Press release

9 Feb 2023 Hong Kong SAR

EY recommends the Government to adopt targeted supportive measures and focus on stimulating Hong Kong’s economic development in the mid- to long-term

HONG KONG, 9 FEBRUARY 2023 — Ernst & Young Tax Services Limited (EY) estimates that the HKSAR Government (the Government) will record a fiscal deficit in the financial year 2022-23 of HK$135 billion, which will be significantly higher than the amount of HK$56.3 billion originally forecasted in the Government’s budget announced in February 2022.

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Ernst & Young Tax Services Limited (EY) estimates that the HKSAR Government (the Government) will record a fiscal deficit in the financial year 2022-23 of HK$135 billion, which will be significantly higher than the amount of HK$56.3 billion originally forecasted in the Government’s budget announced in February 2022.

As a result of the estimated deficit for the fiscal year 2022-23, Hong Kong’s fiscal reserves will be reduced to HK$822.1 billion as at 31 March 2023, equivalent to 12 months of estimated government expenditure.

Paul Ho, EY1 Financial Services Tax Leader for Hong Kong says: “The pandemic continued to impact the economic activities of the mainland and Hong Kong most of the time last year. Although the economy had shown a slight improvement towards the end of 2022, Hong Kong experienced negative GDP growth of 3.5% in 20222. The stagnant economy was mainly driven by the sharp interest rate hikes, the tightening of monetary policies of the major advanced economies and the ongoing geopolitical tensions globally, all of which have weakened consumers’ demands and spendings. 

“Land premium is expected to be much lower than the original estimate by HK$48.6 billion. Tax revenue is also expected to reduce due to the weak economy, resulting in lower earnings in 2022-23.”

Providing targeted support to individuals and enterprises

We are pleased to see the increased people movement and economic activity following the relaxation of COVID control policies in recent months. With the full reopening of the border between mainland China and Hong Kong this week, the growth of the Hong Kong economy will gather pace.

While we are on the road to recovery, the Government should remain cautious about the uncertainties and fluctuations of the external environment in proposing supportive measures in the Budget for 2023-24.

Ho says: “While the Government should implement short-term measures to relieve the hardship of individuals and enterprises amid the challenging economic environment, such as tax rebates, electricity subsidies, extra half month of social security payments to qualified individuals and waiver of rates and government fees, a targeted approach is recommended to ensure the effective use of the Government resources to those in need and at the same time maintain the fiscal reserves at a reasonable level.”

Supporting businesses to transform and grow

In addition to providing short-term relief measures to ease the hardship of individuals and enterprises, the Government should continue to invest in the long-term development and transformation of the Hong Kong economy.

Among the others, the 14th Five-Year Plan promulgated by the Central Government in 2021 has endeavored to develop our country into an innovative nation with strong science and technology. As such, the Government rolled out the Northern Metropolis Development Strategy in 2021 and committed to developing the San Tin Technopole into an integrated community to attract talent to settle and work there.

The Government commenced a study in October 2021 to formulate a detailed development plan for the San Tin Technopole. The study is expected to be completed in the second half of this year. The Government should consider introducing various tax measures to help attract individuals and enterprises to develop their career and business there respectively. Our recommended measures include the launch of a qualified refundable tax credit scheme for enterprises, as well as the introduction of concessionary tax rates to encourage enterprises and individuals to work and conduct research and development (R&D) activities in the San Tin Technopole.

In addition to developing the emerging industries, the Government is recommended to continue to strengthen the competitive advantages of Hong Kong’s traditional industries. For instance, the launch of the Cross-boundary Wealth Management Connect in September 2021 has significantly expanded the market for wealth management products of Hong Kong’s financial institutions to the Greater Bay Area (GBA), which is the most prosperous region in the mainland in terms of economic development with the largest wealth accumulation. To this end, we would suggest expanding the existing tax exemptions for funds to cover bond funds and providing tax incentives to fund managers to reinforce Hong Kong as a wealth management center.

Building a green and sustainable city

Ricky Tam, EY1 Tax Services Partner says: “The International Sustainability Standards Board (ISSB), which was established by the IFRS Foundation Trustees in November 2021, targets to issue two sustainability disclosure standards in 2023 after the exposure drafts which were issued in 2022. Additionally, the directional view from the Hong Kong Stock Exchange is that the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD) will become mandatory by 2025. As a result, more enterprises, and listed companies in particular, will be required to make more financial disclosures relating to environmental, social and governance issues in their financial reports.

“To encourage enterprises to get ready for the above in the foreseeable future, we would recommend granting double tax deductions to enterprises which have engaged qualified consultants to provide carbon services, such as carbon accounting, sustainability advisory and assurance, and greenhouse gas verification.

“To further promote Hong Kong as a green finance hub, we would also propose offering tax incentives to qualifying green bonds and expand the list of qualifying debt instruments to include all qualifying green bonds to attract more investors to invest in those qualifying green bonds traded in Hong Kong.”

Fostering a future-ready workforce and strengthening the community

Robin Choi, EY1 People Advisory Services Partner says: “Talent shortage is an issue encountered by many enterprises. To help our society retain talent in Hong Kong, we would propose granting tax deductions to graduates of universities in Hong Kong on their tuition fees. Qualifying graduates (including both local and overseas students) who have worked in Hong Kong for two years after graduation will be eligible to claim tax deductions in the subsequent three years of assessment.

“Unleashing potential labor supply in an ageing population is another possible way to replenish the workforce. We propose granting higher basic allowance to individuals aged 60 or above for salaries tax and personal assessment purposes as an incentive for silver hair workers to remain in the workforce, earn a better living and continue their contribution to our society. Enterprises may also be given non-taxable cash subsidies to motivate them to employ silver hair workers.

