Hong Kong government surplus to hit $70.1b in FY2016/17, says PwC

Total revenue from profits tax and salaries tax will reach $216.7b.

PwC expects the HKSAR Government to record a HK$70.1 billion consolidated budget surplus in the fiscal year 2016/17, based on projected fiscal revenue of HK$539.7 billion and expenditure of HK$469.6 billion, which is higher than the HK$11.4 billion previously forecast by the Government.

PwC believes that the higher than expected revenues from land sales, profits tax as well as stamp duty, and the lower than budgeted expenditure are the main contributors to this substantial surplus. PwC expects the fiscal reserves will amount to HK$913 billion by the end of March 2017, equivalent to 23 months of total Government expenditure.

PwC Hong Kong Tax Partner KK So said, “PwC predicts the total revenue from profits tax and salaries tax will reach HK$216.7 billion, HK$13.3 billion more than the government’s previous forecast. The total revenue from stamp duty is expected to amount to HK$54.5 billion, slightly higher than the government's previous forecast of HK$50 billion.

Here's more from PwC:

Taking into consideration the land sales plan published by the Government as of the end of December, PwC expects the land sales revenue for 2016/17 will hit HK$88 billion, HK$20.9 billion more than the previously-forecast amount. On the other hand, PwC expects expenditure to amount to HK$4,869 billion, which is lower than the Government’s original estimate of HK$4,696 billion.”

PwC urges the Chief Executive to use the last policy address of his term to commence the implementation of the initiative announced in last year’s policy address to transform Hong Kong into a 'smart city'.

PwC suggests that appropriate initial measures should focus on developing a 'smart economy' through the adoption of financial and tax incentives, and providing capped investment credits for eligible technology startups in respect of their investment in high and new technologies, IT systems, infrastructure and equipment.

PwC also suggests expanding the scope of tax deductions for capital expenditure incurred for the purchase of IP rights as well as the adoption of appropriate tax incentives to encourage multi-national enterprises to establish their regional headquarters in Hong Kong.

In his policy address last year, the Chief Executive committed the Government to formulating measures to "develop Hong Kong into a centre for aerospace financing". PwC applauds this initiative and, in pursuance of it, calls on the Government once again to reform the aircraft leasing tax policies to make the Chief Executive’s vision a reality.

PwC Hong Kong Tax Partner Agnes Wong points out that "Hong Kong still falls behind Ireland and Singapore in attracting aircraft leasing companies to establish a presence in Hong Kong. PwC suggests a series of initiatives for the government’s immediate action, such as investigating the possibility of relaxing the restriction imposed on tax depreciation allowances by Section 39E of the Inland Revenue Ordinance to facilitate genuine leasing operations in Hong Kong to overseas aircraft operators and providing a more favourable tax rate for qualifying income of aircraft lessors. Aircraft leasing profits in Singapore attract a tax rate of between 5% and 10% while the applicable rate in Ireland is 12.5%, compared to a general rate of 16.5% in Hong Kong (although the effective tax rate is much higher where tax depreciation allowances are denied). We also urge the government to continue to expand Hong Kong’s network of double taxation agreements. Hong Kong has entered into double taxation agreements with only 35 jurisdictions, representing around half of the numbers in Ireland and Singapore."

To strengthen Hong Kong's position as an international financial hub, PwC recommends that existing tax exemptions should be extended to onshore funds and tax incentives for insurers should be further expanded. We also endorse the proposal put forward by the Financial Services Development Council to encourage Hong Kong's role as a global trading booking centre.

To maintain Hong Kong’s overall competitiveness in business, PwC proposes the introduction of a group tax loss relief policy. As a cushion to relieve SMEs, which continue to face financial challenges, PwC suggests profits tax be lowered from 16.5% to 10% for companies with an annual turnover less than HK$5 million.

Further, PwC recommends the salaries tax brackets be widened from HK$40,000 to HK$48,000 and the maximum tax allowance for expenditure on individual self-education be raised from HK$80,000 to HK$100,000.

To alleviate the burden on the middle class, PwC proposes again to extend the mortgage interest deduction period from 15 years to 20 years and raise the maximum interest deductible to HK$150,000 per annum.

Moreover, we urge the Government to allow a deduction of up to HK$150,000 a year for rental expenses to individuals who rent a private apartment and do not receive housing allowance from their employer.