The Budget extends funds to support education and innovation, but heavy reliance on land revenue remains unresolved

Hong Kong – In the Hong Kong Government’s 2017/18 Budget speech today, Financial Secretary – Paul Chan Mo-po, delivering his first budget as the city’s top finance official, proposed a number of relief measures amounting to over HK$30 billion, which are mainly tax cuts and funding for sectors including education, tourism and innovation and technology. Such measures are expected to support the diversified development of the society with the goal of maintaining the city’s competitiveness and sustaining its growth.

William Chan, tax partner at Grant Thornton Hong Kong, said, “The latest Budget offers billions in sweeteners in tax and short-term relief measures against the backdrop of a vast fiscal surplus. However, concrete measures have yet been put in place to solidify steps in transforming Hong Kong into a smart city and enhancing the overall livelihood of Hong Kong citizens. The budget still has not addressed the problem of high land prices and the Government’s reliance on land revenue as well as stamp duties.”

Fostering new industries and supporting traditional economic pillars

Faced with tough headwinds and stalled economic growth, many sectors were affected domestically. The tourism industry, making up 5% of GDP, has also suffered as a result. To ensure Hong Kong retains its position as a world-class international city, the Government has introduced three short-term measures to waive licence fees amounting to HK$137 million, benefitting travel agents, hotels and restaurants.

In light of the emergence of a “start-up” wave, and to promote creativity, technology knowledge, entrepreneurship, the Government proposes to set up a HK$2 billion Innovation and Technology Venture Fund (ITVF) to encourage private investment in local Innovation and Technology (I&T) start-ups.

Moreover, to continue its support in the development of the I&T industry and the bettering of livelihoods, the Government proposes a HK$500 million Innovation and Technology Fund for Better Living to finance I&T projects that improve people’s daily lives and benefit the elderly or the underprivileged. Mr. Chan said: “We welcome the various incentives offered to support the traditional and new businesses. However, we suggest the Government to look into additional measures such as reducing the profits tax rate from 16.5% to 10% and to allow for additional deduction for research and development expenditures for qualifying technology companies as well as additional incentives to encourage more start-ups to grow their business in the city. Given the shortage of talent and lack of quality jobs for young people, there is a pressing need to transform Hong Kong into a knowledge-based economy.”

In the Budget, the Financial Secretary points out that as a major effort to improve air quality and seeing an increasing acceptance of electric vehicles, the Government will continue to waive the First Registration Tax for electric commercial vehicles, motor cycles and motor tricycles.

Mr. Chan said, “To strengthen Hong Kong’s position as a leading first-tier international city and accelerate its transformation to a smart city, we recommend the Government to enhance the city’s competitiveness by utilizing technology to improve connectivity to the world, such as introducing city-wide wifi access.”

Short-term relief measures as expected but finally set up a unit to review tax regime

Having regard to the current economic situation and the complicated and uncertain global political and economic climate in the coming year, the Financial Secretary proposes to reduce tax and raise personal tax allowances, including basic allowance, siblings allowance and the allowance for the disabled in order to ease the public’s financial pressure.

With a narrow tax base, Hong Kong is very vulnerable to cyclical fluctuations. To address the problem of a narrow tax base and examine the international competitiveness of the city’s tax regime, the Financial Secretary proposes to set up a tax policy unit in the Financial Services and the Treasury Bureau to comprehensively examine the tax issues from a macro perspective.

Mr. Chan said, “The proposed relief measures are yet to tell whether it can successfully stimulate domestic consumption and stabilise the economy, given not every Hong Kong citizen would be benefited from the measures. But we are pleased to see the Government finally making the move to review the outdated tax regime. We cannot afford to stand still given our aging population and shrinking workforce. We urge the Government to speed up the reform of its tax system so as to establish a steady revenue source to support Hong Kong’s future growth and prosperity.  In view of the substantial fiscal reserves, the Government should make good use of the respite available in the public purse to better position itself to withstand future economic and social challenges.”

Hong Kong’s development into Asia’s full-fledged wealth management centre

In an effort to further develop Hong Kong into Asia’s asset and wealth management centre, the Financial Secretary also proposes in the Budget to extend the profits tax exemption to onshore privately-offered open-ended fund companies. The proposal will help attract more funds to domicile in Hong Kong and build up Hong Kong’s fund manufacturing capabilities.  

Mr. Chan said, “In the face of intense competition in an era of globalization, the Government should also step up its efforts to broaden economic base and move its industries up the value chain. Leveraging on its unique advantage as a key connector between China and the rest of the world, Hong Kong can also actively capitalise on the tremendous business opportunities arising from the ‘Belt and Road’ initiatives by introducing more enabling policies.”

Please read 2017-18 Budget headlines for more information.