Will Hong Kong’s property slump force it to raise taxes?

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Hong Kong’s long-running property market downturn has turn into a rising risk to its low-tax hub standing, specialists have warned, as years of fiscal deficits force the federal government to search new income sources.

The town will want to take into account reviewing its tax construction when monetary secretary Paul Chan unveils its finances subsequent week, in accordance to economists and a number of individuals shut to policymakers within the territory.

Hong Kong’s authorities has traditionally relied on land gross sales for income, imposing low charges on revenue and company earnings — with a progressive salaries tax topping out at 17 per cent — and no capital features or gross sales taxes.

However a years-long slowdown in China’s property market, mixed with the rising prices of the town’s ageing inhabitants, have weighed on Hong Kong’s stability sheet.

The territory, which nonetheless boasts low debt and excessive fiscal reserves, has recorded deficits in 4 of the earlier 5 monetary years, and Chan has forecast one other for 2024-25, elevating alarms about Hong Kong’s future monetary well being.

A Hong Kong lawmaker who requested to stay nameless stated rising the revenue tax for prime earners had been “floated” amongst different concepts in current finances consultations with officers.

Analysts warned that elevating taxes on residents or corporations — which might come on high of a tax rise for high earners final 12 months — might erode one of many metropolis’s aggressive benefits as a monetary hub.

“Hong Kong faces the problem of its conventional income sources not working as earlier than,” stated Heron Lim, an economist at Moody’s Analytics. “The concern is that this isn’t a cyclical downturn however truly structural in nature.”

For years, Hong Kong’s funds have been upheld by a authorities monopoly on land provide in one of many world’s costliest actual property markets.

Land gross sales to builders, supplemented by income from stamp duties and different taxes associated to property transactions, lengthy offered a core supply of presidency revenue.

George Xu, Asia-Pacific director of sovereign scores at Fitch, stated Hong Kong’s means to provide “a quite simple and low-tax system” was thanks to “large” property sector tax revenues.

“But when that’s not the case — if the property-related income sources like land premium will stay subdued or extraordinarily low for an prolonged time period — that ought to convey quite a lot of challenges to the present tax mannequin.”

Income from the land premium — which builders pay for land use — fell to HK$20bn (US$2.5bn) final 12 months, down from about HK$70bn in 2023 and HK$143bn in 2022. Plummeting industrial rents and residential property costs, in addition to ample stock, have depressed tycoons’ urge for food for brand spanking new developments. It’s anticipated to fall additional this 12 months to HK$10bn-HK$15bn, in accordance to actual property company Knight Frank.

Stamp duties have additionally fallen as actual property transactions have slowed.

Economists who argue that the territory continues to be in good monetary well being level to Hong Kong’s low debt and greater than HK$600bn in fiscal reserves, amounting to greater than 20 per cent of GDP.

However authorities funds have come beneath rising stress lately following the coronavirus pandemic and as healthcare and social spending prices rise for Hong Kong’s ageing inhabitants. Its fiscal reserves at the moment are about half of the height of virtually HK$1.2tn in 2019.

Deliberate mega-developments such because the HK$225bn Northern Metropolis venture close to the border with Shenzhen will additional raise spending, stated analysts.

Hong Kong’s financial system expanded simply 2.5 per cent in 2024, and UBS has forecast 2 per cent progress this 12 months. US President Donald Trump’s extra 10 per cent tariff on Chinese language exports — which is about to embody Hong Kong — will injury enterprise sentiment, stated analysts.

“Within the brief run, it’s troublesome to see a really large rebound,” stated Gary Ng, senior economist at Natixis. “Such uncertainties could [affect] funding and progress potential . . . [and] ultimately have an effect on competitiveness.”

In February final 12 months, authorities raised the non-public tax price for high earners to 15 per cent on their first HK$5mn of annual revenue and 16 per cent on their remaining revenue. The transfer impacts about 12,000 taxpayers of the territory’s 7.5mn individuals.

Some tax professionals and lawmakers have expressed help for elevating the company or private revenue tax price additional, pointing to rival hub Singapore’s 24 per cent high revenue tax price.

“Hong Kong can nonetheless stay aggressive amongst different peer jurisdictions — quite a lot of them nonetheless have greater charges,” stated Winnie Shek, a Deloitte China tax accomplice and president of Hong Kong’s taxation institute, an business physique.

A authorities spokesperson stated it had obtained proposals from numerous sectors throughout its finances session however declined to touch upon them individually.

They added that the territory would “preserve [its] easy and low-tax aggressive benefit” whereas exploring income from “those that might afford to pay extra”.

Information visualisation by Haohsiang Ko