EY recommends the Government to focus on attracting investments to Hong Kong and adopt targeted supportive measures

Ernst & Young Tax Services Limited (EY) estimates that the Hong Kong SAR Government (the Government) will record a fiscal deficit in the financial year 2023-24 of HK$148.0 billion, which would exceed the HK$54.4 billion originally forecasted in the Government’s Budget announced in February 2023 by almost two times. 

As a result of the estimated deficit for the fiscal year 2023-24, Hong Kong’s fiscal reserves will be reduced to HK$686.8 billion as of 31 March 2024, equivalent to 10 months of estimated government expenditure.  

Jasmine Lee, EY Hong Kong and Macau Managing Partner, says: “With the pandemic behind us, Hong Kong has been returning to full normalcy over the past year, with GDP growing by 4.1% year-on-year in real terms in the third quarter of 2023, compared to the negative growth of 3.5% in year 2022¹. Although we have seen signs of recovery in the economy in the first three quarters of 2023, external factors such as the interest rate hikes and the challenging global economic environment still affect investment and local consumption.” 

Land premium is expected to be much lower than the original estimate by HK$61.9 billion. Despite the cut on stamp duty rates to stimulate the stock and property markets, it seems that its impact has not been significant with the stamp duty revenue expected to be lower than the original estimate by HK$38.6 billion. Tax revenue is also expected to reduce due to the tough market conditions resulting in lower earnings in 2023-24.

Lee says: “The fiscal deficit and reserves in Hong Kong are currently under significant pressure. It is crucial for the government to take proactive measures to both stimulate the economy and tend to the welfare of the community. The public finances should continue to balance revenue generation and expenditure reduction, allocate resources prudently, formulate forward-looking plans, and implement fiscal consolidation policies to strengthen the fiscal balance.”

Attracting investments to Hong Kong

Paul Ho, EY² Financial Services Tax Leader for Hong Kong, says: “Attracting investments to Hong Kong is essential in building a vibrant economy. In the face of a weak global economy and keen competition from other economies, the Government should focus on consolidating and leveraging Hong Kong’s advantages as an international financial center.” 

As the appetite of investors has changed over the years, we propose for the Government to expand the existing tax exemptions for funds to cover bond funds and crypto funds. Providing tax incentives to fund managers would also reinforce Hong Kong as an international asset management center.

Similar expansion on the scope of investments that can qualify for the family office tax concession to include bond funds, crypto funds and other non-financial assets would also be welcomed. We would also recommend the Government to provide a concessionary tax rate of 8.25% on qualifying profits derived by an eligible single-family office from the provision of prescribed fund management or investment advisory services.

Ho further suggests: “Being an East-meets-West center, Hong Kong is well-positioned to develop ‘headquarters economy’, not only being the perfect platform for mainland enterprises to expand abroad, but also assisting foreign enterprises to tap into the mainland market. A regional headquarters tax incentive offering a concessionary tax rate at 8.25% for qualified profits could raise competitiveness and attract quality enterprises to set up in Hong Kong.”

In the 2023 Policy Address, the Chief Executive (CE) announced that he intends to develop Hong Kong into an East-meets-West center for international cultural exchange. There have also been plans to establish Hong Kong as an international philanthropic center. We believe enhanced tax deductions for charitable donations to include asset donations such as artefacts would incentivize philanthropic giving and facilitate arts and cultural exchange at the same time.

As a measure to tackle the current talent shortage in Hong Kong, we would propose granting tax deductions to graduates of universities in Hong Kong, the mainland and overseas on their tuition fees. Qualifying graduates (including both local and non-local 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, subject to a cap.

Connecting within the Greater Bay Area (GBA)

The pandemic and the resulting border closure over the past few years have somewhat affected cooperation between Hong Kong and other GBA cities. With the border now fully reopened, Hong Kong has the opportunity to resume its close connection and explore “win-win” opportunities within the GBA. An exemption on withholding tax with respect to dividend paid out by enterprises from the GBA to Hong Kong would further facilitate the integration of the economies between Hong Kong and the GBA cities.

We would also recommend the Government to enhance its current research and development tax incentive to allow super deduction on sub-contracting fees paid to institutions or service providers in the GBA, leveraging on the innovation resources from the GBA to promote innovation and technology development in Hong Kong.

