by Stefano Mariani
Hong Kong’s 2016–2017 budget, issued 24 February, is an inoffensive and uncontroversial affair, with no shocks, few surprises, and certainly no rocking of the fiscal boat, despite the received wisdom that the city urgently needs to consider innovative approaches to broadening its tax base to fund anticipated medium and long term increases in public expenditure.
This was a budget structured on Hong Kong’s longstanding commitment to fiscal discipline, reflecting a curious and widely envied balance of low taxation, restrained public spending, and consistent budget surpluses.
Self-employed individuals and corporations paying profits tax will enjoy a 75 percent reduction in their tax bill in the 2016–2017 year of assessment, with the relief capped at HK$20,000 (approximately USD 2,571). Start-ups and investors will be pleased to note that the government remains committed to nurturing innovation and entrepreneurship.
To promote Hong Kong as an intellectual property trading hub in the region, the government will expand the scope of tax deduction for capital expenditure incurred for the purchase of intellectual property rights from five categories to eight: the additional categories of eligible intellectual property are layout design of integrated circuits, plant varieties, and rights in performance.
There is, however, no sign yet of a super-deduction (that is, a deemed deduction of more than 100 percent of expenditure actually incurred) for research and development (R&D) expenditure or of a broad and generalised deduction for IP development based on the Singaporean model. The decision to continue to operate incentives through the existing statutory machinery is, it appears, in part driven by the observation that many start-up small and medium size enterprises pay no profits tax at all, rendering it more efficient to provide incentives by way of, for example, direct transfers under the R&D Cash Rebate Scheme, as opposed to targeted tax breaks or deductions.
Existing institutional support for creative and high-valued added industries will be buttressed with further investments and earmarking of funds, but there remains an open question of whether existing human resources and technical infrastructure are sufficient to bring about a flourishing of a knowledge-based industries. Financial services, real estate, and retail and tourism remain the backbone of Hong Kong’s economy.
The middle class will likewise receive a 75 percent reduction in salaries tax and tax under personal assessment, again capped at a maximum of HK$20,000. A majority of individuals in Hong Kong pay no salaries tax at all, so this measure is aimed squarely at the moderately prosperous who are the backbone of Hong Kong’s skilled workforce. Reflecting the Confucian values underpinning Hong Kong society, the current budget further provides for an increase in the married person’s allowance to HK$264,000 (approximately USD 33,949), from the current HK$240,000 (approximately USD 3,086), and increases in the tax allowance for maintaining dependent parents and grandparents, coupled with increases in the deduction ceiling for elderly residential care expenses.
Whilst there was no mention of the adoption into Hong Kong legislation of the OECD’s Common Reporting Standard and Automatic Exchange of Information regimes in the budget itself, the Financial Services and Treasury Bureau has in consultation reaffirmed its commitment to a first exchange of information before the end of 2018, and acknowledged the challenges posed by the 15 OECD/G20 base erosion and profits shifting action points.
Although the budget measures have generally been well received by the Hong Kong public, certain practitioners and academics remain concerned that there is as yet no indication of how the government intends to fund rising public expenditure over the next decades, especially in light of the demographic challenges posed by the city’s rapidly aging population and widespread concerns about the affordability and quality of housing.
Tax reform is regarded as an especially sensitive topic, notwithstanding that the government’s own statistics evidence that the growth of public expenditure will continue to outpace growth in revenue. Suggestions that the long-discussed goods and services tax be dusted off yet again, or that certain capital gains be taxed, were resisted by stakeholders and may prove unpopular with the public at large, whose interaction with the Hong Kong fiscal regime has historically been both incidental and relatively painless.
Yet again, any fundamental, but much needed change to the fiscal regime in Hong Kong must wait, at least, another year. There will, inevitably, come a time when lurching from expedient to expedient no longer proves a sustainable solution, at which stage structural reform will likely not merely become necessary, but imperative.
— Stefano Mariani is a solicitor and barrister admitted in England and Wales, and a part-time lecturer at Hong Kong University. He may be reached at [email protected].
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