HK Gov’t Must Review Tax System to Maintain Competitiveness, Says KPMG

Hong Kong should review its tax system in order to maintain its competitiveness, according to KPMG.

KPMG recently conducted a survey of 212 senior Hong Kong-based business executives on their expectations of the upcoming Budget. A majority of respondents (54 percent) believe strengthening Hong Kong’s position as an international business center is a key priority for the upcoming Budget.

Almost half (45 percent) of the survey respondents think that Hong Kong’s tax system will lose its competitiveness to other jurisdictions in the future.

In terms of further strengthening Hong Kong’s role as an international financial center, the government could offer tax incentives to attract regional headquarters and funds to Hong Kong, complementing the preferential tax policies for corporate treasury centers and offshore funds introduced in past years.

KPMG suggests to lower the profits tax rate to 8.25 percent for certain income derived by qualifying regional headquarters and extend the current tax exemption to onshore funds.

“In terms of public finance, Hong Kong should study how the principle of a balanced budget should be applied,” says Ayesha Lau, Partner and Head of Hong Kong Tax, KPMG.

“Tax policy is an effective tool for the government to use in support of social and economic goals. We suggest that the government adopt competitiveness as the new value proposition for Hong Kong’s tax system and set up a Tax Policy Unit with full-time specialist resources for the research, recommendation and monitoring of tax policies.”

Budget surplus of over HK$77 billion

KPMG forecasts that the Hong Kong SAR Government will record a consolidated budget surplus of HK$77 billion for the fiscal year 2016/17, exceeding the government’s initial estimate of HK$11.4 billion. This is due to higher than expected revenues from land sales and stamp duties.

“With an estimated fiscal reserve totaling HK$920 billion, we believe the government is able to do more to enhance Hong Kong’s competitiveness in the longer term,” says Lau.

“This includes tax incentives to encourage the private sector’s investment in research and development and to attract multinationals to set up their regional or global headquarters in Hong Kong.”

Private sector R&D investment

Another key area of focus for the upcoming budget is Research and Development (R&D).

Lau says: “R&D expenses as a share of GDP in Hong Kong is much lower than other jurisdictions in Asia. It is also driven mainly by the government and related organizations rather than from the private sector. We believe an advanced and updated tax policy could encourage private sector R&D investment in Hong Kong.”

KPMG recommends a super deduction on qualifying R&D expenses and an extension of the scope of deductible items related to R&D capital expenditure.

In January 2017, the Hong Kong SAR Government signed a landmark deal with Shenzhen to develop a technology park at the Lok Ma Chau loop.

An accelerated depreciation allowance on capital expenditure incurred on buildings and structures should be studied as a means to attract the right investors in the hub.