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HK edition / 2022-02 / 11 / Page021

Putting HK back on its feet

HK EDITION | Updated: 2022-02-11 07:06

While the HKSAR government still seems to be dodging long-term reform of its tax regime, accountants and economists are calling for comprehensive tax reform to bolster the city's economic competitiveness and rationalize economic planning. Oswald Chan reports from Hong Kong.

The Hong Kong Special Administrative Region may not feel so blue after all - the city's budget deficit for the 2021-22 financial year will probably range from HK$400 million ($51.2 million) to HK$37 billion - significantly less than the government's forecast of HK$101.6 billion in February last year.

The projections are made by global auditing and financial services giants, including Deloitte, Ernst & Young Tax Services and PricewaterhouseCoopers, as well as accounting bodies like the Hong Kong Institute of Certified Public Accountants and CPA Australia.
The SAR's fiscal reserves are expected to fetch between HK$865 billion and HK$927 billion by the end of March, as land premiums and revenue from stamp duties and taxes are lifted by the rebound in world economic activities and the revival of consumer and business confidence. At the same time, government expenditure has dropped faster than expected.

While Hong Kong's economy had visibly recovered last year, the increasing threats of monetary tapering triggered by growing concerns over inflation and the impact of the COVID-19 variant omicron may cloud global economic growth this year.

Bank of America Securities sees Hong Kong's tightened social distancing measures as posing downside risks to the local economy which is expected to grow by 2.2 percent in 2022. The strict measures will have a marginal impact on growth, at least, for the first quarter. The four major negative factors are poor consumption due to business closures; prolonged delay in resuming normal travel between Hong Kong and the Chinese mainland; the effect of flight reschedules and quarantine of air crew; and overall negative sentiment.

Amid bleak economic prospects, auditing practice firms and accounting groups are demanding one-off relief measures by the government to help put money back into the pockets of companies and individuals.

EY has proposed a HK$50 billion relief package, including the disbursement of HK$3,000 electronic consumption vouchers to all Hong Kong residents above 18 years of age, as well as other sweeteners, such as cuts to taxes on salaries and profits, waiving rates for both domestic and non-domestic properties, waiving business registration fees, and further extending the existing waivers or concessions for government fees and charges, and providing an extra half month of various social security payments.

"The previous consumption voucher scheme has had a stimulating effect on the consumer market and has helped to revive the local economy and encourage wider use of electronic payments among merchants and the public," says Paul Ho Yiu-po, Hong Kong financial services tax leader at EY.

The HKICPA has also called for the distribution of HK$3,000 electronic consumption vouchers to further stimulate consumer spending and support the retail sector, which is among the hardest hit by the pandemic.

CPA Australia wants the SAR government to offer an enhanced two-tier electronic consumption voucher scheme to boost consumption, accelerate economic recovery and promote the uptake of digital payment technologies. The base amount could be up to HK$3,000 for all eligible Hong Kong residents, while the second tier, targeting vulnerable groups such as low-income earners, could provide an additional payment of up to HK$3,000 to help them tide over.

Tax relief
Apart from electronic consumption vouchers, other measures have been proposed to help businesses and individuals. The HKICPA also recommends introducing a tax loss carryback scheme to help businesses badly affected by the pandemic to carry back their losses to a previous year in which they made profits; reducing salaries tax and tax under personal assessment, as well as profits tax, by 100 percent, capped at HK$20,000; and offering a home rental allowance of up to HK$100,000 annually, initially on a temporary basis.
"If the pandemic worsens, government revenues may be less than expected. The dire economic situation has rendered the government's finances uncertain. Whether there would be a budget deficit for the next financial year would depend on the pace of economic recovery," says HKICPA President Loretta Fong Wan-huen.

Deloitte says a raft of tax relief measures should include a one-off salaries tax waiver, as well as tax reductions in rental and education expenses, annuity premiums, Mandatory Provident Fund voluntary contributions and Voluntary Health Insurance Scheme premiums.
"Despite the relatively strong recovery of the financial and property markets, uncertainties arising from the pandemic continue to weigh on sectors like tourism, retail and international trading," says Sarah Chan Ka-wah, tax partner of Deloitte China. "Tax relief will be critical to easing people's financial hardships in the short term. A more sustainable economy and collaboration within the Guangdong-Hong Kong-Macao Greater Bay Area will be key to boosting competitiveness and growth in the long run."

Moody's Investors Service says effective measures by the Hong Kong government would help macroeconomic policy institutions to implement effective countercyclical plans, support stability in the financial system, and enact broader measures would mitigate the economic and fiscal consequences of long-term issues, such as an aging population.

The US-based credit rating agency, however, expects Hong Kong's long-term growth rate to stabilize at around 2.5 percent, which is below the average of more than 3 percent prior to 2019.

The International Monetary Fund, in its latest report published in January, says Hong Kong's fiscal policies should gradually return to a balanced budget and focus on addressing the structural challenges of an aging population, high income inequality, and insufficient public housing supply to foster balanced and inclusive growth.

