Hong Kong Budget May Give Offshore Funds A Tax Break

Tax-news.com

06 March 2000

Hong Kong is due to announce its budget for 2000/2001 this Wednesday, and the betting is on new indirect taxes, perhaps with a tax break for the offshore funds industry.

Last year, Donald Tsang, Hong Kong's Financial Secretary, estimated a fiscal deficit for the 1999/2000 year of H$36.5bn, but the government's successful stock market play and a recovery in the property market, allowing renewed land sales, have all but closed the gap: local expectation are for a near-balanced budget, with perhaps a moderate deficit of $2bn to $5bn.

The immediate pressure for tax rises may have gone away, but Donald Tsang is faced with the need to bolster Hong Kong's stock market in the face of regional competition, which he can do by reducing or abolishing Stamp Duty. Mr Tsang has mentioned on previous occasions his intention to bring down the stamp duty on stocks. After the merger of the three exchanges, it seems he may have the opportunity to do so. The territory's offshore funds sector also looks vulnerable after recent tax reductions for comparable funds in Singapore, and the Financial Secretary may feel a need to offer tax breaks to restore its competitiveness. There is talk in the fund management industry is that lack of flexibility and uncertainty has forced some fund managers to move to greener pastures.

Local commentators think that with the economy and stock market on an upward trend, the Government might give concessions to maintain a "feel good" factor by encouraging people to buy equities and funds.

Tax experts say that the administration's gains from the stock market and land are themselves non-recurring, uncertain in nature, and subject to the general state of the economy. The budget has relied heavily on property revenue in the past, for as much as 40 per cent of the total tax take. In absolute terms, the level of total recurrent revenue has been declining since 1997-1998, mainly due to problems in the property sector, while at the same time Government expenditure has been increasing. The Financial Secretary will have to broaden the tax base, and sooner or later that probably means the introduction of a sales tax.

Each 1% of a sales tax would bring $7 billion tax revenue to the Government, but at a time when Hong Kong is only just beginning to recover from the drop in tourist numbers following the Asian crisis two years ago, a sales tax is not perhaps the very best medecine. The same goes for a departure tax, which has also been mooted recently; a tax of $20 would bring in revenue of $1bn.

Most Asia-Pacific countries including the Chinese mainland, Japan, Singapore and Australia have a form of value-added tax (VAT). Local suggestions favour a multi-stage VAT system at a level of 3 per cent with exemptions for certain necessities, such as food and clothing.

 

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