HK’s huge reserves a boon in B&R push
Accounting gurus tell SAR to make full use of fiscal strength for city’s long-term growth from key projects
Sitting on a massive fiscal arsenal and with a projected colossal budget surplus for the current financial year, it’s time the Hong Kong Special Administrative Region Government flexed its muscles by leveraging its resources to help push two of the nation’s highest-profile projects — the Belt and Road Initiative and the Guangdong-Hong KongMacao Greater Bay Area — for long-term economic progress.
That’s the view of prominent accounting professional and advisory bodies, which have also called for special tax incentives for both corporations and individuals to help them do business or travel and work in the 11-member city bay area.
The Hong Kong government revealed last month its cumulative surplus stood at HK$110.6 billion as of December 2017 — well above its HK$16.3-billion forecast. Higher-than-expected revenues from land sales, profits tax and stamp duty, combined with under-budget expenditure, have vastly contributed to the surplus bonanza.
Based on estimates by major accounting firms and auditing bodies, the government’s consolidated budget surplus for the 2017-18 financial year could range from HK$150 billion to HK$180 billion — more than 10 times the administration’s initial projection.
As of December last year, the SAR’s fiscal reserves had swollen to HK$1.06 trillion, equivalent to 30 months of total government expenditure, and are predicted to hit HK$1.13 trillion.
With a bumper surplus in the coffers, accounting advisory and professional groups have urged the government to take a long-term, cautious approach to bolster the city’s competitiveness by offering various tax incentives.
They agree that the Belt and Road and the Greater Bay Area should be the two key priority areas where greater financial resources should be deployed in the next financial year.
“It’s an exceptional opportunity for Hong Kong to take advantage of its sound legal system, a sophisticated financial market and an excellent professional services platform to play a super-connector role in linking the mainland with the B&R countries,” said Paul Ho Yiu-po, financial services tax and business advisory services partner at Ernst and Young Tax Services (E&Y).
E&Y prefers a series of measures, including tax exemption for interest income and trading profits from green bonds for investments in specified B&R projects, and granting tax depreciation allowances in respect of plant and machinery used overseas to facilitate offshore equipment leasing and infrastructure projects in the nations and regions along the B&R route.
It also hopes that further resources can be utilized for the negotiation of comprehensive avoidance of double taxation arrangements with other jurisdictions, especially those involved in the B&R vision.
Unveiled by President Xi Jinping in 2013, the B&R Initiative embraces more than 60 economies across Asia, Europe and Africa, accounting for 30 percent of the global domestic product. According to a McKinsey Global Institute forecast, the B&R economies will account for 80 percent of the world’s GDP growth by 2050.
“We think the government should proactively utilize its expansive fiscal reserves to promote the B&R and Greater Bay Area so as to foster general economic development, which would be more effective than just giving cash handouts to Hong Kong residents,” said Danny Po Chun-wong, cochairman of the Hong Kong Tax Subcommittee of the Association of Chartered Certified Accountants.
The Greater Bay Area, one of the central government’s prime economic blueprints to forge deeper economic cooperation in the Pearl River Delta region, covers the Hong Kong and Macao special administrative regions and nine cities in Guangdong province — Guangzhou, Shenzhen, Foshan, Dongguan, Zhuhai, Huizhou, Zhongshan, Jiangmen and Zhaoqing. The cluster boasts a population of more than 100 million, with an annual GDP of $1.4 trillion.
PwC suggests that Hong Kong start regular communications with the mainland to discuss the possibility of reducing tax rates for corporations and individuals to help them conduct business or travel to work in the Greater Bay Area with minimum hindrance. It says Hong Kong enterprises in the area should be taxed based on Hong Kong’s profit tax rate of 16.5 percent, instead of the mainland’s 25 percent.
Technology and innovation also rank high in the development of the Greater Bay Area. The R&D super-tax deduction system, under which the first HK$2 million eligible R&D spending will enjoy a 300-percent tax cut and the rest 200 percent, was proposed in Chief Executive Carrie Lam Cheng Yuet-ngor’s maiden Policy Address last year.
Accounting firms PwC, KPMG and ACCA highlight the importance of allowing frontier workers contained in some double taxation agreements of European countries.
“If the Greater Bay could be capitalized on properly, it could be the next engine of economic growth for Hong Kong,” KPMG Managing Partner Ayesha Macpherson Lau reckoned.
E&Y says Hong Kong residents employed by a Hong Kong employer and who need to travel frequently in the region should be exempt from individual income tax on the mainland, regardless of the number of days they work on the mainland. Similarly, mainland residents should be exempt from salaries tax in Hong Kong while working in the city.
Under the comprehensive double tax arrangement between Hong Kong and the mainland, Hong Kong residents who stay on the mainland for more than 183 days for any relevant 12-month period are required to pay individual income tax to the mainland authorities.
PwC recommends that the mainland tax authorities levy no more than 15 percent of their individual income tax on Hong Kong people working in the Greater Bay Area, or offer tax rebate/exemption if certain criteria are fulfilled. Hong Kong should also lobby mainland authorities for a waiver on social contributions for Hong Kong residents who have already contributed to the Mandatory Provident Fund scheme in Hong Kong.
“Singapore adopts a stratified system of providing tax incentives to companies based on their investment amount and number of staff they employ in the country, whereas Hong Kong utilizes a standardized approach of slashing corporate profit tax of 50 percent to lure overseas investment,” said Jeremy Choi Hing-chiu, a tax services partner at PwC.
“We think Hong Kong should be more flexible in designing a range of tax incentives to attract more overseas investment,” he said.
Hong Kong should be more flexible in designing a range of tax incentives to attract more overseas investment.”
Jeremy Choi Hing-chiu,