FISCAL POLICY – 2016/17 Hong Kong Budget: Business As Usual

The government’s proposed measures announced by Financial Secretary John C Tsang in his ninth annual Budget speech are essential steps intended to help Hong Kong maintain economic development and fiscal health, support local enterprises, cope with market volatility and safeguard employment. However, many are questioning whether the latest Budget is doing enough, given the current market outlook

By Charles Kinsley and Wade Wagatsuma


Domestic spending

The Budget speech is in many ways a case of “business as usual,” with a number of proposed one-off relief measures similar to what had been put on the table in previous years. This year, they include reductions in payable Salary and Profits Tax up to 75 percent and capped at HK$20,000, a waiver of business registration fees, an extra allowance to recipients of social security benefits, and a waiver of property rates with a ceiling of HK$1,000 per quarter.

Tourism is one particular industry highlighted for additional government support. It currently accounts for five percent of Hong Kong’s GDP and employs 270,000 people. Despite rapid and extraordinary growth in the last ten years, the industry is facing challenges because of external and domestic factors, which have been covered extensively in the news media in recent months. Several initiatives in support of Hong Kong’s tourism industry are a continuation of steps introduced last year in response to the Occupy Movement of 2014.

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While it was encouraging to see many of the one-off or short-term measures in support of the local economy, we had hoped to see more of a longer-term focus in the form of strategic development. It is a good sign in this regard that a “Housing Reserve” is being set up for the purpose of public housing, that an amount totalling HK$200 billion is set aside for a ten-year hospital development plan and that of a “Future Fund,” in addition to a focus of the government on nurturing innovation related in large part to R&D, Fintech, Startups, and other creative industries.

In his speech, Tsang specifically mentioned that the establishment of incubation programs and technology-related laboratories in Hong Kong by professional services firms “underlines our edge in [the development of] Fintech.” To move forward in the field, he proposed a range of spending measures: a funding of more than HK$17 billion targeting the innovation and technology sector, including a HK$2 billion Innovation and Technology Venture Fund to co-invest with private venture capital funds on a matching basis in local technology start-ups.

To further facilitate the progress on Fintech development, three government agencies, namely the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission, and Office of the Commissioner of Insurance, will establish dedicated platforms in order to liaise with the industry and to drive the sustainable development of innovative financial products and services in Hong Kong.

Global trade

Incentives for the offshore funds regime, aircraft leasing, and corporate treasury center initiatives, which have been introduced in previous budgets, were mentioned again this year. While the changes to the offshore funds regime have come into force and are a positive development for the asset management sector, the other incentives are still yet to be realized. The proposed corporate treasury incentive announced last year has generated much positive response from the business community of Hong Kong.

The Financial Secretary has also proposed to allow, under certain conditions, interest deductions in Profits Tax for corporate intra-group financing arrangements and to reduce the Profits Tax rate on offshore income by 50 percent for qualifying corporate treasury centers. However, the timeline of its adoption is still unclear, given that the bill for the corporate treasure center incentive remains subject to approval by the Legislative Council.

Noting the “New Economic Order,” Tsang emphasized that emerging markets are increasingly important to the global economy, highlighting the need to develop such markets for enterprises in Hong Kong and to expand trading ties with the rest of the world. China’s “One Belt, One Road” initiative is a key area providing opportunities in the fields of commerce, logistics and financial services. However, there were few new additions in these areas, with the familiar initiatives reiterated and further developments limited.

It is interesting to note, in a recent KPMG survey of over 300 senior business executives about their business concerns in Hong Kong and their expectations for the 2016/17 Hong Kong budget, that a majority of respondents indicated the “biggest opportunity” for Hong Kong under the “Belt and Road” initiative lies in its role as a financial center and its ability to help raise funds – a view shared by the Financial Secretary as he announced that HKMA will establish an office to help facilitate financing, among other services, with respect to infrastructure projects in “Belt and Road” countries.

In support of the measures, we believe Hong Kong should further broaden its network of Double Taxation Agreements (DTAs) with the “Belt and Road” countries. With favorable withholding tax rates and greater certainty on the tax outcome of cross border trade, Hong Kong could benefit significantly as a business platform with an increasing number of DTAs because it creates an attractive environment for multinational companies doing – or looking to do – business in Hong Kong.

So far, Hong Kong has only concluded DTAs with 13 countries out of the 65 along the “Road,” and is in negotiation with another eight countries. Meanwhile, Singapore has 39 DTAs with the “Belt and Road” countries, so there is still a long way to go before Hong Kong can become competitive on this front.

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Gone far enough?

From a social perspective, we support the particular focus of the government on caring for people through investment in healthcare and additional support for the under-privileged, and we welcome the one-off relief measures for SMEs, including an extension of the application period for the “special concessionary measures” under Hong Kong’s SME Financing Guarantee Scheme through a ten-percent reduction in the annual guarantee fee rate and the removal of the minimum guarantee fee.

It is unfortunate that some of the Financial Secretary’s proposals stopped short of where certain other jurisdictions have particularly headed a forerunners. Whilst we welcome the Financial Secretary’s proposal to expand the categories of intellectual rights eligible for deduction on purchase, this may have limited substantive benefit.

In the case of tax incentives for R&D activities, other countries are already ahead of Hong Kong by offering much more generous tax incentives. In Singapore, for example, qualifying businesses can enjoy a deduction of up to 400 percent or allowances of up to S$400,000 of expenditures incurred on certain qualifying innovative activities.

The government’s continued commitment to modernizing Hong Kong’s tax legislation by maintaining a fair tax environment, aligning its tax system with international standards and enhancing the city’s overall competitiveness is nonetheless a very positive and important key – a commitment reflected in the legislation introduced earlier to facilitate the automatic exchange of tax information.

Tsang also stated that Hong Kong would consider participating in the international framework being developed by the Organisation for Economic Co-operation and Development to defend against Base Erosion and Profit Shifting (BEPS). Whether Hong Kong will make a commitment or how it will participate remain to be seen as there are potential impediments to signing up for certain international conventions.

And we certainly look forward to seeing the government follow through with the implementation of the new initiatives proposed in this year’s Budget.


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Charles Kinsley, Partner, KPMG China

A financial services tax partner with over 25 years tax experience, Kinsley has extensive knowledge and experience in retail and investment banking, securities dealing, funds (including those in the private equity, real estate, alternative investments and infrastructure business) and fund management. His role includes advising on operational taxes, the US Qualified Intermediary regime, FATCA, CRS and AML tax evasion.

 

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Wade Wagatsuma, Partner, KPMG China

Head of US Corporate Tax, Wagatsuma specializes in the area of US federal income taxation, with an emphasis on transactional tax planning, both domestic and cross-border. He has extensive experience advising clients on the structuring and implementation of acquisitions of foreign and domestic assets by foreign funds with US investors, the structuring of inbound investments by foreign companies as well as funds having or acquiring US assets.

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