2020 was a challenging year for many economies around the world, and Hong Kong was no exception. The unprecedented Covid-19 pandemic has brought Hong Kong's projected fiscal deficit for 2020/21 to a record high of HK$257.6 billion. The unemployment rate also climbed to 7.2% in the three months to February 2021, the highest since 2004.
As the global economy is set to rebound moderately this year, and with the launch of the Covid-19 vaccination program in Hong Kong and many other countries, it is hopeful that the worst has passed and the local economy will gradually pick up pace in the second half of 2021. Looking ahead, revitalising Hong Kong's economy after the pandemic is over is now one of the most imminent tasks for the government.
Although Hong Kong still possesses a wide range of competitive advantages and continues to play a pivotal role in the Mainland's ongoing economic expansion, the city's privileged position has not gone unchallenged. At present, Hong Kong faces various challenges in boosting its competitiveness and fostering its economic growth.
Internally, Hong Kong is heavily reliant on four traditional "pillar industries," and is lagging behind our neighbours in innovation and technology (I&T) development, partly due to the shortage of scientific and technological talent who are interested in pursuing their careers locally.
From a more general perspective, the government could do more to make the business and tax environment in Hong Kong more attractive to foreign investment as compared to other countries in the region. As the government is projecting an operating deficit for the next five years, coupled with the fact that future spending on public services and social infrastructure is likely to increase, the government also needs to explore new sources of revenue in the longer term to maintain fiscal sustainability.
Externally, uncertainties in the global trade environment, fierce competition from neighbouring markets, and the fast-changing international tax landscape also pose challenges in driving economic development and ways to strengthen the city's competitiveness.
Key recommendations to promote growth
We believe revitalising Hong Kong's economy and achieving greater success hinge on government initiatives to increase the city's competitiveness, and renewed efforts to retain and attract funds, businesses and talent to Hong Kong. To achieve this, we offer eight key recommendations on promoting Hong Kong's economic growth:
Attracting funds and businesses to Hong Kong and capitalising on GBA opportunities
- Strengthen Hong Kong's role in RMB internationalisation and as an offshore RMB centre. Further facilitate trading on the Hong Kong Stock Exchange in RMB and promote more initial public offerings in RMB.
- Develop competitive business and tax incentives to attract multinational groups to set up regional headquarters in Hong Kong (eg rental subsidies, financial/tax incentives, school availability for expats).
- Extend the current super tax deduction for research and development (R&D) expenditure to R&D activities conducted outside Hong Kong but within the Greater Bay Area (GBA).
Redefining the government's role in driving economic development and revenue growth
- Go beyond the current "facilitator and promoter" role and act as a "driver" in fostering industries with high growth potential.
- Adopt a holistic rather than piecemeal approach to formulating and implementing policies. Ensure effective policy execution across different bureaus and departments.
Nurturing, attracting and retaining talent
- Attract more high-tech enterprises, venture capital funds and overseas talent to Hong Kong to build a vibrant local I&T ecosystem.
- Use financial incentives (eg housing subsidies and cash bonuses) to attract overseas talent to work and stay in Hong Kong. Establish an employment matching programme for local STEM graduates with employers in Hong Kong and the GBA.
Making the Hong Kong tax system more competitive
- Conduct a cohesive and comprehensive review of the tax system. Ensure tax incentives are business-friendly, commercially viable and actively promoted. Conduct regular reviews to enhance their effectiveness.
Other than the above key recommendations, we also suggest that the government considers the following measures to enhance the competitiveness of Hong Kong, and capitalise on rising business opportunities from the GBA development:
- Introduce group loss relief and tax loss carry backward for three years.
- Expand Hong Kong's tax treaty network and provide unilateral double tax relief in the absence of tax treaty.
- Provide tax and financial/business incentives for (i) intellectual property hubs in Hong Kong, (ii) bank booking centres in Hong Kong, and (iii) financing of ESG projects.
- Lobby the Mainland authorities to enhance the existing China individual income tax (IIT) treatment for Hong Kong people working in the GBA (eg expanding the current scope of China IIT subsidy to cover young Hong Kong graduates working in the GBA).
All in all, we recommend strengthening our well-established "pillar industries," and proactively identifying new engines of economic growth for Hong Kong. Businesses in Hong Kong can play an important role in this journey. Through ongoing dialogue with policymakers and active participation in the government's consultation exercises, the business community's voice will be heard. This will help the government to come up with business and tax policies, and concrete measures, that bring real benefits to businesses and further the economic development of Hong Kong.
With the challenges ahead, the need to better equip Hong Kong for long term strategic growth after the city emerges from the economic downturn, a renewed focus on bold and timely actions by the government are critical. In particular, the government can be more visionary and proactive in mapping out clear and targeted strategies to attract funds, businesses and talent, and boost the city's long-term competitiveness.
This requires holistic and long-term planning, as well as collaboration between the government, the business community and professions. Above all else, it calls for effective and efficient execution of government policies and measures.
Charles Lee, South China (incl. Hong Kong SAR) Tax Leader, and Kenneth Wong, Partner, at PwC China