EY Proposes Tax Measures That Could Improve Hong Kong’s Business Environment

The Hong Kong government will report a surplus of HK$75 billion for the financial year 2016-17, far exceeding the original estimate of HK$11.4 billion, according to estimates from EY.

Based on EY’s figures, the estimated surplus would increase Hong Kong’s fiscal reserves to HK$917.9 billion by the end of 31 March 2017.

“We estimate that the land premiums for the financial year 2016-17 will reach a record level of HK$104 billion, exceeding the original estimate by HK$37 billion,” says Agnes Chan, Managing Partner, Hong Kong and Macau at EY. “This is due to the high volume of turnover and prices following the government’s increase in land supply with a view to rein in runaway property prices, and mainland property developers bidding aggressively for residential sites in government tenders.”

“In addition, the government is expected to collect HK$60 billion from stamp duty, which is HK$10 billion higher than the original estimate. The robust property market in the first half of the financial year 2016-17 will more than make up for the slight fall in transactions subsequent to the recent introduction of the 15% flat stamp duty rate aimed at cooling the residential property market.

“As both the business and employment environment in Hong Kong performed reasonably well in 2016, we estimate that tax receipts would exceed the conservative estimate made in the original budget by HK$6.6 billion.

“On the expenditure side, by reference to past trends and based on government expenditure incurred in the first 8 months of the year, we estimate that actual government expenditure for the year 2016-17 will be HK$10 billion less than budgeted,” Chan adds.

Hong Kong’s fiscal reserves exceed HK$900 billion by 31 March 2017

This year's expected budget surplus would propel Hong Kong’s fiscal reserves to HK$917.9 billion as at 31 March 2017, amounting to 37.7% of Hong Kong’s estimated 2016 gross domestic product (GDP).

With an enviable level of fiscal reserves of over HK$900 billion, the government has deep reserves which can fund measures to tackling future challenges.

In particular, the government has the capacity to provide tax incentives to high-new technology and creative industries in order to foster an innovation-driven economy for Hong Kong. It is through continuous innovation will more higher-paying jobs be created in Hong Kong. This will in turn help to propel economic growth in a sustainable manner and create opportunities for upward social mobility.

Fostering an innovation-driven economy

To attract top-notched high-new technology or cultural and creative enterprises, as well as professionals to establish and work in the Hong Kong/Shenzhen Innovation and Technology Park, in addition to rent concession, EY proposes the following  preferential tax treatments: (i) a concessionary profits tax rate of 8.25% (i.e., 50% of the normal rate of 16.5%) for qualifying enterprises; (ii) only 50% of the assessable income of individuals employed as high-new technology or creative professionals by enterprises in the Park to be subject to salaries tax; and (iii) preferential salaries tax treatment for stock rewards and stock option gains awarded to such individuals.

Profits tax concession and income tax relief 

In terms of nurturing high-new technology and creative start-ups, EY proposes the introduction of a profits tax concession for qualifying high-new technology and creative start-ups and an income tax relief for angel investors.

Under the proposed profits tax concession, a newly established company that meets the qualifying conditions would enjoy a concessionary tax rate of 8.25% (i.e., 50% of the normal rate of 16.5%) for the first three consecutive years after the company has commenced to derive assessable profits.

This proposed measure will be at an estimated revenue cost of HK$0.7 billion per year.

As for the proposed income tax relief, individual taxpayers that can commit a minimum of HK$500,000 in a qualifying start-up would enjoy a tax deduction of 50% of their investment at the end of a three-year holding period, subject to a cap of HK$1 million for each year of assessment.

“We believe that the proposed measures can encourage more private investors, especially business veterans, to invest in start-ups that have high growth potential, and help start-ups overcome difficulties in accessing capital. Furthermore, the start-up companies may also benefit from the guidance and mentorship provided by the angel investors,” explains Chan.

Tax incentives to encourage R&D and talent development

Compared to neighboring jurisdictions, Hong Kong’s research and development (R&D) expenditure as a percentage of GDP is not only lower, but a greater portion is attributable to public institutions. This is in contrast with other economies in which the greater part of the R&D expenditure is made by the private sector.

