In Focus
ECONOMY | Staff Reporter, Hong Kong

What the big consulting firms expect in the 2021 budget speech?

COVID-19 measures and tax rationalization lead firms’ proposals for Hong Kong’s 2021 spending plan.

Hong Kong ’s Financial Secretary Paul Chan is expected to outline the government’s plans in further ushering the city toward recovery as he delivers the 2021/2022 appropriations bill on 24 February.

Major accounting firms in Hong Kong have forecasted a 2020 budget deficit, ranging from $282b-$363b, but whilst predictions slightly differed, the firms have agreed granting fiscal stimulus and reforming Hong Kong’s tax system are the key in helping businesses.

COVID-19 relief measures

KPMG sees Hong Kong will record a S282b budget deficit for FY2020-2021, the largest in 20 years, largely due to the government’s measures to mitigate impact of the crisis brought by the coronavirus pandemic. The deficit is expected to result in fiscal reserves of around $878b in March 2021.

“Although the government is facing a significant deficit this year, Hong Kong’s public finances remain healthy and therefore a fiscal deficit is acceptable for a short period of time,” said Alice Leung, partner for corporate tax advisory at KPMG China.

Leung proposed that electronic consumption vouchers, worth $10,000, be issued for general consumption, food, and entertainment of permanent residents.

KPMG also recommended extending allowances for rental expenses for residential properties and a $50,000 allowance for working parents with children, aged 16 or below, or those with disabled dependents.

EY likewise proposed a one-off relief package, worth $100b to support the people as well as businesses. The package includes $5,000 e-consumption vouchers, expected to bring about a 1.4% GDP growth.

EY has estimated the government will record a $363b fiscal deficit, higher than KPMG’s forecast. This is seen to reduce fiscal reserves to $797.3b by the end of March.

“The COVID-19 pandemic has plunged the global economy into a severe contraction. The Government has dedicated over HK$300 billion to support our people and businesses in this crisis and these relief measures have swollen the budget deficit,” said Agnes Chan, EY's managing partner for Hong Kong and Macau.

EY’s proposed relief measure also include some $77.5b in care and support packages and $22.5b for businesses.

Meanwhile, Agnes Wong, tax partner at PwC Hong Kong, outlined three key measures that will relieve financial burden. These covers granting a temporary loss carry-back for small and medium enterprises, more lenient approach on salaries and profits tax treatment, and a one-off allowance of rebate for taxpayers.

Budget deficit in 2020-2021 is estimated at $331b whilst fiscal reserves are expected at $829.2b in end-March, according to PwC Hong Kong.

Rationalize tax system

“PwC urges the Government to refine existing tax policies (R&D tax deduction) for encouraging Hong Kong businesses to expand into the bay area,” said Kenneth Wong, tax partner.

Moreover, PwC encouraged offering tax incentives to attract foreign firms to set up shop in Hong Kong. KPMG and EY had also asked the government to rationalize the tax system to ease burden doing business in the city.

John Timpany, KPMG's partner and head of tax for Hong Kong, said the government should consider cutting normal tax rate for profits derived by regional headquarters by 50%. He added the government should review the system to ensure it remains competitive as well as introduce new legislation to encourage foreign firms to re-domicile their headquarters in Hong Kong.

Also among KPMG’s proposal are short- to medium-term measures, such as allowing current year tax loss as a one-off set-off of the previous year’s taxable profits and refunding excessive tax already paid, providing a one-off subsidy for qualified companies that suffered a certain amount of tax loss, deferring tax filing and payments by three months, and waiving 50% of the provisional tax for 2021/22.

EY, for its part, proposed to amend the tax regime to attract more family offices, enhance incentives for more investments in qualifying green bonds, and exempt real estate investment trusts from property tax.

“The government should also ensure that the tax codes and incentives of Hong Kong are aligned with international tax developments, including the Base Erosion and Profit Shifting 2.0 (BEPS 2.0) initiative,” said Robin Choi, people advisory services partner at EY Tax Services Limited.

Workforce retraining

Further, the firms also raised that the Hong Kong government can provide more support to individuals hit by the coronavirus pandemic through retraining programmes to capacitate workers with new skill sets.

“Providing additional retraining will enable individuals to repurpose their skillsets in order to seek new opportunities in a post COVID-19 economy,” Leung of KPMG said.

PwC made similar recommendations, noting continuous learning and development is crucial today. Citing World Economic Forum’s “Future of Jobs Report 2020”, Paul Ho of EY Tax Services Limited said the disruption of automation and the pandemic will displace 85 million jobs by 2025.

“The staggering scale of the challenge means that the government needs to provide greater support for reskilling and upskilling of at-risk or displaced workers,” commented Ho, a partner for financial services tax and business advisory services at EY.

On this note, EY proposed a super tax deduction of 200% for employee training costs paid to accredited providers of training services.

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