Providing targeted support to individuals and enterprises 

Hong Kong’s fiscal reserves in 2023-24 is expected to shrink to the equivalent of 10 months of estimated government expenditure. The Government should remain cautious on the use of its fiscal reserves. The full reopening of the borders between the mainland and Hong Kong in early 2023 only generated a short-term increase of tourists, with the number of tourists from the mainland below pre-pandemic levels. Instead, local Hong Kong residents now travel more frequently across the border.   

Ricky Tam, EY² Tax Services Partner, says: “It is time for the Government to revisit whether existing ‘support measures’ are effective in relieving the hardship of those really in need. A targeted approach is recommended for future support to individuals and enterprises. Given the overall economic uncertainties, it is important for the Government to continue to exercise stringent control over public expenditure and maintain a healthy level of fiscal reserves. A user-pay principle with concessions for the less privileged should be reinforced.” 

Building a caring community

Apart from providing targeted support to individuals and enterprises in the form of tax rebates, the Government should tailor its policies with reference to the current demographic structure of Hong Kong and strengthen its support on caring for an aging population. 

In addition to the numerous measures announced in the 2023 Policy Address to encourage childbearing amid the persistently low birth rate, we would propose to grant an additional child allowance of HK$130,000 (adjustable according to the review results announced by the government from time to time) for each new-born in the first to the fifth year of birth.

An aging population means there is increasing demand on medical and healthcare services. EY recommends increasing the current tax deduction limit by 50% from HK$8,000 to HK$12,000 for Voluntary Health Insurance Scheme (VHIS) to encourage more people to shift their medical needs from public to private healthcare services. Such collaboration of public and private healthcare services would help to cope with the challenges brought about by the increasing prevalence of chronic diseases and shortage of labor in the public healthcare sector.

Echoing the principle of “ageing in place as the core, with institutional care as back-up” in the CE’s 2023 Policy Address, our recommended measures for caring for the elderly include increasing the annual tax deduction ceiling for elderly residential care expenses from HK$100,000 to HK$120,000, as well as expanding the scope of such tax deduction to cover expenses paid to residential care centers under the Residential Care Services Scheme in Guangdong.

To encourage stay-at-home parents to return to the workforce and expand the labor market, EY would also propose the Government to provide tax deductions based on the minimum wages for employing foreign domestic workers, to relieve the financial pressure on families that hire foreign domestic workers to take care of their children.

Another source of potential labor supply might be Hong Kong’s “silver hair” population who can still contribute to society. As an incentive, the government can give enterprises non-taxable cash subsidies to motivate them to employ “silver hair” workers.

We are pleased to see that the Government continues to strive for building a sustainable city. The first registration tax concession arrangements for electric vehicles are due to expire on 31 March 2024 and we would recommend the Government to renew such concession for another three years until 31 March 2027.

Assessing the effectiveness of tax incentives

Lastly, the Government is recommended to establish a mechanism to continuously evaluate the effectiveness of the tax incentives after their implementation. The tax incentives should be regularly reviewed and enhanced to ensure that they achieve the intended objectives. We are pleased to see that the Government is making effort in this aspect and the bill to enhance the tax concession on aircraft leasing is currently being scrutinized in the Legislative Council. We would recommend the Government to also extend its review to other tax incentives and collect feedback from relevant industries on a regular basis.

In addition, as some of the tax incentives have prerequisites such as registration and/or approval requirements with certain government departments, we would suggest the Government to ensure smooth communications and co-ordination between different government departments to reduce the administrative burden of the taxpayers.

We believe that the proposed fiscal measures will help attract investments to Hong Kong, especially from the GBA, for building a vibrant economy, as well as addressing the short-term needs of individuals and enterprises.
 

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

²Ernst & Young Tax Services Limited

-Ends- 

Notes to Editors

EY | Building a better working world

EY exists to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets.

Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate. 

Working across assurance, consulting, tax, strategy and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients, nor does it own or control any member firm or act as the headquarters of any member firm. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. EY member firms do not practice law where prohibited by local laws. For more information about our organization, please visit ey.com.