Hong Kong SAR Budget 2012/2013
Deloitte's commentary & tax measures summary
The Financial Secretary for the Hong Kong Special Administrative Region (HKSAR), Mr John Tsang, delivered his fourth HKSAR Budget to the Legislative Council on Wednesday 1 February 2012. The Deloitte Hong Kong Budget Team, led by Yvonne Law, Tax Partner and National Chief Knowledge Officer, has prepared a summary of the Budget highlights and a commentary on the new Budget measures.
Summary of allowances, deductions & tax rate
Robust and comprehensive, long-term measures needed
The Budget, which is Mr. John Tsang's fifth, may not be considered by some as attractive as expected given the lack of a cash handout or sufficient long-term measures to strengthen Hong Kong’s competitiveness against neighboring economic rivals. Nevertheless, the Budget is comprehensive and offers wide-ranging and solid measures that should largely be helpful to stabilize the economy, alleviate the financial burden of taxpayers and assist the small and medium enterprises (SMEs) that form the backbone of Hong Kong’s economy to sail through any global economic turmoil in the forthcoming year.
The Budget was prepared against the backdrop of the sovereign debt crisis in Europe and a weak U.S. economy still facing the prospect of a double dip recession. Hong Kong as a small open economy is unfortunately not immune to these factors. The drop in demand for imported goods from these regions (both being Hong Kong’s major trading partners) led to a severe decline in Hong Kong’s export trade. Such a slowdown in export performance hindered economic growth, which, as revised, stands at 5% in real terms for 2011 as a whole and is expected to drop to 1% to 3% for 2012.
In this regard, the economic outlook of Hong Kong for the upcoming fiscal year is rather uncertain and volatile. It is therefore not surprising to have a robust budget for fiscal year 2012/13 proposed by the Government. In fact, there is a genuine need to adopt a prudent fiscal budget and conserve Hong Kong’s current financial strength in terms of its substantial existing fiscal reserve for any adverse impact that could result from an expansion of Europe’s debt crisis or worsening external economic situations in general.
We highlight the Budget’s key proposals to prepare against any such possible spillover effects, as well as measures to support Hong Kong’s SMEs and middle class. An appendix summarizing proposed tax changes is also provided. All measures will apply for fiscal year 2012/13, which begins 1 April 2012, unless otherwise noted. The Budget is expected to be debated and voted upon in the next few months.
Initiatives for SMEs
Profits tax rebate
In response to the general public's call for tax relief, a 75% profits tax rebate, capped at HK$12,000, has been proposed for the year of assessment 2011/2012 final tax payable. While Deloitte welcomes the tax rebate, we also recommend the Government provide tax incentives targeting selected industries to consolidate Hong Kong's competitive edge as the financial, investment and commercial hub for the Asia Pacific region.
Hong Kong's profits tax rate has remained stagnant in the past years. Deloitte believes that the Government can afford to lower the corporate profits tax rate from 16.5% to 16% given its current substantial fiscal reserves and added benefits that exceed the costs of lowering the rate. Such a measure would not only enhance Hong Kong's competitiveness over neighboring regions such as Taiwan and Singapore in terms of attracting foreign investments, but also would alleviate the tax burden of SMEs.
SME financing guarantee scheme and enhanced export credit insurance measures
Employing more than 1.2 million, SMEs have always been a major contributor to the success of Hong Kong. The Financial Secretary has proposed a series of supportive measures to ease the financial pressure SMEs face under the fluctuating economic environment. In particular, the Government will enhance the SME Financing Guarantee Scheme by raising the maximum loan guarantee ratio from 70% to 80% and reducing guarantee fees.
In addition, the Hong Kong Export Credit Insurance Corporation will be incorporating new terms to its insurance policy, which will include special concessions and premium discounts for SME policyholders. While Deloitte appreciates the Government's effort in facilitating the development of SMEs, we would be pleased if the Government could also introduce such tax initiatives as allowing a 150% tax deduction on rental expenses for office space usage and providing double deduction on salaries paid to employees with disabilities (relieving the tax burden of SMEs and encouraging them to employ more disabled persons).
Apart from the above, the Government has laid out the following incentives in an attempt to promote business activities in Hong Kong:
- Abolition of capital duty levied on local companies;
- Waiver of business registration fees for 2012/13; and
- Reduction of the import and export declaration charges by half.
These suggestions are generally in line with the public's expectation, and Deloitte views these as effective incentives to fuel the development of SMEs.
The Financial Secretary stressed in the Budget the importance of employment in stabilizing the economy and safeguarding people's livelihood. Through assigning funds to the Four Pillar Industries1 and the Six Industries2 , the Government aims to stimulate employment for each sector. Deloitte applauds the Government's care for SMEs and the labor market.
