## sipea2026047

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---

### Fiscal context and recent developments
- Hong Kong SAR long adheres to the Hong Kong Basic Law’s balanced-budget principle and sound public financial management.
- Recent drivers of fiscal deterioration:
  - substantial falls in revenue associated with changes in land use (land premiums),
  - reduced stock market initial public offerings,
  - headwinds to corporate profits,
  - weakness in the labor market.
- These factors have contributed to persistent fiscal deficits and a decline in fiscal reserves (Text Figure 1).
- Revenue-raising measures implemented:
  - a global minimum tax (GMT)/Hong Kong Minimum Top-up Tax (HKMTT) framework for in-scope multinational enterprise (MNE) groups,
  - adjustments to stamp duties,
  - a hotel accommodation tax,
  - revisions to the airport passenger departure tax.
- These measures have not been sufficient to restore fiscal balance.

### Medium- to long-term fiscal pressures and projections
- Key structural pressures:
  - ageing population,
  - government pensions (including outlays from a now-closed civil service pension scheme),
  - large capital expenditure projects (e.g., Northern Metropolis),
  - expansion needs for social safety nets (higher health care spending, financial assistance to older residents, subsidized long-term care services).
- Projected additional spending by 2040:
  - around 1.8 percentage points of GDP annually for ageing-related spending (Hoyle, 2025),
  - around 0.9 percent of GDP by 2040 from improvements to the social security system (as suggested in Hoyle (2025) raising the OALA’s benefit levels to improve the net replacement rate by 10 percentage points).
- Northern Metropolis is a multi-year, multi-phased mega project that will add to spending pressures with significant uncertainty on timing and magnitude.

### Fiscal stability, monetary linkage, and policy space
- Sustained fiscal discipline supports monetary and financial stability and underpins the Hong Kong dollar’s link to the U.S. dollar.
- A gradual erosion of fiscal buffers or a sustained rise in public debt could reduce policy space to respond to external shocks and increase pressure on capital flows.
- Maintaining prudent fiscal policies and adequate reserves remains important for monetary and financial resilience.

### Revenue structure and concentration risks
- No VAT/GST; tax strategy emphasizes simplicity and investor-friendliness.
- Two primary revenue “pillars”:
  - corporate profits (profits tax / CIT),
  - property-related revenues (land premiums, government rent, general rates, property tax, stamp duty).
- Non-tax revenues contribute materially but are highly volatile.
- Profits tax (CIT) details:
  - typically accounts for about 5-6 percent of GDP,
  - generated roughly 25 percent of total general government revenue between 2010 and 2023.
- Property-related revenues:
  - historically around 6 percent of GDP on average but highly variable,
  - dropped to 3 percent in FY24/25 from higher levels in some years exceeding 8-10 percent.
  - land premium revenues averaged around 4 percent of GDP between 2010 and 2022 but dropped to around 0.7 percent in FY 2023/24 and further to 0.4 percent of GDP FY 2024/25.
- Combined corporate profits and property revenue fluctuated from around 15 percent of GDP in 2018 to under 9 percent in 2024.
- