A Budget for a "profoundly different world"
Amid the current wave of Covid-19, the Financial Secretary has proposed a number of novel measures in his Budget to ensure that Hong Kong remains on a path that will lead to sustainable growth.
Based on the revised estimate announced in the 2022-23 budget proposals, the HKSAR Government will record a budget surplus of HK$18.9 billion for the financial year 2021/22, a reversal of the budget deficits of the prior two years. This may explain the confidence shown by Hong Kong’s Financial Secretary in launching a suite of countercyclical measures in his proposal.
The boldest of these measures is the rolling out of another round of consumption vouchers. In his Budget speech, Financial Secretary Paul Chan announced that HK$10,000 electronic vouchers will be given to around 6.6 million eligible residents to boost domestic consumption. The measure is expected to cost the Government HK$66.4 billion.
“The fifth wave of Covid-19 infections in Hong Kong and the restrictive measures imposed to control the outbreak has dealt a hard blow to the recovering economy. Coupled with the threat of inflation in major economies and uncertainties in the global economic outlook, the Government has rightly directed more resources to relieving people's hardships, stabilising the economy and maintaining public confidence in consumer markets,” says Agnes Chan, EY Managing Partner, Hong Kong and Macau.
Although the optimal timing for giving out the e-vouchers is hard to judge, Agnes Chan said the boost resulting from the previous hand-out was very positive, contributing to Hong Kong’s economic growth of 6.4% in 2021. In addition, it is an exceptional one-off measure taken in light of the current circumstances and therefore should not impose a burden on Hong Kong’s long-term fiscal position.
The Financial Secretary projects that a fiscal balance will be achieved in 2023/24. This forecast is based on a real economic growth rate of 3%. Given this, it is imperative for the Government to ensure that Hong Kong re-emerges from its present economic difficulties and rebounds promptly.
During his speech, Paul Chan mentioned the perennial concerns over revenue collection due to Hong Kong’s narrow tax base. While indicating that now was not the time to increase the salaries tax or profits tax, he viewed the implementation of a minimum 15% corporate tax rate (as required under the city’s international commitments) as enabling Hong Kong to collect an additional estimated HK$15 billion per year in the form of a “top-up” tax. The Government will also roll out a progressive scheme from 2023/24 based on the “affordable users pay” principle of the rating system, which has remained largely unchanged since 1995.
“Given the current economic situation, it is reasonable for the Government not to revise the rates for profits tax and salaries tax,” says Paul Ho, Financial Services Tax and Business Advisory Services Partner at Ernst & Young Tax Services Limited. “The proposed introduction of domestic minimum top up tax with regards to the multinational enterprises under the scope of BEPS 2.0 Pillar Two and revision in the rating system should provide the Government with new revenue streams to achieve fiscal balance. These proposed measures will not impact local SMEs and most individual property owners.” It is hoped that the Government will consider using the additional revenue collected from the “top-up” tax to introduce new non-tax measures to enhance the overall competitiveness of Hong Kong.
Taken together, Hong Kong’s residents and taxpayers will benefit from the salaries and profits tax rebates, transport fare subsidies, help with their electricity bills and the distribution of e-vouchers. One new item for individuals was a tax deduction for residential rents up to a maximum of HK$100,000.
Robin Choi, People Advisory Services Partner at Ernst & Young Tax Services Limited, says: “We are happy to see that the Government has taken up our previous recommendation and introduced a tax deduction for domestic rental expenses. This will help ease the burden of renting a private property for taxpayers liable to salaries tax and tax under personal assessment who are not owners of domestic properties.”