KPMG expects Hong Kong Government deficit narrowing to HKD37 billion, ahead of estimates

KPMG recommends distribution of HKD5,000 electronic consumption vouchers with certain portions designated to targeted sectors to stimulate economy

KPMG recommends distribution of HKD5,000 electronic consumption vouchers with certain...

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14 February 2022, Hong Kong – KPMG forecasts the Hong Kong SAR government will record a HKD37 billion consolidated budget deficit for fiscal year 2021/22, beating the previous estimate of a HKD102 billion deficit, driven by better-than-expected revenue from land-related transactions and higher stamp duty revenue. KPMG estimates the city’s fiscal reserve to stand at around HKD891 billion by the end of March 2022. 

John Timpany

John Timpany, Partner, Head of Tax in Hong Kong, KPMG China, says:

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Despite recording a deficit for the third consecutive year, the Hong Kong Government’s fiscal position remains healthy. With our strong reserves position, we are well placed to navigate the challenges ahead. While the upcoming fiscal position could depend on the economic recovery in the region and worldwide, Hong Kong’s economy continues to show resilience despite the ongoing pandemic. We should leverage Hong Kong’s strategic position as an international financial centre to attract foreign investment and enhance our competitiveness.

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Amid the ongoing impact of COVID-19, KPMG expects Hong Kong’s fiscal reserves to remain healthy. At the same time, the government could utilise the fiscal reserves to assist local people and enterprises that have been hit hard by the pandemic.

KPMG expects the government to roll out immediate measures to assist local businesses that continue to be significantly impacted by the pandemic. In the short to medium term, the government should continue to stimulate the economy and prepare for a full recovery. In the long run, it must enhance the potential for sustainable economic growth and boost Hong Kong’s competitiveness while creating new industries and job opportunities. 

KPMG proposes the government launch another round of its Employment Support Scheme targeted for employees in industries that have not seen any business revival since the onset of the pandemic and consider introducing a “Negative tax rate” by providing a one-off subsidy for qualified companies who suffered a tax loss of up to HKD600,000 for the year of assessment 2021/22. The government should also consider deferring tax payment for individuals and waiving rates for the four quarters of 2022/23, with a quarterly ceiling of HKD2,000.

Alice Leung

Alice Leung, Tax Partner, KPMG China, says:

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The government will need to gradually stimulate the economy and prepare for recovery. Apart from another round of its targeted Employment Support Scheme, we propose launching a second round of HKD5,000 electronic consumption vouchers for each Hong Kong permanent resident aged 18-69, with designated portions allocated to certain targeted sectors such as catering and entertainment. We believe that these targeted sectors could benefit more from the stimulus and achieve the goal of stimulating the economy.

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In the short to medium term, KPMG recommends the government dedicate additional resources and funding for the public and private sectors to create more full-time jobs to reduce unemployment. It should also encourage corporations to provide job-related training to assist employees in affected industries with the aim of upskilling the labour force. Moreover, KPMG suggests the government provide an allowance on rental expenses on residential properties and allow a one-off tax losses to be carried backward in order to ease the burden of residents and businesses.

In the long run, the government should enhance Hong Kong’s competitiveness in the Asia-Pacific region by attracting more foreign investment and creating job opportunities for local workers. KPMG suggests the government introduce new incentives by reducing the normal tax rate on profits of regional headquarters in Hong Kong by half (to about 8.25%) to encourage more companies to set up their regional headquarters in the city. Moreover, with the evolving international tax landscape, Hong Kong should enhance our tax system to remain competitive.

Apart from businesses, the opportunities brought by the establishment of more family offices in the city should also be highlighted. KPMG recommends the government expand the current profits tax exemption regimes on funds to provide certainty of tax exemptions for qualified family offices. Also, necessary procedures could be streamlined to attract more offshore family offices to re-domicile to Hong Kong.

Stanley Ho

Stanley Ho, Tax Partner, KPMG China, concludes:

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The government could expand the tax treaty network to cover the jurisdiction of other principal trading partners and optimise our tax treaty network. As such, Hong Kong could attract more foreign investors to set up companies in the city and foster economic development. In the long term, we should also make good use of Greater Bay Area initiatives and launch policies that support and attract innovative and technology-related businesses to relocate or set up offices in the Northern Metropolis to seize the opportunities presented by the GBA.

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