On February 28 2018, Hong Kong Financial Secretary Paul M P Chan delivered his speech to the Legislative Council which confirmed a record surplus of HK$138 billion ($17.6 billion). Forty percent of the surplus would be spent on relief measures while the remaining would be spent on improving public services and the future.
The three main objectives of the budget are:
- Diversified economy – to create wealth for Hong Kong to better support and provide a broader range of industries for the future development of Hong Kong;
- Investing in the future – to address the needs of the aging population and ensure that Hong Kong's living environment is improved environmentally and technologically, making it an ideal location in which to live and work; and
- Caring and sharing – to better support children and young people with care, protection and opportunities; relieve the financial burden of middle-class families; and support the underprivileged and vulnerable in Hong Kong.
The Hong Kong government's higher than expected fiscal surplus arose from the unexpected increases in revenue from land sales and stamp duty. It is expected that Hong Kong's fiscal reserves will reach more than HK$1 trillion by March 31 2018.
Various measures introduced
The financial secretary has proposed various measures to boost several areas/industries:
- Enhancing the innovation and technology (I&T) industry: given the global economic landscape, a large amount of the budget will be spent on developing the I&T industry, namely in four areas: biotechnology, artificial intelligence (AI), smart city development and financial technology (fintech);
- Financial services industry: a pilot bond grant scheme will be introduced to attract local, mainland and overseas enterprises to issue bonds in Hong Kong. These measures will help develop Hong Kong's bond market, including green bonds to help provide financing for green projects. Other measures would also be introduced to support the Hong Kong bond market, as well as the insurance and asset management sectors. However, limited details have been provided on these proposed measures;
- Small and medium-sized enterprises (SMEs): financial assistance was also pledged to help SMEs seize opportunities from the 'Belt & Road' and Great Bay Area initiatives. For other businesses, no substantial tax incentives or reductions were announced; and
- Others: financial support and investment were also pledged for the pillar industries of tourism and transportation and logistics, as well as the construction, professional services and creative industries (such as investing HK$1 billion into the new CreateSmart Initiative (CSI) which aims to nurture the young generation and help start-ups). Hong Kong's employment shortages were also addressed by suggesting that foreign workers could be imported.
Key tax changes arising from the budget
The introduction of the regional headquarters (RHQ) tax regime in Hong Kong and the corporate treasury centre (CTC) tax incentive enhances Hong Kong's competitive position as a leading regional business and financial hub. This is in line with the Hong Kong government's key policy initiatives to boost Hong Kong's competitiveness as an RHQ location in the Asia Pacific region. The RHQ tax incentive would increase foreign investment into Hong Kong as well as increase jobs.
The Hong Kong profits tax rate for 2018/19 remained unchanged and so did the allowances. A one-off reduction of 75% for both Hong Kong profits tax and salaries tax payable for 2017/18 has been proposed subject to a ceiling of HK$30,000 each. With the introduction of the two-tiered profits tax regime, it will reduce the existing tax rate for corporations (16.5%) and unincorporated businesses (15%) by 50% for the first HK$2 million of assessable profits, where applicable.
A number of measures were also aimed at reducing the tax burden on individuals by widening the progressive rate bands from HK$40,000 to HK$50,000, thus increasing the tax bands from four to five.
Other key policy initiatives included:
- Extending the tax concession for qualified debt instruments to include those listed on the Stock Exchange of Hong Kong and with maturity periods of any duration;
- Extending the tax concession to specified treasury services provided by qualifying CTCs to their onshore associated corporations;
- Commencing the operation of the regime for open-ended fund companies and related tax exemption later this year;
- Examining the feasibility of introducing a limited partnership regime for private equity funds;
- Continuing to participate in the negotiation of more comprehensive double taxation agreements (CDTAs); and
- Introducing enhanced deductions for I&T expenditure, which includes a 300% tax deduction for the first HK$2 million of qualifying R&D expenditure and a 200% deduction for the remainder.
Overall, the Hong Kong budget is relatively safe and conservative and more or less follows previous years' budgets. However, the budget did not really address some core issues such as housing affordability and pollution (despite some green initiatives being introduced).
|Lewis Lu||Curtis Ng|
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