Press releases

Time to re-think, review and revive Hong Kong's tax system for a better future

Published: 26 February 2020

Today, Financial Secretary Paul Chan Mo-po presented his fourth budget speech against the backdrop of a significant budget deficit for the first time in 15 years, as well as uncertainty over the city’s economic downturn due to the coronavirus outbreak. He introduced a raft of relief measures to support the economy, which has also been affected by China-US trade tensions and social unrest.

"One of the key challenges confronted by most economies is how to generate economic growth amid record-low interest rates. This is also true for Hong Kong. The HKSAR government should not be constrained by a 'fiscal straitjacket' in 2020. The urgency of fiscal expansion is also heightened by the knock-on effect of the coronavirus," says Deloitte China Chief Economist Sitao Xu.

"Mitigating losses in the retail and hospitality industries should top the policy agenda. Hong Kong could also regain some of its comparative advantages in financial services through more favorable tax policies. Unlike in previous crises, investors' confidence remains rock solid, as evidenced by stable HKD rates."

The government’s fiscal reserves are expected to be HK$1,133.1 billion by 31 March 2020, and the latest unemployment rate is 3.4 percent, the highest for more than three years. With this in mind, the Financial Secretary announced HK$120 billion of relief measures and funding in his speech, but will these one-off "sweeteners" be enough to revive the economy?

"It is time for the Government to re-think how it can best make use of its fiscal reserves, as well as to review and enhance the tax system to broaden the tax base and help revive Hong Kong economy as a regional financial center," says Deloitte China Tax Partner Sarah Chan.

Deloitte applauds the Government for its efforts to help the healthcare sector, such as the HK$1.5 billion scheme to boost mask production in Hong Kong to avoid shortages.

"We welcome efforts to bring manufacturing back to Hong Kong with a focus on sustainable, unique, high-end sectors including biopharmaceuticals, innovative technologies like AI, high-tech medical equipment, and development of new energy. The Government could also consider tax incentives to attract multinationals and local companies to set-up manufacturing bases in Hong Kong, which could be a long-term solution to unemployment," Chan adds.

The Financial Secretary also announced that to strengthen Hong Kong's competitiveness as an asset management center, concessions will be given on the tax treatment of carried interest – the share of profits given to PE partners – paid by funds operating in Hong Kong, provided certain conditions are fulfilled. Deloitte welcomes this measure and is happy to see the Government take a step to address the industry's concern about the tax treatment of carried interest, which has been a contentious issue in Hong Kong for several years.

Hong Kong has long been recognized for its simple and low tax regime, which has been one of the factors that attract foreign companies to invest in Hong Kong. In recent years, the government has rolled out several tax concessions to promote investment in the development of particular sectors. However, with new developments in the international tax arena, how can Hong Kong remain competitive?

"Although we welcome all the short-term measures presented by the Financial Secretary, with upcoming developments in the international tax arena, we still look forward to more long-term measures, in particular tax regime adjustments to improve Hong Kong's business environment and strengthen its competitiveness," says Deloitte China Tax Director Alfred Chan.

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