Hong Kong Budget Brings Modest Tax Relief

by Mary Swire, Tax-News.com, Hong Kong

23 February 2006

Henry Tang yesterday unveiled his third budget as Hong Kong's Financial Secretary, which has committed the government to modest income tax cuts for the middle classes, measures to boost the city's standing as an international financial centre, further liberalisation of Renmimbi (yuan) business and a consultation on the proposal to introduce a goods and services tax.

While business groups and taxpayers will be dismayed at a lack of significant tax cuts given Hong Kong's strong economic record recently - gross domestic product grew by 7.3% in 2005 following 8.6% growth in 2004 - Tang's latest budget shows a determination to get to grips with the territory's notoriously narrow tax base; currently only about 20% of Hong Kong's work force pay tax.

Nonetheless, Tang has tinkered with marginal salary tax rates in order to give mainly middle-class residents about HK$1.5 billion a year in tax cuts. Under the changes, the marginal rates of the second, third and top tax bands will by lowered by one percentage point to 7, 13 and 19% respectively.

Tang also proposed to extend the limit for the deduction of mortgage interest by a further three years to a total of ten years, subject to the maximum annual deduction of HK$100,000. This measure will cost the Government some HK$1.2 billion in 2006–07.

To attract further inflows of new funds into the financial sector, Tang confirmed that a bill will be introduced to give effect to the proposed exemption of offshore funds from profits tax, and pledged to cut by 20% the levy on trading in securities, options and futures contracts. Tang added that the recent abolition of estate duty will also help to attract new funds to Hong Kong.

Further expansion of a market for the Chinese currency, the Renmimbi (RMB), in Hong Kong is one Tang's "major development objectives". As a result, Hong Kong residents will soon be allowed to open RMB current accounts in a Hong Kong bank, while RMB deposit-taking services have been extended to non-individuals. In addition, to facilitate the further development of RMB business in Hong Kong, the Clearing Bank for RMB business will shortly launch a new settlement system being developed by Hong Kong Interbank Clearing Limited.

Hong Kong is the first place outside the Mainland that can offer RMB business services and by the end of 2005, 38 banks in Hong Kong were providing RMB deposit-taking, exchange and remittance services. Total RMB deposits in Hong Kong had reached RMB22.6 billion, and the cumulative value of spending and cash withdrawals using RMB debit and credit cards in Hong Kong amounted to $9.4 billion.

Hong Kong officials are also in discussions with Beijing regarding two other major liberalising measures, namely the proposals to allow cross-boundary trades to settle in RMB and to establish a RMB debt issuance mechanism in Hong Kong.

As the SAR government endeavours to widen its tax base, Tang revealed that a consultation into the long-debated merits of a goods and services tax (GST) will be launched in the middle of the year and will last about nine months.

"After the conclusion of the consultation period, we will prepare a report and submit our proposals for consideration by the Government of the next term," Tang stated.

"From making a decision to introduce GST to its actual implementation will take about three years," he added.

Tang said that he is "cautiously optimistic" about this year's economic outlook, and stated that he expects Hong Kong's economy to grow by between 4% and 5% in 2006.

The full text of Mr Tang's 2006-07 Budget speech can be found in the Tax News Resources section.

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