HONG KONG: PwC expects the HKSAR government to record a HK$168 billion (US$21.5 billion) consolidated budget surplus in the fiscal year 2017/18, based on projected fiscal revenue of HK$621.2 billion (US$79.4 billion) and expenditure of HK$453.2 billion (US$58 billion). This is over ten times the original forecast of HK$16.3 billion (US$2.1 billion), which was made by the Government twelve months ago.
PwC believes higher than expected revenues from land sales, profits tax and stamp duty, combined with under-budget expenditure, are the main contributors to this “greater than predicted” surplus. PwC expects the fiscal reserves to stand at HK$1,121.8 billion (US$143.5 billion) by the end of March 2018 – equivalent to 30 months of total Government expenditure. This should enable the HKSAR Government to invest in the future and strengthen the city’s competitive position to address the challenges ahead.
PwC Hong Kong Tax Partner Jeremy Choi said: “PwC predicts total revenues from profits tax and salaries tax will reach HK$219.8 billion (US$28.1 billion) – HK$14.1 billion (US$1.8 billion) more than the government’s previous forecast. The total revenue from stamp duty is expected to amount to HK$84.1 billion (US$10.8 billion), nearly 60% higher than the government’s previous forecast of HK$53 billion (US$6.8 billion). Taking into consideration the land sales plan published by the government at the end of December, we expect the land sales revenue for 2017/18 to hit HK$166.3 billion (US$21.3 billion). This is more than 60% of the previously forecast amount.”
At the same time, PwC expects expenditure to amount to HK$453.2 billion (US$58 billion), which is lower than the Government’s original estimate of HK$491.4 billion (US$62.8 billion). This shows that the HKSAR government has managed to maintain the principle of fiscal prudence and is committing resources only where justified.
Chief Executive Carrie Lam has announced a number of measures since she took office seven months ago, which aim to maintain Hong Kong as the “freest economy in the world” and the “leading financial hub in the region”. These include fostering innovation-based entrepreneurship and actively participating in the development of the Guangdong-Hong Kong-Macau Bay Area and the Belt and Road Initiative.
“We believe the policies being pursued by the HKSAR government will move the territory in the right direction. At the same time, reducing people’s tax burden and making good use of reserves in order to enhance people’s quality of life are also important,” says Agnes Wong, PwC Hong Kong Tax Partner.
PwC suggests that the government establishes regular communications between Hong Kong and the Mainland to discuss the possibility of reducing tax rates for corporates and individuals who carry on business or frequently travel to work in the Bay Area. Moreover, it should lobby for a waiver on social contributions in the Mainland for Hong Kong residents who have already contributed to the MPF scheme in Hong Kong.
“On top of the super-tax deduction proposed in the Chief Executive’s Policy Address for encouraging the private sector to invest more in R&D, we suggest that the government provides clearer guidance when defining R&D activities and expenditures. It should also provide refundable credits for R&D investments for start-up business and reduced profits tax rate for intellectual property hubs set up in Hong Kong,” said Choi.
To maintain Hong Kong’s overall competitive position in doing business, PwC proposes introducing competitive profits tax policies and incentives to attract more foreign and Mainland corporations to set up their regional headquarters in Hong Kong.
In addition, PwC recommends widening salaries tax brackets from HK$45,000 (US$ 5,755) to HK$50,000 (US$6,395) and further increasing the deduction cap for individual self-education expenses to $160,000 (US$20,463). To alleviate the financial burden on the middle class, PwC proposes increasing deductions for child allowance from $100,000 (US$12,789) to $120,000 (US$15,347) and extending the mortgage interest deduction period up to a maximum of 25 years, while raising the maximum interest deductible to HK$150,000 (US$19,184) per annum.