1 The Four Pillar Industries include trading and logistics, financial services, business and professional services, and tourism.
2 The Six Industries comprise cultural and creative industries, medical services, education services, innovation and technology, environmental industries and testing and certification services.
Caring for the middle class
The Financial Secretary introduced a number of tax relief measures to ease the pressure on the middle class from the economic downturn and inflation. Exceeding the general public’s expectations, a salaries tax and tax under personal assessment rebate of up to HK$12,000 for the year of assessment 2011/12 final tax payable was proposed. In addition, the maximum entitlement period for the tax deduction on home loan interest would be lengthened from 10 to 15 years of assessment, with the maximum annual deduction remaining unchanged at HK$100,000
An increase to the following allowances and deductions, ranging from 5% to 21%, also was proposed:
- Basic, single parent and married person’s allowances;
- Dependent parent and grandparent allowances;
- Child allowance and additional one-off child allowance in the year of birth;
- Dependent brother/sister allowances; and
- Disabled dependent allowance.
- Deduction ceiling for elderly residential care expenses; and
- Maximum annual tax deduction for mandatory contributions to Mandatory Provident Fund (MPF) scheme.
While the above reliefs are expected to be broadly welcomed by the middle class, Deloitte suggests that the Government also allow such tax deductions as a premium paid for self-participating medical insurance schemes, actual medical expenses, and the principal amount repaid for home mortgage loans. Although the Government has extended the entitlement period of the home loan interest deduction to 15 years of assessment, Deloitte favors an extension to 20 years to lessen taxpayers’ high housing cost burdens.
Additionally, more employees are encountering double taxation issues on employment income due to increasing cross-border activity. We suggest the Government allow a full income exemption from salaries tax in respect of income reported and taxed in Mainland China.
Other one-time reliefs
The Government also put forward a basket of one-time “sweeteners”, including:
- Extending the rates waiver for 2012/13, subject to a cap of HK$2,500 per quarter for each rateable property;
- Providing electricity subsidies in the amount of HK$1,800 to each residential electricity account in the coming fiscal year;
- Paying two months base rent for public housing tenants and two-thirds of rent for two months for the non-elderly tenants of the Hong Kong Housing Society's Group B estates;
- Providing an extra allowance to Comprehensive Social Security Assistance recipients and Old Age Allowance and Disability Allowance recipients that equals one month of the standard rate payments and allowances; and
- Allocating an additional HK$100 million for short-term food assistance services to ease the low income group's financial burden from surging commodities prices, etc.
Investing in the future
To maintain Hong Kong's competitiveness and economic growth, the Government has proposed to combat inflation and safeguard the livelihood of the mass public. Notable measures include the promotion of the retail bond market and enhancement of healthcare facilities.
Promoting the retail bond market
To foster the development of the retail bond market, the Government will issue another tranche of iBonds, capped at HK$10 billion. The new series of iBonds will retain the same payout options as the previous year's, with a maturity of three years and interest payable semi-annually at a rate linked to the inflation of the last six-month period. While investors were not as responsive to iBonds as anticipated at the first launch in July 2011, they should be well-received by investors in the coming year due to better-than-expected returns (despite pressures from the European debt crisis) and the low expected yield of conventional fixed-rate investment instruments. The Government is treating the iBonds as a special measure taking into account the current market situation. In the long run, an expansion of other kinds of bonds, such as conventional fix-rate bonds and Islamic bonds, will be beneficial for developing a mature bond market in Hong Kong. Deloitte applauds the Government's attempt to ease the public's financial burden under soaring inflation rates and to encourage the development of the retail bond market.
Enhancing healthcare facilities
The burden of elderly and public healthcare services is rapidly increasing along with the aging population. The Government has taken forward projects of various scales at the district level, including the redevelopment of Queen Mary Hospital and Kwong Wah Hospital, as well as the expansion of Tseung Kwan O Hospital in the coming year, to address the population’s surging demand for medical services.
This year's budget is generally appreciated as a comprehensive one that offers wide-ranging and solid measures to stimulate the local economy and lessen the financial burden of SMEs, which contribute to a stable job market. There also are various relief measures to rightly address the imminent call for financial assistance to the middle class. In addition, there are important measures to improve education, medical and healthcare facilities, as well as social services (in particular, those delivered to the elderly).
While we are impressed by the robust budget, there is room for more long-term policies and measures to attract foreign investment and enhance the competitiveness of Hong Kong. We look forward to seeing the next Government formulate longer term policies and capitalize on Hong Kong's competitive edge to sustain its status as a world-class financial and services center.