PwC doubts Hong Kong government's HK$3.5 billion deficit

PWC estimates a rather very huge budget surplus.

PwC expects the HKSAR Government will record a HK$28.7 billion consolidated budget surplus in the fiscal year 2012/13 against a small deficit of HK$3.5 billion forecasted by the Government. In view of the global economic uncertainties, PwC urges the Government to grasp the opportunities brought by the National 12th Five-Year Plan as well as to sustain the competitiveness of Hong Kong.

Peter Yu, PwC Southern China and Hong Kong Tax Leader says, “The National 12th Five-Year Plan proposes lifting the share of the value added of the service sector in the Mainland's GDP by four percentage points in five years, equivalent to Hong Kong's GDP in one year. This will provide development opportunity of massive value for Hong Kong, as a service-oriented economy. Given the pilot financial zones in Qianhai & Hengqin are already in place, Hong Kong should embrace its four pillar industries - finance, logistics and trade, tourism, and professional services, as its economic growth engines to leverage on the emerging opportunities.”

PwC expects the total revenue of profits tax and salaries tax will be around HK$165.9 billion. With the implementation of special stamp duty measures curbing the sky-high property prices, we expect the revenue from stamp duties will drop from HK$44.4 billion in the fiscal year 2011/12 to HK$37.8 billion in 2012/13. Revenue from land sale, however, will be boosted by the land sale plan released by the Government in late December 2012, from which we expect an additional HK$20 billion will be recorded in the first quarter in 2013. Overall, PwC expects a consolidated budget surplus of HK$28.7 billion.

KK So, PwC Hong Kong Tax Partner says, “The Government should undertake a review of its tax system to ensure that it will cope with the needs of the future and stay competitive. It should introduce measures to assist with the development of the strategic industries. The Government should also provide more clarity and certainty on certain areas of the tax law, such as the taxation of fund management activities in Hong Kong, and continue the negotiation with more territories on new agreements to avoid double taxation.”
To promote Hong Kong’s bond market, PwC proposes profits tax exemption for all short, medium and long-terms bonds.

To strengthen Hong Kong as a global fund management centre and the platform for private investment into the Mainland, the current profits tax exemption for foreign funds should be expanded to Hong Kong resident funds and private equity funds.

For companies with taxable profits below HK$500,000, profits tax reduced from 16.5% to 10%.

Jeremy Choi, PwC Hong Kong Tax Partner says, “Environmental protection has been weighing up in Hong Kong’s competitiveness to attract foreign investments. Data from the Environmental Protection Department shows a significant number of high-polluting vehicles are still in service. Given diesel commercial vehicles are the main source of roadside pollution, the government should re-visit its measures to encourage owners to deploy environmental friendly vehicles. Air quality is vital to retain talents to work in Hong Kong, this helps contribute to Hong Kong’s overall competitiveness.”

PwC recommends the salaries tax bands be widened from HK$40,000 to HK$ 45,000. In alleviating the burden on the middle class, PwC suggests the Government to consider extending 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. In addition, PwC recommends a tax deduction for personal health insurance contributions and medical expenses up to a maximum amount of HK$20,000 per annum.

By end of March 2013, the fiscal reserves would reach HK$697.8 billion, equivalent to 21 months of total Government expenditure. With healthy reserves in hand, the Government should continue to pursue a prudent approach when preparing the new Budget. It should strive for a balance when addressing the specific needs of the community, as well as maintaining sustainable development for Hong Kong. Amidst the global economic uncertainties, the Government should be well equipped to weather future economic storms with its fiscal reserves.