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Budget deficit and one-off relief measures
Agnes Chan, EY Managing Partner, Hong Kong and Macau, says: “Based on the revised estimate announced in today’s budget, the HKSAR Government will record a deficit of HK$37.8 billion for the financial year 2019/20, the first budget deficit in 15 years.
In view of the double blow of the current economic downturn and the COVID-19 outbreak, and given the enviable level of Hong Kong’s fiscal reserves, the Financial Secretary (FS) rightly introduced in today’s budget an array of one-off relief measures totaling HK$120 billion, the major one being a HK$10,000 cash handout to each Hong Kong permanent resident aged 18 or above. These proposed measures are in addition to the HK$30 billion fund, earmarked for helping people and enterprises to fight against the pandemic, as announced earlier by the Chief Executive. The one-off relief measures announced today would help alleviate the tax burden of individuals and enterprises and help those within the social security net to better prepare for the challenging time ahead.”
Agnes Chan added that “Although the cash payout scheme involved a huge sum of public money of HK$71 billion, it was an exceptional one-off measure taken in light of the current unique circumstances and should not therefore impose a burden on Hong Kong’s long-term fiscal position. In fact, the budget deficit for 2020-21 would be reduced from HK$139.1 billion to HK$59 billion after excluding the one-off relief measures (and excluding certain items that do not actually represent revenue). Viewed in this light, the HK$59 billion deficit would be well within the internationally accepted limit of 3% of GDP.”
Agnes Chan adds, “While the projected budget deficits for 2021/22 to 2024/25 ranged from HK$7.4 billion to HK$16.8 billion would not be too significant, representing 0.2% to 0.6% of Hong Kong’s GDP in the relevant years, the projection is based on the economic growth rate of Hong Kong of 2.8% (the average rate for the past ten years being 2.9%). As such, it would be imperative for the government to ensure that Hong Kong re-emerges stronger from its current economic difficulties and rebounds promptly.”
How Hong Kong should respond to the proposed global minimum tax rate under Base Erosion and Profit Shifting (BEPS) 2.0
Agnes Chan says: “We welcome the FS announcing that he will invite scholars, experts and members of the business community who are experienced in the fields of international taxation and economic development to give him advice on how Hong Kong should respond to the new international tax scheme.
Internationally, the proposed imposition of a global minimum tax rate under BEPS 2.0 created by the BEPS initiative, launched in recent years by the Organisation for Economic Co-operation and Development, continues to evolve and pose many challenges to the viability and relevance of Hong Kong’s existing preferential tax regimes used to promote the development of certain target industries and the fundamental territorial source regime of Hong Kong.”
Supporting our people and households
Robin Choi, People Advisory Services Partner at Ernst & Young Tax Services Limited, says: “The proposed 100% reduction for the 2019-20 final tax capped at HK$20,000 is a targeted approach primarily intended to benefit middle and lower-income earners.”
Calls for unilateral tax credit in Hong Kong for overseas withholding taxes not addressed
Paul Ho, Tax Leader for Hong Kong Financial Services Tax and Business Advisory Services Partner at Ernst & Young Tax Services Limited, says: “The FS did not respond to the calls for Hong Kong to grant unilateral tax credits for overseas withholding taxes as made by many professional bodies.
The case for Hong Kong introducing legislation granting unilateral tax credit for overseas withholding taxes in respect of royalty and interest income suffered in a jurisdiction that has not concluded a tax arrangement with Hong Kong has become more urgent and necessary. This is because the Inland Revenue Department has since August 2019 changed its assessment method and now denies a tax deduction for such withholding taxes under the existing tax rules of Hong Kong, even where the relevant income is regarded as being Hong Kong-sourced chargeable income.”
He also added that “Introducing unilateral tax credits in Hong Kong for overseas withholding taxes on royalty and interest income would help develop Hong Kong as an intellectual property trading hub and its financial services.”
Promoting ship leasing and ship leasing management businesses in Hong Kong
Paul Ho says: “We welcome the introduction of the bill which will offer tax concessions to qualifying ship lessors and ship leasing managers. We hope that the government will provide more clarifications on how closely the scope of the proposed tax concessions under the bill compares with that of Singapore, a major competitor of Hong Kong in the region.”
Enabling Hong Kong to compete internationally for reinsurance and specialty insurance businesses
Paul Ho comments: “We are also delighted to see the introduction of the bill that will offer various tax concessions to relevant insurers and insurance brokers. The bill will enable industry players in Hong Kong to compete internationally for the business of the insurance of specialty risks, the demand of which is expected to increase significantly due to the opportunities arising from the Belt and Road Initiative of mainland China.”
Further developing Hong Kong into a green finance hub
Paul Ho further expresses that EY welcomes the government’s plan to issue green bonds totaling HK$66 billion within the next five years so as to further develop Hong Kong into a green finance hub. In addition, the FS should perhaps also consider introducing tax measures to provide tax incentives that will encourage the issuance of, and investment in, green bonds in Hong Kong. We hope the FS will give further thought to such tax measures.
Business registration fee waiver and 100% reduction in profits tax, with a HK$20,000 cap
Paul Ho adds: “The proposed business registration fee waiver and 100% profits tax reduction capped at HK$20,000 would be most welcomed by SMEs in terms of easing cash-flow pressure and helping them to better handle the challenges ahead.”
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Notes to Editors
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This press release is issued by the EY China practice, a part of the Ernst & Young global network.