IMF Calls On Hong Kong To Broaden Its Tax Base

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

23 February 2005

Whilst the International Monetary Fund this week congratulated the government of Hong Kong for reining in the fiscal deficit well ahead of schedule, it warned that longer term fiscal pressures will remain unless steps are taken to broaden the tax base.

In its Article IV report on the Hong Kong economy, the IMF noted that strong economic growth during 2004, combined with the rapid scaling back of the territory’s fiscal deficit (which was initially projected to reach more than HK$40 billion, but which could actually be in surplus by the end of the current fiscal year in March), was: “a testament to the resilience and flexibility of the Hong Kong SAR economy, especially given the significant external shocks of recent years”.

However, the IMF Directors encouraged the authorities to take advantage of the current favourable macroeconomic environment to “forcefully address” the long-standing structural deficit problem, adding that broadening the tax base and stabilizing revenues remain key policy priorities.

Among the options on the table, the IMF considered that the proposed goods and services tax would be an appropriate measure for improving the efficiency of the tax regime and reducing the territory's reliance on volatile revenue sources.

The IMF assessors welcomed the forthcoming public consultations aimed at building a consensus on the introduction of a GST. However, they stressed that the technical preparations for the implementation of the new levy would need to get under way “without delay”, given the long lead time involved.

Furthermore, the IMF recommended that the government develops a longer-term focus on fiscal policy relating to Hong Kong’s aging population.

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