KPMG China supports the Hong Kong Government’s announcement to review its public finances strategies amid future challenges such as an aging population and prior committed spending on infrastructure. However, the scale of relief measures announced was disappointing.
Jennifer Wong, Partner, KPMG China, says: “We are happy to see that the Government realizes the issues caused by a narrow tax base and is now taking steps to address this.”
Wong welcomes the Government’s plan to set up a working group, led by the Treasury Branch, which will look to introducing more comprehensive planning for public finances, in order to cope with an ageing population and the Government's other long-term commitments. It is hoped the working group will raise suggestions to broaden the narrow tax and revenue base, as well as exploring rooms for the Government to set additional strategies and incentives for the longer term.
KPMG China also welcomes the measures to enable more private equity funds to domicile in Hong Kong. The Government announced it will extend the profits tax exemption for offshore funds to include transactions in private companies which are incorporated or registered outside Hong Kong and do not hold any Hong Kong properties nor carry out any business in Hong Kong. KPMG China believes that these initiatives will help cement Hong Kong as Asia’s leading fund and asset management centre.
Darren Bowdern, Tax Partner, KPMG China, says: “The changes announced by the Financial Secretary are excellent news for the Hong Kong fund’s industry. The existing tax exemption for offshore funds is not effective for private equity funds and has resulted in key fund personnel needing to follow onerous operating protocols if their Fund is to be based in Hong Kong. This has left Hong Kong at a competitive disadvantage to Singapore who has had broad based exemptions for funds in place for a number of years and which has been successful in attracting new Funds and Fund platforms to Singapore.”
“KPMG has been extensively involved, in conjunction with the leading fund industry bodies, in lobbying the Government for the types of changes announced today. It is pleasing to see that the Financial Secretary has reacted quickly with changes that clearly demonstrate a commitment to promoting a strong funds industry in Hong Kong. However we also advise the Government to proceed with the proposed consultation process as soon as possible,” he adds.
“This will provide certainty to new funds being established in the region. As with all changes, there will be some important details to be sorted out during the consultation process. In particular, ensuring that a proposed carve out which appears to be aimed at the Hong Kong property industry, does not result in Hong Kong based Funds falling foul of the revised tax exemption through the mere holding of offshore investments through a Hong Kong SPV,” he explains.
KPMG China also welcomes the Government’s plan to introduce open-ended investment company vehicles in order to encourage traditional mutual funds and hedge funds to domicile in Hong Kong. This in turn will result in larger numbers of funds using Hong Kong as a platform to invest in Mainland China, and further strengthen Hong Kong’s status as an international financial hub.
In other areas KPMG China believes the Government could introduce further concessionary measures. “People living in Hong Kong feel the impact of rising inflation which has adversely affected their living and businesses,” Wong explains. “However the relief measures do not significantly benefit the middle class and SMEs. The overall scale is also smaller than last year. The Government continues to offer relief for salaries tax, profit tax and rates, but all with a reduced cap, which is disappointing.” With a budget surplus of HKD64.9 billion forecasted in fiscal year 2012/13 and fiscal reserves of HKD734 billion by end of March (equivalent to 36 per cent of GDP or 23 months of government expenditure), KPMG China believes the Government can do more.
In the recent Policy Address, the Chief Executive highlighted his aims to promote Hong Kong as a hub for intellectual property development. In today’s Hong Kong Budget, it was announced that the Secretary for Commerce and Economic Development will lead a working group to study the overall strategy for promoting Hong Kong as a hub for intellectual property trading, but without any solid measures proposed.
Wong warns Hong Kong may further lose its ground to Singapore in terms of the development of intellectual property. “Singapore in comparison provides tax incentives and subsidies as well as a jumbo deduction of up to 400 percent for R&D activities. Hong Kong will lose out in terms of competitiveness to Singapore if we sit and wait,” Wong adds.
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