Fiscal deficit to reach HK$110 billion – PwC

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Hong Kong needs to rapidly implement effective policies to bolster the local economy by attracting and retaining talent, with focus on targeted sectors.

Hong Kong, 12 December 2023 – PwC Hong Kong expects the HKSAR Government to record a HK$110 billion consolidated budget deficit for the fiscal year 2023/24, based on projected revenue of HK$651 billion and expenditure of HK$761 billion.

PwC’s latest estimate is that total revenues from profits tax and salaries tax will stand at HK$264.5 billion, against the Government’s original projection of HK$260.2 billion. Stamp duty is expected to generate HK$65 billion. Land sales revenue will amount to approximately HK$37 billion – 56% lower than the original estimate of HK$85 billion. The estimated expenditure of HK$761 billion is the same as the original forecast. PwC estimates fiscal reserves of HK$724.8 billion as at 31 March 2024 – equivalent to around eleven months of total Government expenditure.

PwC South China and Hong Kong Tax Leader Charles Lee said: “In the face of the challenges of fiscal deficits and a declining reserve, the Government needs to act fast to reignite Hong Kong's prosperity. Over the past few years, the Government has already introduced a number of key measures to unify talents and encourage high-quality investments in key sectors. In light of intense economic competition, we need to band together as a team and move forward as one united people to promote these initiatives and shape a brighter future for Hong Kong. Further tax and non-tax incentives to entice skilled professionals to key sectors such as family offices and ESG, incentivise full-time parents to return to the workforce and support employers on employee upskilling should also be considered.”

PwC Hong Kong Tax Partner Kenneth Wong said: “The HKSAR Government should prioritise deepening collaboration within the Greater Bay Area (GBA) and friendly tax measures accordingly to foster economic growth and integration. In particular, the HKSAR Government should seize the opportunity to work with relevant authorities in the Chinese mainland in light of the development blueprint for the Hetao Shenzhen-Hong Kong Science and Technology Innovation Cooperation Zone, in fostering the flow of I&T talent and resources, with possibilities of novel tax-efficient structures for conducting R&D activities, and financial incentives and support for Hong Kong talent working in other GBA cities and vice versa, promoting cross-border talent mobility and knowledge exchange.”

PwC Hong Kong Tax Partner Agnes Wong said: “To bolster Hong Kong's status as a leading hub for family offices, the Government should expand the classes of specified assets eligible for the family office tax concession to cover alternative assets like digital assets, wine, fine arts and collectibles, and relax the restrictions on fixed income from financial instruments to qualify for the tax concession, in order to enhance the competitiveness of the regime. Besides, ensuring alignment between the classes of eligible investment assets under the new Capital Investment Entrant Scheme and the tax concession would create consistency and facilitate operations. Lastly, consider giving Hong Kong residency status to immediate family members of qualified family offices would provide stability and encourage long-term commitment in investment.”

To further enhance Hong Kong's financial services sector, the Government should expedite the review of preferential tax regimes for investment funds and carried interest, as well as modernise the Stamp Duty Ordinance to support the development of financial markets and provide exemptions to market intermediaries.

Capitalising on the success of the Office for Attracting Strategic Enterprises (OASES) in bringing in over 30 enterprises to set up in Hong Kong with an expected total investment of HK$30 billion, the Government should quickly follow on with additional measures to anchor more quality investments here. In pursuit of the vision to develop a headquarters economy and attract enterprises as mentioned in the Chief Executive’s Policy Address, the Government should implement competitive tax and non-tax incentives for regional headquarters in Hong Kong, subject to meeting local spending and employment requirements. This should be complemented by an acceleration of Hong Kong’s tax treaty network expansion, along with measures to alleviate the burden faced by large multinational enterprises in scope for the upcoming global minimum tax rules.

With its robust legal and financial systems, well-established infrastructure and well-designed preferential tax regimes, Hong Kong already possesses favourable conditions necessary for developing the maritime and aviation industry. To further cement its position as an international maritime centre and global aviation hub, the Government should proactively liaise with local Chinese mainland government to collaborate and promote the industry with a view to providing a win-win situation for Chinese mainland and Hong Kong.

To provide stronger support for individual taxpayers coping with rising living costs, the government should review the levels of all allowances and deductions, most of which have not been revisited for many years. Additionally, expanding the scope of tax deduction for health insurance premiums to cover premiums paid under private medical schemes other than the VHIS, and introducing tax deductions for private medical expenses incurred by individual taxpayers and their specified dependents would be beneficial.