While the rest of the world’s leaders are biting their nails over woes of debt, the  Hong Kong government looks like it will be able to relax, with consultancy firm PricewaterhouseCoopers predicting a HK$55 billion (over $7 billion) budget surplus  for fiscal year 2012/2013.

The advisory firm revised its budget forecast upwards following the more than expected revenue from profits tax and land sales. The new surplus estimate  is also based on the latest government financial result as at 31 December 2012 and historical information and models. The original prediction  made in January 2013 was for a budget surplus of HK$28.7 billion. 

PwC expects the total revenue of profits and salaries tax to be around HK$178 billion and land sales HK$75 billion. Despite the implementation of the special stamp duty measures curbing the sky-high property prices, the firm expects revenue from stamp duties will only drop slightly from HK$44.4 billion in the fiscal year 2011/2012 to HK$42 billion in FY2012/2013 due to the recent rebound of the stock market, the firm said in a statement released yesterday.

Wealth hub

“The National 12^th Five Year Plan reaffirms Hong Kong’s strategic direction to develop itself into an offshore Renminbi business centre and an international asset management hub. However, there remains a high degree of uncertainty in our current tax regime on the taxation of international asset management businesses. Our current tax regime is lagging far behind our competitors in the region,” said KK So, PwC Hong Kong tax partner.

To strengthen Hong Kong as an international fund management centre and platform for direct investment into the Mainland, PwC urges the government to expand the current profits tax exemption for foreign funds to Hong Kong resident funds and private equity funds. This would help attract international fund managers to establish their regional base in Hong Kong. 

SMEs

Jeremy Choi, PwC Hong Kong tax partner added: “Needless to say, many SMEs and local enterprises are going through a rough patch, with sky-high rentals and uncertainties in the global economy. It is more than ever that they need strong support from the government to tide them through such difficult times. Better facilitation in terms of financial support and policy implementation could be a timely relief for businesses.” 

For SMEs, PwC proposes that the profits tax rate should be reduced from 16.5 per cent to 10 per cent for taxable profits up to HK$500,000. To help the business sector, PwC also suggests a group tax loss relief and a revisit on the DIPN No.21 to clarify the “Source of Profits” for taxpayers. 

Wealth gap

“Given that fiscal reserves remain healthy, instead of repeating the measures of providing one-off giveaways to all Hong Kong residents, the Hong Kong government should leverage on more long term measures to address the deep-rooted widening wealth gap and aging population issues, and strive for a balance when addressing the specific needs of the community, especially the sandwich class, as well as maintaining sustainable development for Hong Kong,” said Marcellus Wong, PwC Hong Kong senior advisor. 

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

Preparing for challenges

By end of March 2013, Hong Kong’s fiscal reserves would reach HK$724.1billion, equivalent to 23 months of total Government expenditure. In view of the global economic uncertainties, it is expected the overall economic environment will be more challenging this coming year. With the possibility of a global relapse into recession, the government should be well equipped to weather future economic storms with its healthy reserves, PwC concluded.