Hence, the IMF suggestes that Hong Kong should start comprehensive tax reforms in the medium term to broaden the tax base to meet long-term fiscal needs, build buffers and secure greater equity, while maintaining fairness and international competitiveness. Possible options include introducing a value-added tax, raising excise taxes, and levying taxes on capital gains and dividends.
In such a scenario, while it's necessary for Hong Kong to use its financial resources to ride out the short-term business storm created by the pandemic, auditing experts urges the SAR government to initiate comprehensive tax reforms by taking the following factors into consideration - the nation's 14th Five-Year Plan (2021-25), the Guangdong-Hong Kong-Macao Greater Bay Area, the international tax law landscape, and rationalizing economic planning based on a sustainable tax regime.

Tang Heiwei, an economics professor at HKU Business School and associate director of the Hong Kong Institute of Economics and Business Strategy, says the government should use the budget to cement the city's high-end innovation and technology sector; attract mainland and overseas students to come to Hong Kong for studies, do research and for work; and release preliminary plans for developing the infrastructure of the innovation and technology hub under the Northern Metropolis Plan.

In the financial sector, Deloitte proposes tax exemptions, covering different types of investment income, for family offices in Hong Kong, while fulfilling certain requirements. It also recommends a holistic review of the city's tax laws to expand the scope of the definition of intellectual property, enhancing the deduction of IP development or acquisition costs, nurturing IP talent, and introducing incentives for taxing income from IP.

Comprehensive reform
To develop Hong Kong into a global innovation and technology center, EY suggests designating the San Tin Technopole in the proposed Northern Metropolis as a preferential tax zone, offering profits tax concessions to high-end new technology and creative startups, introducing tax relief for angel investors, and granting super tax cuts for employee training costs paid to accredited providers of training services.

Auditing experts say the SAR government should also offer tax incentives to support Hong Kong in the Greater Bay Area's development.
PwC calls for amending tax laws to allow tax depreciation allowances and/or deductions for fixed assets and intellectual property used, and for research and development activities undertaken in the Greater Bay Area by Hong Kong companies. The government should lobby mainland authorities to encourage cross-border investments with more favorable tax rates.

Deloitte suggests extending the scope of qualified research and development expenditure to cover subcontracted activities in the Greater Bay Area, introducing a list of designated research and development institutes in the region, and offering bigger cuts in education expense deductions for Hong Kong residents, in order to promote broader and deeper collaboration among businesses and talent across the region.

"Capturing the Greater Bay Area's potential by deepening regional integration and enhancing cross-boundary tax policies should be a priority. Introducing policies to reinforce Hong Kong's status as an international financial center, promoting its position as a regional innovation and technology hub, and boosting the city's appeal as the main gateway to the mainland can only strengthen its distinctiveness," Deloitte China Southern Region Managing Partner Edward Au Chun-hing highlights.

The latest developments in the international tax landscape, including the European Union's review of harmful tax practices and the Organization for Economic Cooperation and Development's Base Erosion Profit Shifting (BEPS) 2.0 project, have brought significant challenges to Hong Kong's simple and low-rate tax regime.

Firstly, the BEPS 2.0's Pillar 2, which relates to the right to further tax corporate income that is subject to an effective tax rate below 15 percent, will affect Hong Kong's low-rate tax regime when the new tax regime is scheduled to be implemented next year. The EU review could require modifications to Hong Kong's territorial, source-based system.

"The Hong Kong tax regime relies heavily on direct taxes and land premiums. Hong Kong should consider enlarging its narrow tax base as a main policy objective to provide the government a steady income stream that is less affected by economic fluctuations," says Eugene Yeung Chak-chi, convenor of the HKICPA's budget proposals sub-committee.

"The government should consult the market now to reach a consensus on what types of indirect taxes, such as a goods and services tax or a capital gains tax, should be adopted to facilitate changes in the city's tax regime in the coming decade," he notes.

CPA Australia would like to see changes to Hong Kong's tax system in response to the city's inclusion in the European Union's "Grey List" of non-cooperative tax jurisdictions in 2021. The accountant association urges the SAR government to enforce measures to address the city's addition to the "Grey List" and provide details on how it will respond to the BEPS 2.0, including clarifying implementation of a domestic minimum tax.

"To maintain Hong Kong's international competitiveness in a changing tax environment, we would like the government to launch a comprehensive reform of its tax system. Such a review should focus on certainty, clarity and consistency," says Anthony Lau Ming-young, co-chairperson of CPA Australia's Taxation Committee, Greater China.

Tang says Hong Kong should start consultations on tax reforms immediately, such as slapping taxes on capital gains and a property tax based on property market values to enlarge the city's narrow tax base and rationalize future economic planning. "Salaries tax usually accounts for a smaller proportion of government revenues, while land premiums normally take up a much higher portion. This makes government revenue much more volatile," he says.

Due to the volatility, the government usually cannot make accurate predictions of its surpluses or deficits. With such inaccurate estimates, it is more difficult for the government to make economic planning. It has to be more conservative in drafting the budget," Tang warns.

In his view, a low tax regime could lead to speculative money inflows into Hong Kong, making the economy more volatile and creating an uneven distribution of wealth.

Contact the writer at
oswald@chinadailyhk.com

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