PwC predicts Hong Kong's budget surplus to hit $22.3b

Here's what it recommends to the government.

PwC expects the HKSAR Government will record a HK$22.3 billion consolidated budget surplus in the fiscal year 2013/14 against a small deficit of HK$4.9billion forecasted by the Government. 

In the face of a highly competitive global financial market, particularly the keen competition in offshore RMB businesses, the HKSAR Government should embrace every emerging opportunity so as to strengthen Hong Kong’s leading position as an international financial centre.

Here's more from PwC:

Peter Yu, PwC Southern China and Hong Kong Tax Leader says, “Hong Kong is facing arising challenges we well as opportunities from the continuing internationalisation of the Renminbi; new offshore RMB businesses operating in Taiwan and Singapore, etc; and the development of the financial industry in the free trade pilot zones in mainland China. In fact, the Financial Services Development Council (FSDC) has already recognised in its earlier report that Hong Kong’s leading position as an international financial centre needs to be further strengthened. To address the advice and proposals submitted by FSDC, we expect the Chief Executive CY Leung to respond and even announce possible measures in his second Policy Address next week.”

PwC expects the total revenue of profits tax and salaries tax will be around HK$180.9 billion. In light of the stamp duty measures introduced by the Government in a bid to curb the property speculation activities, we expect the revenue from stamp duties will drop from HK$42.9 billion in the fiscal year 2012/13 to HK$36.1 billion in 2013/14. On the other hand, taking into consideration the land sales plans announced up to 31 December 2013, we expect revenue from land sales for 2013/14 will reach HK$79.6 billion, i.e. HK$10.5 billion higher than the Government’s original estimation. Overall, PwC expects a consolidated budget surplus of HK$22.3 billion.

KK So, PwC Hong Kong Tax Partner says, “The tapering initiated by the US Fed has foreshadowed the recovery of the US economy. We are cautiously optimistic about the global economy this year. However, given the source of revenue of the Hong Kong Government is relatively confined, it should adhere to the prudent fiscal discipline of keeping expenditure within the limits of revenues and committing resources only where justified and needed. As in past years, we expect that the expenditure for 2013/14 would be lower than the Government’s orginal estimation and adjusted from HK$44.4 billion to HK$41.5 billion.”

To strengthen Hong Kong as a leading international financial centre, PwC urges the Government to adopt the initiatives proposed by the FSDC, including “Advancing the Development of Hong Kong as an Offshore Renminbi Centre”, “Development and Reform of Mainland China’s Financial Sector and the Strengthening and Enhancement of Hong Kong’s Pivotal Role as a Financial Centre”, “Developing Hong Kong as a Capital Formation Centre for Real Estate Investment Trusts”, “Proposals on Legal and Regulatory Framework for Open-ended Investment Companies in Hong Kong” and “Proposing Tax Exemptions and Anti-avoidance Measures on Private Equity Funds”. To promote Hong Kong’s bond market, PwC proposes profits tax exemption for all short and medium bonds.

Jeremy Choi, PwC Hong Kong Tax Partner says, “The Government should undertake a review of its tax system to ensure Hong Kong stays competitive and continue to attract more business. To provide a sustainable business environment especially for Hong Kong manufacturing companies, we recommend to relax the restriction imposed by Section 39E of the Inland Revenue Ordinance on depreciation allowance for plant and machinery used outside of Hong Kong . To help the business sector, PwC also suggests to introduce a group tax loss relief measure.”

PwC also proposes a revisit of DIPN No.21 – ‘Source of Profits’ to have clearer guidance for general taxpayers. As a timely relief for the SMEs, PwC proposes to reduce the profits tax from 16.5% to 10% for companies with taxable profits below HK$500,000.

Marcellus Wong, senior advisor at PwC and a member of the Government’s Working Group on Long-Term Fiscal Planning, says, “Population ageing is an inevitable trend and all sectors of society must come together to find a solution for the future. Given our current fiscal reserves remain healthy, the Government should plan ahead to address the deep-rooted widening wealth gap and aging population issues, and strive for a balance when addressing the specific needs of the community, especially the sandwich class, as well as maintaining sustainable development for Hong Kong.”

PwC recommends the salaries tax bands be widened from HK$40,000 to HK$48,000. In alleviating the burden on the middle class, PwC propose again to extend the mortgage interest deduction period from 15 years to 20 years and raise the maximum interest deductible from HK$100,000 to HK$150,000 per annum. The annual child allowance and additional child allowance (in the year of birth) for each of the child should be increased from HK$70,000 to HK$100,000.

By end of March 2014, the fiscal reserves would reach HK$756.2 billion, equivalent to 21 months of total Government expenditure.