From HK$10,000 in spending vouchers for residents, to investment in training and infrastructure, Hong Kong’s 2022-23 Budget combines measures to help the city weather the pandemic and to remain competitive in the long term.
Announced on 23 February, this year’s budget was delivered against a backdrop of significant challenges, as the city struggles with its fifth wave of COVID-19 infections, and the ongoing drag on the global economy caused by the pandemic and geopolitical tensions. “I think the Financial Secretary had a really tough job in setting this year’s budget because Hong Kong is facing one of the most testing times in its history,” Jo-An Yee FCPA, Tax Partner at EY Tax Services Limited and a member of the Institute’s Taxation Faculty Executive Committee (TFEC), says.
Significant funds were allocated for anti-pandemic measures, with a total of HK$67.5 billion set aside for support, ranging from the construction of anti-epidemic facilities to strengthening the testing work of the Food and Health Bureau.
Yee praised Financial Secretary Paul Chan’s focus on fighting the pandemic, as well as his efforts to safeguard Hong Kong’s economy and people’s livelihoods from its impact. She points out that in 2021, when COVID-19 was largely under control locally, Hong Kong’s gross domestic product (GDP) growth had recovered to 6.4 percent in 2021, following a 6.5 percent contraction in 2020. “The situation this year is very different, and at EY, we agree with the Financial Secretary that controlling the epidemic is key,” she says.
Michael Chan FCPA, Chairman of the Institute’s Professional Accountants in Business Committee, described the budget as being very well-balanced. “It addresses both immediate needs and medium- to long-term ones, and the needs of individuals and those of companies. There are a lot of measures to reinvigorate the economy after the pandemic, as well as measures that pave the way for Hong Kong’s future competitiveness,” he says.
Supporting the community
The budget contained a raft of measures to help support individuals through the current situation, including a second round of electronic consumption vouchers for permanent residents and new arrivals, valued at HK$10,000. “It is very generous, and it is double the amount they gave last year. The amount is appropriate, given the pandemic situation,” says Eugene Yeung CPA, Partner, Tax, at KPMG China and Convenor of the Institute’s Budget Proposals 2022/23 Sub-committee.
Yee points out that alongside the consumption vouchers, cash subsidies were previously announced for businesses such as restaurants and beauty parlours, while a moratorium will be introduced to stop landlords from terminating tenancy agreements for businesses that fall behind with their rent. “These measures will help these businesses survive and hopefully preserve jobs for people on low incomes,” she says.
Yee adds that the introduction of a progressive rating system for domestic properties from 2024-25, will see more affluent members of society with higher value properties pay more. Under the new system, the current flat rate of 5 percent will be replaced with a progressive rate of 5 percent, 8 percent or 12 percent depending on the annual rateable value of the property.
Meanwhile, Yeung welcomed the announcement of the HK$100,000 tax deduction on domestic rental expenses, for which the Institute has been calling for a number of years, as it puts renters in the same position as homeowners, who can claim deductions for home loan interest. “It is not a big loss of revenue for the government, but it will be very helpful to people who rent their home,” he says. Despite the measures announced, Yeung still thinks low-income households may require more support, as this group is most likely to be struggling from the combination of higher expenses as a result of the pandemic and lost income. “There are tax relief and rates concessions, but people on low incomes may not benefit as they usually don’t pay tax,” he points out.
Sarah Chan FCPA, Partner, Tax and Business Advisory Services, Deloitte China, and Chairman of the TFEC, agrees: “With the fifth wave of pandemic lasting for longer than expected, we are seeing businesses closing and people losing their jobs. I think the government could have introduced more concrete measures to help those who are most in need.”
“These measures will help these businesses survive and hopefully preserve jobs for people on low incomes.”
Boosting the economy
Individuals were not the only ones to receive support in the budget, with the Financial Secretary also unveiling measures to strengthen the core pillars of Hong Kong’s economy.
