A look at the Institute’s budget recommendations to the government ahead of the budget speech 2021-22 in late February
Like many other jurisdictions, the near-total disruption to lives due to the COVID-19 pandemic and the related restrictions on travel continue to have a significant impact on Hong Kong’s economy, resulting in the high unemployment rate and budget deficit we see today. Other challenges ranging from an outmoded tax system, geopolitical tensions, the need for faster digital transformation in light of the “new normal” under COVID-19, and the pressure on public finances, indicate an urgent need for the government to take additional actions to support the economy, and help the public and businesses to adapt to the new normal.
Taking into account the extra spending for the four rounds of Anti-epidemic Fund (AEF) spending, the Hong Kong Institute of CPAs estimates that the fiscal deficit for 2020/21 will reach HK$348 billion. Fiscal reserves are expected to stand at HK$812 billion, equivalent to around 12 months of government expenditure.
While many hold out hope for a vaccine to mitigate the virus, it is likely that 2021 will still face disruption. The government should therefore continue to support the economy and its preparations for the recovery.
The recent challenges should also not distract the government from the task of maintaining Hong Kong’s position as a global financial hub. In addition, a comprehensive review of public finance and tax policies will help secure Hong Kong’s future economic success.
To cater the above, the Institute submitted its Tax policy and budget proposals 2021-22 with 21 measures, under the title of “Preparing for the recovery,” to the government for their consideration in late December 2020. The proposals cover four main categories: (i) preparing for the recovery, (ii) help citizens and businesses to adapt to the new normal through more extensive digital transformation, (iii) enhance public finance and taxation, and (iv) environmental measures to improve the local environment and citizens’ well-being.
Preparing for the recovery
The unemployment rate reached 6.6 percent in the three months ended December 2020, the highest in nearly 16 years. Underemployment also reached 3.4 percent during the period, almost the highest in 17 years. In its four rounds of AEF measures there have only been two rounds of the Employment Support Scheme (ESS). The record high unemployment rate suggests that the effect of the ESS does not appear to be long lasting.
More should therefore be done to support employment and the economy, through creating jobs in both the public and private sectors. In view of the particularly high unemployment rate in the construction sector, the government should consider accelerating the scheduled infrastructure/construction projects to create more jobs. The government should also help recent graduates to enter the job market and ensure that the existing workforce is sufficiently skilled to benefit from the digital transformation taking place by funding relevant training.
Even with the financial support, in mid-November the government was projecting a decline in real gross domestic product (GDP) of 6.1 percent. This is the biggest decrease in GDP recorded by Hong Kong, lower than the 5.9 percent decrease after the Asian Financial Crisis in 1997. While the International Monetary Fund forecasts that the economy will return to growth in 2021, the recovery will be modest at 3.7 percent, Hong Kong will need help from the government in preparing for the recovery, supporting its population, and providing the training the working age population needs to benefit from the digital transformation taking place.
The Institute’s recommendations include five measures regarding preparing for recovery: 1) job creation in both the public and private sectors; 2) employment-related financial assistance; 3) career transition assistance; 4) targeted relief measures; and 5) maintaining Hong Kong as an international commercial centre.
The government should ensure that any future economic relief measures are targeted to those most affected as far as possible to maximize the benefits while minimizing the burden on public finances. Providing domestic consumption subsidies, instead of direct cash subsidies to business owners, to incentivize consumers to spend (similar to the “Triple Stimulus Voucher Programme” in Taiwan) is one of the targeted relief measures that the government could consider.
Adapting to the new normal through more extensive digital transformation
Being able to work remotely has proven to be critical to the survival of many businesses in 2020. Remote working and learning is an illustration on how important IT is for success in this Internet-enabled era. The pandemic has shown the world the importance of investing in technology, and the infrastructure needed to support it.
Hong Kong has world class Internet coverage – but there are blind spots, which need to be fixed to improve livability across the territory. Hong Kong’s first 5G subscription plan launched in 2020, but support is still needed to facilitate total coverage and increase usage of the technology. Development of Hong Kong’s 5G infrastructure is therefore critical to securing the benefits of this new technology.
Supporting Hong Kong’s small- and medium-sized enterprises (SMEs) in particular is key to ensuring that the economy can adapt to the new normal. Some SMEs do not have the resources necessary to support their digital transformations and cybersecurity needs. To help SMEs, the government should consider developing a public cloud infrastructure, upgrading the existing e-government services, and educating the public and SMEs about cybersecurity matters.
It is important for Hong Kong’s future that everyone has access to technology. Access to the Internet has been vital for students this past year to continue learning while schools have been closed. The government should support needy families by subsidizing their Internet subscription plans.
The Institute proposes three measures for adapting to the new normal through more extensive digital transformation:
- facilitating digital transformation;
- enhancing cybersecurity; and
- subsidies for needy students.