To encourage the private sector to increase its investment in R&D, we propose allowing a super tax deduction of 200% for qualifying R&D expenditure.

Under the current tax regime, if an intellectual property right (IPR) is created or developed by a taxpayer carrying on business in Hong Kong and is licensed by the taxpayer to another party for use outside Hong Kong, the royalties so derived will generally be subject to Hong Kong profits tax.

To encourage Hong Kong’s creative enterprises to expand and exploit their IPRs overseas, we propose that such royalties are subject to a concessionary tax rate of 8.25%.

In addition, to encourage enterprises to develop talents, EY also proposes allowing a super tax deduction of 150% for employee training costs paid to accredited providers of training services.

Enhance tax competitiveness of Hong Kong

Paul Ho, Financial Services Tax Partner at EY, says: “In addition to the new tax initiatives proposed above, our taxation system needs to be improved to make it more conducive to business operations and thereby enhance Hong Kong’s tax competitiveness.”

The proposed tax measures are: 

  • Under the current profits tax exemption regime for offshore funds, offshore private equity funds can only invest in overseas incorporated private companies, and such companies cannot have business operations nor immovable properties in Hong Kong. But under the impending Innovation and Technology Venture Fund, an eligible investee company has to be a Hong Kong incorporated start-up with adequate presence in Hong Kong. As such, the aforesaid exemption conditions have to be relaxed, so as to attract private equity funds to invest in local innovative start-ups and facilitate the implementation of this policy.
  • Under the current profits tax exemption regime for offshore funds, the Hong Kong Inland Revenue Department’s (IRD) position on bond interest income having a Hong Kong source is that such interest income is “income from incidental transactions” (rather than income from “specified transactions”) and would only be exempt from Hong Kong profits tax to the extent it does not exceed 5% of the total trading receipts of the offshore fund. To encourage the development of bond market in Hong Kong and further consolidate Hong Kong’s position as a leading international financial centre, the IRD should relax its position in this regard, otherwise it will discourage bond funds that principally derive interest income from establishing in Hong Kong.
  • Providing clarification on determining the source of different types of profits derived from e- commerce so as to provide tax certainty.
  • Relaxing section 39E to grant tax depreciation allowances in respect of plant and machinery used overseas to facilitate offshore equipment leasing and infrastructure projects.
  • Directing more resources toward the negotiation of comprehensive double tax treaties/arrangements with other jurisdictions, especially jurisdictions along the “Belt and Road”.
  • Introducing regional headquarter incentives to encourage enterprises to set up their regional headquarters in Hong Kong. Furthermore, EY urges the government to consider undertaking a comprehensive and in-depth review of our tax laws. The last time such a comprehensive review was performed was 41 years ago. Given the tremendous changes which have since taken place in the manner in which businesses operate and recent revamp of the international tax rules, EY considers now is an appropriate time to perform such a review.

Relieve operating costs of SMEs

Small and medium enterprises (SMEs) are the backbone of Hong Kong’s economy, providing nearly half of all employment opportunities in Hong Kong.

Given that many neighboring jurisdictions are offering comparatively lower rates of tax for SMEs to foster their competitiveness, EY proposes a two-tier tax system. Under the proposed system, companies with turnover below HK$10 million would have their first HK$500,000 or less of assessable profits taxed at a lower rate of 10%.

The proposed measure, at an estimated revenue cost of HK$2 billion per year, would hopefully enable such SMEs to re-invest their capital to improve productivity and upgrade or transform business processes.

As a means of improving future cash flow, EY proposes allowing businesses to immediately write-off each eligible fixed asset they purchase which cost HK$50,000 or less.

Green tax measures

EY proposes the following green tax measures: (i) allowing a 100% tax deduction for the acquisition cost of plant and machinery employed in recycling businesses in the year of purchase; and (ii) further raising the duty on motor-use leaded petrol.

EY believes that the above green tax measures would help to make Hong Kong a better place to live and do business. 

 

 

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