Hong Kong’s budget 2017–2018 tax proposals: more of the same, reheated

by Stefano Mariani and Calvin Ng, Deacons, Hong Kong

Hong Kong’s budget 2017–2018, delivered on 22 February, once again evidences the limited creativity of the government in addressing the increasingly complex challenges faced by Hong Kong’s economy, and its structural unwillingness to grasp the nettle of substantive structural reform.

Perhaps that is understandable, with the next election for the post of Chief Executive just around the corner, but it is difficult to shake the impression that this year’s budget is simply more of the same.

Personal and business taxation

Corporations and self-employed individuals paying profits tax will be entitled to a reduction in profits tax of 75%, with relief capped at HK$20,000.

A series of one-off tax measures, which have nonetheless become a regular feature of government budgeting, are the so-called “middle-class sweeteners.”

Salaries tax will likewise be reduced by 75%, subject to a cap of HK$20,000. This measure corresponds closely to its description: it is a targeted fiscal bribe for the middle classes, which have in recent years become restive at the decline in the quality and affordability of life in Hong Kong. Most Hong Kongers pay no direct taxes of any description; it follows that only the relatively well-off pay salaries tax in the first place.

The budget further provides for widening of the marginal salaries tax bands by HK$5,000 to HK$45,000, coupled with increases in the disabled dependant allowance from HK$66,000 to HK$75,000, and an increase in dependant brothers and sisters allowance from HK$33,000 to HK$37,500, but with no corresponding increase in dependant parent and grandparent allowances.

For the purpose of further promoting the government-advocated voluntary medical insurance programme, the budget noted that tax deductions will be available for the purchase of regulated health insurance products, with a view to encouraging the use of private healthcare services by the public. This hints that the Government intends to implement its proposed voluntary medical insurance scheme in the near future.

Property tax

Homeowners and homebuyers may be pleased to discover that the Budget also provides for waivers of 4 quarters of property rates in the year of 2017-2018, up to a cap of HK$1,000 per quarter, and an extension of the entitlement period for the home loan interest tax deduction from 15 years to 20 years of assessment.

They will however be less pleased to find that the government has done precisely nothing to address the issue of the affordability of housing, and the generally poor quality of housing stock.

To address this issue, which is a matter of great concern for Hong Kongers seeking to move up into the property ladder, serious thought would need to be given to structural reforms in the way land is allocated for residential property and capital is taxed in Hong Kong. Such reforms are not remotely palatable either to the government, which is generally deferential to the vested interests of politically influential property developers, or to the Legislative Council, which in any event has been fundamentally plutocratic from its inception.

Aerospace tax incentives

Echoing the measures formulated by the Chief Executive C.Y. Leung in his 2017 Policy Address, Hong Kong budget 2017-2018 has dedicated a section to the aviation industry, confirming the published government commitment to developing Hong Kong into a centre for aerospace financing.

The budget intends to provide for tax concessions for aircraft financing by way of introducing amendments to the Inland Revenue Ordinance.

A tax incentive targeted at the aerospace leasing industry should in principle enable Hong Kong to compete effectively with Singapore in this area with considerable future growth potential.

It should nonetheless be noted that the track record of the importation of Singaporean ideas into the Hong Kong tax code has been mixed. The introduction in 2016 of tax incentives for corporate treasury centres based in Hong Kong was met with mixed responses from both industry and professional observers.

Fund industry

Turning to Hong Kong’s fund industry, a profits tax exemption is contemplated for onshore privately-offered open-ended fund companies. This measure is largely consistent with concerted government efforts to make Hong Kong into an investment fund and asset management hub.

Officially, the government has restated its commitment to the development of innovation and technology in Hong Kong.

Whereas funding has been benchmarked to stimulate this critical sector, there has been little in the way of developments on the fiscal incentives front. There are as yet no super-deductions available for research and development expenditure, and the government’s policy approach of genuinely assisting high technology start-ups is perceived as being lackadaisical.

It is difficult to envisage sustained investment in the ‘real economy’ where there are as yet no targeted fiscal incentives that would render Hong Kong an attractive destination compared with Singapore – or, indeed, certain free-trade zones in China – and perceived easy returns in low value-added sectors such as retail and property operate to limit economic diversification.

In the ambit of tax reform, the government is committed to setting up a tax policy unit in the Financial Services and the Treasury Bureau for the purpose of examining the tax regime from a macro perspective.

Tax reform deferred

Again, the government deferred making difficult or indeed meaningful decisions on revising or restructuring Hong Kong’s venerable tax code. That is in stark contrast to the apparent willingness of the government of Singapore to bring the question of tax reform into sharp focus.

Further, given the lack of enthusiasm for political collaboration between the pro-establishment and pro-democracy wings of the political establishment, and a generally fractious atmosphere in the Legislative Council, it is unclear how much, if anything,will be accomplished in the way of substantive tax reform.

The budget speech was decidedly light on details in this regard, confining itself to outlining in broad terms positions of policy which have long been mooted in other channels.

To practitioners and observers accustomed to the government’s shambolic approach to fiscal legislation, this most anodyne of budgets comes as no surprise.

It is nonetheless disappointing that serious and difficult questions relating to Hong Kong’s long term competitiveness in the global marketplace, the affordability of housing, and whether a 19^th century tax code can truly continue to operate essentially unaltered in a 21^st century economy have simply been archived for future political generations to address.

The colossal ostrich of Hong Kong’s Financial Services and Treasury Bureau remains with its head planted firmly in the sand.[1]

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[1] The authors acknowledge that despite popular credence, ornithologists are unanimous that ostriches do not, in point of fact, bury their heads in the sand at the sight of danger, and take this opportunity to apologise unreservedly to any ostriches offended by this article.