“In addition to university graduates and silver hair workers, the Government may provide incentives to encourage stay-at-home parents to return to the workforce by granting caregiver subsidies and provision of more childcare services.

“We would also propose to remove the existing deduction cap of charitable donation up to 35% of the assessable income or profits of individual and business donors, and to expand approved charitable donations to include in-kind donations of land or buildings and artefacts to qualifying institutions, subject to a cap. We believe that this would encourage charitable donations by individuals, enterprises and family offices. Artefact donations would also help to facilitate Hong Kong in developing itself as a hub for arts and cultural exchanges between China and the rest of the world.” 

Assessing the effectiveness of tax incentives

Last but not least, the Government is recommended to establish a mechanism to continuously evaluate the effectiveness of the tax incentives after their implementation. If necessary, the tax incentives should be enhanced to ensure that they achieve the intended objectives.

A full list of EY 2023-24 budget proposals is included in the appendix. We believe that these proposed fiscal measures will help relieve the short-term needs of individuals and enterprises, as well as provide incentives to the individuals and enterprises in Hong Kong to equip and transform themselves for building a more sustainable city.

 

1C&SD : National Accounts (censtatd.gov.hk)

2Ernst & Young Tax Services Limited

-Ends- 

 

Appendix - Full list of proposed budget measures

  • Table A: Proposed one-off resilience package for people

    No. Proposed measure

    Estimated cost (HK$ billion)
    1 Reduce salaries tax and tax under personal assessment for 2022-23 by 100%, capped at HK$10,000 (for taxpayers with salaries tax chargeable at progressive rates) 11.5
    2 Waive rates for domestic properties for 2023-24, capped at HK$1,000 per quarter for each rateable property (restricted to one residential property for individual) 8.0
    3 Grant an electricity charge subsidy for 2023-24 of HK$1,000 to each residential electricity account 2.8
    4 Provide an extra half month of various social security payments 2.5
    Total 24.8

  • Table B: Proposed one-off resilience package for enterprises

    No. Proposed measure Estimated cost (HK$ billion)
    1 Reduce profits tax for 2022-23 by 100%, capped at HK$10,000, for companies with assessable profits below HK$2 million 1.0
    2 Waive rates for non-domestic properties for 2023-24, subject to a ceiling of HK$2,000 per quarter for each rateable property 1.5
    3 Waive business registration fees for 2023-24 3.0
    4 Further extend the existing waivers or concessions of government fees and charges 1.5
    Total 7.0

  • Table C: Other proposed fiscal measures

      Supporting businesses to transform and grow
    1 Designate San Tin Technopole as a preferential tax zone
    2 Offer profits tax concession to high-new technology and creative start-ups
    3 Grant super tax deduction for employee training costs paid to accredited providers of training services
    4 Provide a qualified refundable tax credits scheme to enterprises engaging in qualifying R&D activities
    5 Introduce a patent box regime
    6 Enhance tax incentives for bond funds to set up in Hong Kong
    7 Offer concessionary tax rate of 8.25% to approved fund managers, including eligible single family offices
      Deepening cooperation among GBA cities
    8 Propose to the relevant tax authorities in mainland China to exempt Hong Kong resident enterprises from withholding tax in respect of dividends distributed from their subsidiaries in the GBA 
    9 Introduce regional headquarters incentives
      Building a green and sustainable city
    10 Strengthen the HKSAR Government’s ESG disclosure requirements
    11 Provide super-deduction of 200% to enterprises engaging qualified consultants in providing carbon services
    12 Grant super-deduction of 200% in respect of issuance costs of qualifying green bonds and annual compliance expenditure
    13 Expand the list of qualifying debt instruments to include all qualifying green bonds
    14 Allow 200% tax deduction for the acquisition cost of plant and machinery employed in recycling businesses in the year of purchase
    15 Offer concessionary tax rate of 8.25% on qualifying recycling profits
    16 Waive the first-time registration tax on electric vehicles (EVs)
    17 Raise the duty on motor-use leaded petrol
    18 Grant preferential treatment for EVs 
    19 Provide rates concession to incentivize private resident and commercial buildings to install EV charging facilities
      Fostering a future-ready workforce and strengthening our community
    20 Allow a higher amount of basic allowance to individuals aged 60 or above for salaries tax and personal assessment purposes
    21 Provide tax relief for medical costs incurred by those aged over 50 for health screening every other year 
    22 Grant enterprises a non-taxable cash subsidy in a range from 2%-5% of the wages paid to employees aged 60 and above and earning up to HK$20,000 per month (subsidy percentage increases with age)
    23 Subsidize low-income families with the relevant expenses to employ babysitter or caregiver 
    24 Allocate more quota for sponsored childcare, after-school childcare or compassionate nanny childcare services after assessing the needs in various districts in Hong Kong
    25 Introduce after-school childcare services in applicable schools
    26 Provide tax deductions for qualifying graduates’ university tuition fees in the subsequent three years of assessment after they have worked in Hong Kong for two years upon graduation
    27 Remove the existing cap of allowing charitable donation up to 35% of the assessable income or profits of individual and business donors; and expand approved charitable donations to include in-kind donations of land, buildings and artefact to qualifying institutions
      Assess effectiveness of tax incentives post implementation
    28 Put in place a mechanism by which the effectiveness of a tax incentive post implementation can be evaluated on an ongoing basis
    29 Take enhancement measures where necessary to better achieve the objectives of the tax incentives involved
    30 Provide timely administrative guidance on new tax incentives on timely basis to increase tax certainty
    31 Assess the relevant economic benefits if feasible

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