For financial services, he announced plans to offer tax concessions to family offices based in Hong Kong. Meanwhile, the tourism sector is set to receive HK$1.26 billion in support, and the logistics industry looks set to benefit from the continued development of sea-air cargo transhipment between the Hong Kong International Airport and the rest of the Greater Bay Area. Additional funding for agriculture and fisheries, trade and the arts sectors were also announced.
Yee welcomed the news on family offices, pointing out that it would help to increase the attractiveness of Hong Kong as a financial centre, at a time when it faces growing competition from Singapore, and countries in Asia-Pacific such as Malaysia and Indonesia. “These new tax concessions will help to enhance Hong Kong’s relevance in the asset and wealth management space,” she says.
Sarah Chan agrees, adding: “The government has started the consultation on the family office concession regime. I hope the draft rules can be finalized and discussed in the Legislative Council (LegCo) very soon.”
Significant support for the innovation and technology sector was also welcomed, including a further HK$10 billion to support the development of health technology and funding for the Hong Kong Growth Portfolio under the Future Fund to set up a HK$5 billion Strategic Tech Fund to invest in technology enterprises and projects with strategic value to Hong Kong.
But with so many areas receiving funding, Yeung expressed concern that support was being spread too widely. “It may have been better to offer more concentrated support in fewer areas. I think it would be a good idea to reallocate some of the resources to supporting the younger generation’s career growth, such as talent development, graduate employment and supporting start-ups,” he says. Michael Chan also points out that while the support was welcome, the government must ensure the various funding schemes are easy for companies to access, particularly those targeted at small- and medium-sized enterprises (SMEs). He adds that having a single portal through which SMEs could find out which schemes they were eligible for and make applications to them would help to remove some of the hurdles smaller firms faced when accessing government funding. He gives the example of the Hong Kong Productivity Council’s portal through which SMEs can see what schemes they are eligible for at various stages based on a set of criteria.
Aligning with international tax laws
For many accountants, one of the most eye-catching measures included in the budget was the announcement that the government plans to start the legislative process to introduce a top-up tax in Hong Kong, in line with the Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two’s global minimum tax initiative proposed by Organization for Economic Co-operation and Development (OECD). “This topic has been a matter of concern for many large corporations and tax practitioners for years,” says Sarah Chan. “The proposed introduction of the top-up tax is not just to align us with the international tax environment, but it also provides the Hong Kong government with a source of tax revenue.”
The government plans to put the relevant legislation before the LegCo later this year, with a view to introducing the domestic minimum top-up tax in the 2024-25 financial year. Yee says: “For them to clearly articulate this publicly shows the government’s concern about what is happening internationally around tax reforms and the OECD’s measures on a global minimum tax rate. In order for them not to lose any tax revenue, they will implement a domestic minimum tax rate of 15 percent in Hong Kong.”
Sarah Chan adds that the government still needs to come up with a detailed plan on how the top-up tax will be imposed and how information will be exchanged with other tax jurisdictions in an efficient and timely way.
“The proposed introduction of the top-up tax is not just to align us with the international tax environment, but it also provides the Hong Kong government with a source of tax revenue.”
Aside from measures to help individuals and businesses in the short term, the budget also contained announcements to position the city for the medium and long term. It showed Hong Kong’s fiscal position has improved in the past 12 months, with the Financial Secretary estimating the city will record a budget surplus of HK$18.9 billion in 2021-22, ending two years of deficits.
It looks set to return to a deficit of HK$56.3 billion in 2022-23 due to the cost of one-off relief and anti-pandemic measures, before returning to a surplus in the following three years, enabling fiscal reserves to exceed more than HK$1 trillion.
Despite the forecast deficit for the coming year, Michael Chan says the budget shows the government is continuing with its adoption of an expansionary fiscal policy. “The initiatives to relieve people’s hardships, and enhance industry, economic resilience and infrastructure, all point towards an expansionary fiscal policy,” he says.
