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Hong Kong Budget Provides Less In Handouts

Friday, March 1, 2013

Despite the continued slow growth in Hong Kong’s economy, Financial Secretary John Tsang produced measures to help those on lower incomes, middle-class taxpayers and small- and medium-sized enterprises (SMEs), amounting to only HKD33bn (USD4.25bn) in his 2013/14 Budget, compared to HKD80bn last year.

The Financial Secretary said Hong Kong's gross domestic product (GDP) growth for 2012 as a whole was only 1.4%, much lower than the average 4.5% growth rate over the past ten years. While he forecast a modest improvement in the economy in 2013, with annual GDP growth of 1.5% to 3.5%, that could be knocked off course by, what he called, “wars on three fronts, namely 'currency', 'trade' and 'geopolitics'. As a highly open and small economy, Hong Kong will be impacted by the development of these wars."

The Government is therefore to adhere to fiscal discipline, without the greater tax breaks that had been requested by some commentators, maintaining Hong Kong’s revenue ratio at about 20% of GDP and its revenue reserves at approximately 34% of GDP.

The revised estimate for government revenue in 2012/13 is HKD445.5bn, HKD55.2bn higher than the original estimate – largely due to increases in earnings and profits tax, as well as in stamp duty and other property revenue due to the buoyant real estate market. For government expenditure, the revised estimate is HKD380.6bn in the last fiscal year, so that an overall surplus of HKD64.9bn is expected.

Total government expenditure is budgeted to reach HKD440bn for 2013/14, an increase of 15.6% compared with the revised estimate for 2012/13 and some 21.7% of GDP, while total government revenue will be HKD435.1bn (with earnings and profits tax, estimated at HKD189.4bn, remaining Hong Kong’s major source of revenue).

Hong Kong will, consequently, expect a small fiscal deficit in the coming fiscal year, but revenue reserves are still estimated to reach HKD729.1bn by end-March 2014, the equivalent to 20 months of government expenditure.

In his Budget, Tsang proposed eleven one-off measures, including waiving rates for 2013/14 subject to a ceiling of HKD1,500 per quarter for each rateable property, so that around 75% of properties will be subject to no rates in the year; granting each residential electricity account a subsidy of HKD1,800; and paying two months' rent for public housing tenants.

Salaries tax and tax under personal assessment for 2012/13 (and payable this year) will be reduced by 75%, subject to a ceiling of HKD10,000; the basic and additional child allowances will be increased from the current HKD63,000 to HKD70,000 for each child; and the deduction ceiling for self-education expenses will be raised from HKD60,000 to HKD80,000.

For SMEs, "In the face of the unstable external economic environment and increasing operating costs,” he will waive the business registration fees for 2013/14, to benefit 1.2m businesses; and reduce profits tax for 2012-13 by 75%, subject to a ceiling of HKD10,000.

"SMEs are an important pillar of Hong Kong’s economy and employment market, Tsang added. “They form the majority of enterprises in Hong Kong and employ over 1.2m people or half the private-sector workforce. In the face of persistently weak export markets and a challenging external environment, we shall assist SMEs to help them raise capital and tap new markets."

Tsang also outlined measures to aid Hong Kong’s financial sector. With the total value of fund assets under management in Hong Kong at more than HKD9 trillion, ranking second in Asia, he promised to provide a clear and competitive tax environment with a view to attracting more funds of various types to base in Hong Kong, to broaden the variety and scope of its fund business. He pointed out that Hong Kong-domiciled funds will drive demand for professional services, such as fund management and investment advice as well as legal and accounting services.

To attract more private equity funds to domicile in Hong Kong, he proposed to extend the profits tax exemption for offshore funds to include transactions in private companies, which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong.

In addition, while investment funds established in Hong Kong can only take the form of trusts at the moment, he believed that, as an international financial center, Hong Kong should provide a more flexible business environment for the industry to meet market demand. To attract more traditional mutual funds and hedge funds to domicile in Hong Kong, the Government is therefore considering legislative amendments to introduce the open-ended investment company.

To expand the distribution network of Hong Kong's fund industry, the Securities and Futures Commission is also studying with Mainland China’s authorities an arrangement for the mutual recognition of funds. The arrangement could attract more funds to establish in Hong Kong and foster the development of those professional sectors engaged in the registration, investment management and sales of funds.

Finally, as the Government has seen that many large enterprises in Asia are keen to run their own captive insurance companies to insure against their business risks, and to attract more enterprises to form such captive insurance companies in Hong Kong, Tsang proposed to reduce the profits tax on the offshore insurance business of captive insurance companies, such that they will enjoy the same tax concessions as those currently applicable to reinsurance companies.