Public finance and taxation
The record government deficit predicted for 2020/21 is a consequence of its AEF spending supporting the economy as well as the lower revenue estimates due to the downturn in the economy. While necessary, it is important that the government considers how it pays for the supporting measures.
The COVID-19 pandemic has revealed the weaknesses of the existing public finance model amid the economic turmoil, demonstrating the problems Hong Kong faces due to its narrow tax base and heavy reliance on three taxes (profits tax, salaries tax and stamp duty) and land sales, which are highly sensitive to the economic cycle.
The Institute has been advocating the importance of conducting a holistic review of the Hong Kong tax system for the past several years. A review of the public finance revenue model has become even more pressing now in order to address the longer-term public finance challenges and avoid potential structural deficit. Therefore, the government should consider new revenue sources including introducing new types of broad-based taxes when the economy is ready.
We also saw progress in 2020, albeit slowed by the pandemic, towards agreement in international taxation that is likely to require adjustments to the Hong Kong tax system. The Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting 2.0 initiative, which is expected to be agreed by the middle of 2021, proposes allocating taxing rights for cross-border activities based on revised nexus and profit allocation rules and giving the parent and source jurisdictions a right to tax untaxed/undertaxed income where an entity’s income is taxed at an effective rate below a certain minimum rate (known as the Global Anti-Base Erosion rules, GloBE). This will likely require adjustments to the Hong Kong tax system. As a low tax jurisdiction, Hong Kong must ensure that it collects the “top-up tax” levied under these rules. Otherwise, other jurisdictions will collect the top-up tax in this zero sum game. Implementing an “alternative minimum tax” under the domestic tax law that mirrors the tax base and rate of GloBE
has been advocated by stakeholders and tax professionals as a defensive measure.
Meanwhile, the government should ensure that the tax system is fit and proper for the future, and that Hong Kong can remain an attractive location for international businesses through reviewing of Hong Kong’s preferential
The Institute makes nine recommendations in how the government could review the public finance and taxation situation: 1) review of public finance revenue model; 2) undertake a comprehensive review of the Hong Kong tax system; 3) expedite treaty negotiations with major trading partners; 4) introduce unilateral tax credit for foreign taxes paid in non-treaty jurisdictions; 5) promote Hong Kong as an intellectual property hub; 6) enhance tax certainty; 7) rationalize personal allowances; 8) tax measures to support remote learning and working; and 9) other tax-related support measures.
In addition to the proposals on extension of tax payment deadlines and increase of the tax rebate ceiling, the Institute recommends the government to introduce tax loss carryback in the profits tax regime and share the burden with landlords who offer rental concessions by giving a 200 percent special deduction for landlords on rent forgiven during 2020/21 and 2021/22.
Concerns about environmental degradation and climate change have been given greater impetus worldwide in recent years. Sustainability and eco-friendly activities are also becoming increasingly important considerations for Hong Kong. Businesses are also increasingly aware that investors, particularly among the younger generations, are concerned about the impact of climate change and environmental damage, and choosing to invest in less damaging businesses. During the year, the environmental, social and governance reporting requirements of the Listing Rules of the Stock Exchange of Hong Kong were strengthened, with more required to be disclosed on a comply-or-explain basis than previously.
The Institute suggests that the government should make use of the Computer and Communication Products Recycling Programme and distribute refurbished second hand computer devices to needy students. It should consider introducing some tax and non-tax measures based on the “polluter pays” principle.
It is noted that the government has recently announced its aim to achieve carbon neutrality before 2050. Since improving the local air quality can help improve the life quality of Hong Kong’s citizens, the government should consider measures to promote the usage of electric vehicles and replacing aged commercial vehicles with more efficient models.
The Institute makes four recommendations of environmental measures to consider for Hong Kong’s future: 1) facilitate the distribution of secondhand computers to needy students; 2) green taxes; 3) incentives for replacing aged commercial vehicles; and 4) encourage early adoption of electric vehicles.
With the challenges ahead, the Institute believes the measures proposed above can help the government to take concrete action to prepare for the recovery and explore new sources of revenue. Financial Secretary Paul Chan will give the 2021-22 Hong Kong Budget Speech on 24 February, outlining the government's short, medium and long term plans for Hong Kong. It is expected that the government will announce measures to help stabilize the economy, and prepare for the recovery.
The article is contributed by William Chan, Chairman of the Taxation Faculty Executive Committee, Eugene Yeung, Convenor of the Budget Proposals 2021-22 Sub-committee, Eric Chiang, Deputy Director, Selraniy Chow, Manager, Advocacy and Practice Development, and Paul Smith, Manager, Corporate Communications, Hong Kong Institute of CPAs.