Michael Chan points out that the government is also keen to establish a new city centre away from Hong Kong Island to the north to help new and emerging industries tap into the opportunities presented by the Greater Bay Area, with HK$100 billion set aside to fund the land, housing and transport infrastructure needed for the Northern Metropolis on the border with Mainland China.
Significant funding is also being allocated to nurturing future talent across healthcare, financial services, construction, education and the arts. Meanwhile, Yeung highlighted Paul Chan’s remarks, where he pointed out that while the financial services industry contributes 23 percent of Hong Kong’s GDP, only 7 percent of residents are employed in this sector. This, he says, may be a signal that the government is looking to further diversify the economy going forward.
While the budget was widely welcomed by accountants, there were still a number of areas in which they thought measures were missing. One of the key features they would like to have seen included was a clear strategy to expand Hong Kong’s tax base.
Yeung points out that the Financial Secretary’s revision of his previous forecast of a HK$101.6 billion deficit for the 2021-22 financial year to a surplus, was in part due to there being higher land sales during the year than previously anticipated, reflecting the issues associated with Hong Kong’s narrow tax base. “For a couple of years, the Institute has proposed that the government should revisit its revenue model and find ways to expand Hong Kong’s tax base. Right now, it is too dependent on direct taxation and land sales,” he says.
Yeung adds that although he does not think new taxes should be introduced in the coming tax year while the economy is still being impacted by COVID-19, the government should start doing research and consult on ways in which to broaden the tax base.
Yeung would also like to see the Inland Revenue Ordinance modernized. “Hong Kong’s tax laws were first written in the 1940s. We need to catch up and align with international tax rules and reforms,” he says. “We have things now, such as the Internet, e-commerce and telecoms, which did not exist when the tax laws were first written. We need to catch up and I hope the government can speed up its work in this area.”
Sarah Chan thinks the Financial Secretary missed an opportunity by not introducing a mechanism to allow companies to carry back losses. “The past two years have been very challenging for SMEs, and many of them have made a loss. If they were allowed to utilize the losses to offset them against profits generated in previous years and receive a tax refund, it would definitely relieve both their tax burden and cash flow.”
On the environmental front, the announcement that the government plans to issue green bonds totalling US$4.5 billion and retail green bonds worth at least HK$10 billion in the next financial year were welcomed.
Meanwhile, although a further HK$1.5 billion was allocated to the EV-charging at Home Subsidy Scheme, Michael Chan would like to have seen more support for green industries, such as recycling – particularly recycling electric vehicle batteries, given their popularity in recent years – to help Hong Kong meet its 2050 carbon neutrality target. “We need more subsidies to incentivize the replacement of public transport vehicles which are predominately aged and not environmentally friendly, and for exploring alternative fuel options, such as hydrogen. We need green taxes to incentivize good practices and resource conservation, as well as subsidies or tax deductions for companies deploying capital to make commercial and industrial buildings more environmentally friendly,” he says.
Yee would like to have seen incentives or tax relief measures to help establish Hong Kong as an intellectual property hub. “I think we have all of the right commercial and economic factors that make it an attractive place for intellectual property, such as lawyers, talent and a strong intellectual property framework,” she says.
Despite the current challenges, Yeung says the measures introduced in this year’s budget will meet Hong Kong’s current and future needs and aid the city in maintaining its relevance and status as an international financial centre. “The budget covers a lot of areas and includes short-term measures and relief, as well as a vision for the future and shows the government’s willingness to plan ahead,” he says.
Measures in this year’s budget include HK$10,000 in consumption vouchers to all Hong Kong residents; cash subsidies for small businesses; tax concessions to family offices based in Hong Kong; and the introduction of a top-up tax in Hong Kong, in line with the Base Erosion and Profit Shifting 2.0 Pillar Two’s global minimum tax initiative proposed by Organization for Economic Co-operation and Development.