 Policy Address, the EY budget proposals are formulated around a number of objectives covering the Greater Bay Area (GBA), the development of the innovation and technology (I&T) and financial services industries andreducing the tax burdens of individuals given the current social and economic realities . Fuller details are given in the Appendix.

 “Hong Kong needs to build on its strengths and the areas where we can have the greatest impact. We believe the GBA initiative is a key development strategy in the country's reform and opening up. It will also provide a key driver for reviving Hong Kong's economy after the pandemic. Particularly, seeking the agreement of the State Taxation Administration to grant a full exemption of the withholding tax in respect of dividends derived by Hong Kong resident enterprises in the GBA will be an important drive for Hong Kong’s participation in GBA,” says Chan.

Strengthening Hong Kong’s competitiveness in innovation & technology and position as an international financial center

Paul Ho, Financial Services Tax and Business Advisory Services Partner at Ernst & Young Tax Services Limited, also notes, “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, EY recommends the Government to introduce new tax incentives designating the Hong Kong/Shenzhen Innovation and Technology Park as a preferential tax zone in addition to granting rent concessions.”

Continuous learning and development is imperative in the technology disruptive era. The World Economic Forum’s “Future of Jobs Report 2020”¹ revealed that the double disruption of automation and the pandemic will displace 85 million jobs by 2025. For those set to remain, 50% will need reskilling by 2025. The staggering scale of the challenge means that the government needs to provide greater support for reskilling and upskilling of at-risk or displaced workers. In this connection, EY further recommends a super tax deduction of 200% for employee training costs paid to accredited providers of training services to encourage employers to groom future talent.

Another area of traditional strength for Hong Kong is as an international financial services center.  EY recommends a number of measures to complement those announced by the Chief Executive in her 2020 Policy Address, including:

  • Exempting (i) H-REITs from property tax in Hong Kong; and (ii) all transfers of units in H-REITs from stamp duty
  • Amending the tax exemption regime for funds in order to attract more family offices
  • Offering tax incentives to qualifying green bonds (QGBs) to attract more investors to invest in QGBs traded in Hong Kong
  • Enhancing tax incentives for funds 
  • Improving the position of Hong Kong as an asset management center through certain concessionary tax rates

Building a greener and more sustainable city

EY is committed to carbon neutrality and we welcome the Government’s pledge to achieve carbon neutrality before 2050 and to devise more proactive strategies and measures to reduce carbon emissions. Promoting waste reduction and green transportation are keys to attaining this ambitious goal. To this end, we suggest a combination of the following tax and non-tax measures:

  • Providing a 200% tax deduction for the acquisition cost of plant and machinery employed in recycling businesses in the year of purchase
  • Offering a concessionary tax rate of 8.25% on qualifying recycling profits
  • Waiving the first-time registration tax on electric vehicles (EVs)
  • Further raising the duty on motor-use leaded petrol granting preferential treatment for EVs, such as lower annual vehicle license fees and tunnel tolls; and providing rates concession to incentivize private resident and commercial buildings to install EV charging facilities

Fighting COVID-19 and reducing the tax burden of individuals

The pandemic has forced many employees to work from home. As a result, employees often incur additional running expenses such as electricity, phone and internet expenses, as well as capital costs relating to the acquisition of additional computer equipment and office furniture. Furthermore, some employees may need to undergo COVID-19 tests as they need to commute across the border or travel to other countries for work.

Robin Choi, People Advisory Services Partner at Ernst & Young Tax Services Limited, says, “In view of COVID-19 and the additional expenses incurred by work from home, EY proposes introducing interim measures for the years of assessment 2020/21 and 2021/22, under which taxpayers will be allowed to claim a tax deduction for the COVID-19 related testing fees and home office expenses not reimbursed by their employers or their insurance plans.

To simplify the process for deducting home office expenses, EY proposes that taxpayers would be allowed to either (i) claim a fixed deduction of HK$24,000; or (ii) the actual amount incurred in respect of certain specified expenses, such as electricity charges, phone and internet expenses, computer consumables, home office computer equipment (capped at HK$10,000), home office furniture and fixtures (capped at HK$10,000) etc., provided that they have worked from home for at least 30 days in the relevant year of assessment.

To ease the tax burden of individuals, EY also recommends the following recurring tax relief measures:

  • No longer differentiate basic and additional dependent parent/grandparent allowance (DPGA) such that the amount of DPGA would be increased to HK$50,000 (aged 55-59) and HK$100,000 (aged 60 and above) respectively, and expanding the relevant condition to include dependents residing in the Greater Bay Area;
  • 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
  • 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 relevant course.

After Hong Kong’s economy has recovered from the downturn caused by the pandemic, we urge the Government to conduct a comprehensive review of the tax system of Hong Kong so as to ensure Hong Kong’s long-term fiscal sustainability. In addition, the Government should also ensure that the tax codes and incentives of Hong Kong are aligned with international tax developments, including the Base Erosion and Profit Shifting 2.0 (BEPS 2.0) initiatives. In order to conduct such review and monitor the effectiveness of the tax incentives currently offered by Hong Kong, EY proposes that more resources be allocated to the Tax Policy Unit of the Financial Secretary’s Office.

¹ www.weforum.org/reports/the-future-of-jobs-report-2020

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Notes to Editors             

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This press release has been issued by Ernst & Young, China, a part of the global network of Ernst & Young firms.