2017/18 Hong Kong Budget Commentary

Member News
February 22, 2017 - Aoba CPA Limited


On 22nd February, 2017, Mr. Paul M Chan, the newly appointed Financial Secretary of Hong Kong, delivered his first budget speech at the Legislative Council. Alongside the stagnant global environment, Hong Kong economy has only seen a tepid growth by only 1.9% for the year 2016 as a whole, which is much lower compared with the 2.4% GDP growth last year. Economic recovery in the euro area and Japan is fragile and constrained by deep-seated structural issues, while some emerging markets including Brazil and Russia are still lackluster. The normalization of US interest rate and policy divergence among major central banks had also given rise to the uncertainties to Hong Kong’s future economic outlook. Even though the recovery of economy is bumpy, the labour market remained remarkably resilient. Despite the slackening labour demand in the trade- and consumption-related sector, total employment sustained moderate growth and the employment earnings continued to improve. Inflation successively eased back to averaging 2.3% for 2016 contributed mainly by the milder year-on-year increases in rental costs and prices of basic foodstuff.

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Growth disappointment in major economics, the raising of protectionist sentiment and heighten policy uncertainty in major advanced economics will continue to cloud the economic outlook for 2017. The 2016 Brexit referendum voted for the United Kingdom to leave the European Union could have significantly impact on regional growth prospects, yet the full effect of Brexit remains to be unfolded in 2017. Despite Brexit, confidence in the Euro Area has continued to improve, but due to the aftermath of the Euro Area debt crisis and refugees of the Syrian Civil War, investment rate in Euro Area remains low. In the United States, policy uncertainty has increased substantially following the election of the new administration. Should trade
frictions arise between the United States and China, Hong Kong would be hard to escape the crosshairs. The fragile state of the advanced economies underscores the importance for Hong Kong to continue forging closer
ties with our economic partners in Asia. The budget surplus of 2016 is HKD92.8 billion, which is HKD81.4 billion higher than the original estimated
budget surplus of HKD11.4 billion. As said in the budget this year, the Government is proactive in taking a forward-looking perspective with the optimal use of public resources to promote social and economic development. In order to enhance Hong Kong’s overall competitiveness and improve people's livelihood, the budget has proposed the following measures:

Highlights

Proposed fiscal/ tax measures
1 Reduce profits tax, salaries tax and tax under personal assessment for 2016/17 by 75%, subject to a ceiling of HKD20,000
2 Waive rates for four quarters of 2017/18, subject to a ceiling of HKD1,000 per quarter
3 Widen the marginal bands for salaries tax to HKD45,000 from 2017/18 onwards
4 Increase the disabled dependent allowance to HKD75,000, and the dependent brother/sister allowance to HKD37,500 from 2017/18 onwards Extend the entitlement period for the tax reduction for home loan interest to 20 years of assessment from 2017/18 onwards, while maintaining the current deduction ceiling of HKD100,000 a year
6 Increase the deduction ceiling for self-education expenses to HKD100,000 from 2017/18 onwards


Policies for long-term development

1 Set up a tax policy unit to study ways from a macro perspective to foster development of industries through tax measures, strengthen Hong Kong’s international competitiveness, and enhance Hong Kong’s tax regime
2 Reform the regulatory regime for listed entity auditors to make the oversight regime independent from the audit profession
Extend the profits tax exemption to onshore privately-offered open-ended fund companies

Recognizing the urgent need to tackle Base Erosion and Profit Shifting (“BEPS”) practiced by some multinational enterprises (“MNEs”) through aggressive tax planning and artificially shifting profits to low or no-tax regions, major international bodies such as the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development (“OECD”) have jointly delivered 15 Actions with the aim to promote fairness and restore integrity of the tax systems. Countries and jurisdictions worldwide including Hong Kong have committed to join the inclusive framework on BEPS and adhere to the new global standards. 

Automatic Exchange of Information (“AEOI”)
On 30th June, 2016, the Inland Revenue (Amendment) (No.3) Ordinance was enacted to provide the necessary legal framework for Hong Kong to implement AEOI that is in compliance with the Common Reporting Standard set out by the OECD. The Ordinance requires the reporting financial institutions (“reporting FIs”) to identify financial accounts held by tax residents of the reportable jurisdictions via specific due diligence procedures and to submit the reportable financial information of such accounts to the Inland Revenue Department (“the IRD”) on an annual basis, who will then exchange the information with the tax authorities of the AEOI partner jurisdictions on an annual basis.

Information to be furnished by reporting FIs in respect of each reportable account include:-
1) Particulars of the account holder - name, address, jurisdiction of residence, taxpayer identification
number and etc.;
2) Account number and account balance as at the end of the specified information period or other appropriate reporting period;
3) For a custodial account – total gross amount of interest, dividends, proceeds from sale or redemption of financial assets paid to the account; and
4) For a depository account – total gross amount of interest paid to the account.
Reporting FIs are expected to receive the first AEOI returns issued by the IRD in January 2018 and file by May 2018. To facilitate the preparation of the AEOI returns, self-certifications, a formal declaration made by the account holder in connection with his/her tax residence, would be required for all new accounts (i.e.accounts opened on or after 1st January 2017). For pre-existing accounts (i.e. accounts opened before 1st January 2017), reporting FIs may seek a self-certification from the account holder to verify his/her taxresidence if in doubt.

Transfer pricing documentation and Country-by-Country Reporting (“CbC Report”)
According to the consultation paper on measures to counter BEPS released by the Government in October 2016, Hong Kong intents to adopt the three-tiered standardized approach to transfer pricing documentation developed by the OECD.
1) Master File – a high-level overview of the group of MNEs;
2) Local File – detailed transactional transfer pricing information specific to the enterprise in each jurisdiction; and
3) CbC Report – sets out the MNE group’s global allocation of revenue, profits, taxes paid, and
certain indicators of economic activities for each jurisdiction it operates.
Exemption for the filing of Master File and Local File is proposed to enterprises which satisfy any two of the following three conditions – total annual revenue not more than HKD100 million; total assets not more than HKD100 million; and no more than 100 employees.
Meanwhile, the ultimate parent entity of the MNE Group whose annual consolidated group revenue equal to or exceeding HKD6.8 billion is required to file the CbC Report in its tax jurisdiction within 12 months from the last day of their fiscal year. To cater for special cases, the MNE Group may authorise or the Commissioner may mandate a constituent entity to file the CbC Report in its tax jurisdiction, so as to enable the CbC Report to be exchanged with other tax jurisdictions. Subject to necessary legislative amendments, MNEs will be required to gather the information in 2018 and file their first CbC reports to the IRD in 2019. Should you need further explanation on the above matters, please kindly contact Edmond Poon at
(852)3929-4912 or email edmond.poon@aoba.com.hk to seek our professional advice.

Note: All information contained in this budget commentary is provided for reference only. We make no guarantee as to the accuracy or completeness of such information. Readers should consult with their professional advisors before making use of the content. We accept no liability for any loss arising from the use of, or reliance upon, the content of this budget commentary.


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Aoba CPA Limited

Our company was established in 1989 when Hong Kong was still a British colony. As Hong Kong became a significant part of China, the company grew together with the changing economy. Today, China has become the second largest economic entity in the World. We find ourselves woven deeper and deeper into the business fabric of Mainland China.

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