Thursday, February 25, 2010
Hong Kong’s Financial Secretary, John C Tsang, has delivered a budget for the 2010-11 fiscal year that includes a relief package to build on the economic recovery, additional taxes to reduce volatility in the property market, and further measures to strengthen the competitiveness of the asset management industry.
While for 2009 as a whole Hong Kong’s gross domestic product (GDP) only fell by 2.7%, and growth in GDP of up to 5% is expected this year, the government is still concerned about the sustainability of the current economic recovery. There will therefore, only be a slow withdrawal of the exceptional measures, totalling HKD87.6bn (USD11.3bn) previously taken by the government to protect the economy.
He was concerned that some people have yet to benefit from the economic recovery, and therefore announced an HKD20bn relief package that includes tax rebates, rates concessions and public housing rental waivers, to provide financial assistance to the community during the economic recovery.
The package includes reducing 75% of salaries tax and tax under personal assessment for 2009-10, subject to a ceiling of HKD6,000; waiving rates for 2010-11, subject to a ceiling of HKD1,500 per quarter for each rateable property; and waiving business registration fees for one year.
He disclosed that, due to the surge in global liquidity as a result of the eased monetary policies in a number of countries, Hong Kong has received an inflow of funds exceeding HKD640bn since the fourth quarter of 2008, increasing the potential risk of creating asset-price bubbles, particularly in the property market. The government is also concerned that if capital flows were to reverse or interest rates rebound, asset prices would become more volatile.
He said that government is closely monitoring the situation in the property market. The inflow of funds has fuelled an increase in the prices of luxury flats, which to some extent has affected the prices of small and medium-sized flats. Overall, property prices are 8% above their peaks before the global recession.
While the government will therefore take measures to improve the supply of flats and land for development, and reduce excessive mortgage lending, Tsang revealed that the government “will increase the transaction cost of property speculation with appropriate tax measures so as to reduce the risk of creating a property bubble.”
He proposed that “with effect from April 1 this year the rate of stamp duty on transactions of properties valued more than HKD20m be increased from 3.75% to 4.25%, and buyers will no longer be allowed to defer payment of stamp duty on such transactions. In parallel, we will closely monitor the trading of properties valued at or below HKD20m. If there is excessive speculation in the trading of these properties, we will consider extending the measures to these transactions.”
“The Inland Revenue Department (IRD),” he added, “has established procedures to track property transactions involving speculation and will follow up each case closely. If it is found that such transactions constitute a business, the IRD will levy profits tax on the persons or companies concerned for profits arising from such transactions.”
As part of the effort to develop offshore renminbi (RMB) business and make Hong Kong a global financial centre and asset management centre, the government, together with the Chinese authorities, will continue to study the ongoing refinements to the RMB trade settlement services, and to promote the expanded use of RMB outside the Mainland. It will also continue to develop the RMB clearing platform in Hong Kong, thereby facilitating Hong Kong's development as a regional RMB settlement centre.
The government will also continue to promote the development of RMB bond business in Hong Kong, such as expanding the issuance size of bonds and increasing the types of bond issuers and the classes of qualified investors. It is also hoped that RMB sovereign bonds will be issued on a regular basis in Hong Kong and that RMB-denominated investment products will be developed.
He proposed to introduce a number of measures to strengthen the competitiveness of the asset management industry. Firstly, the stamp duty concession in respect of the trading of exchange traded funds will be extended to cover funds that track indices comprising up to 40% of Hong Kong stocks. It is expected that this will reduce the trading cost and promote the diversification and healthy growth of the exchange traded funds market.
For the local bond market, currently a concessionary profits tax rate at 50% of the normal rate is applied to the interest income and profits derived from qualifying debt instruments with a maturity period of less than seven years but not less than three years. He has extended this concession to cover qualifying debt instruments with a maturity period of less than three years.
In addition, to attract more fund managers to manage overseas funds in Hong Kong the Commissioner of Inland Revenue will further clarify the definition of "central management and control" to address the industry's concern about the residency requirement for directors of the management committee of offshore funds in their applications for profits tax exemption.
The budget also includes a proposal to update the lists of recognized stock exchanges and futures exchanges under the ordinance to extend the application of tax exemption for offshore funds engaged in futures trading.
Finally, with regard to intellectual property, under the existing tax arrangements, capital expenditure by enterprises to purchase patent rights and industrial know-how is deductible under profits tax. To promote the wider application of intellectual property by enterprises and the development of creative industries, Tsang will extend the deduction to cover registered trademarks, copyrights and registered designs. The IRD will formulate detailed proposals.
Furthermore, the patent application grant under the Innovation and Technology Fund provides funding support to Hong Kong companies and inventors in their first patent applications so as to help them capitalize and protect their intellectual work. To further encourage creativity and innovation, the government will raise the grant ceiling for each case from HKD100,000 to HKD150,000.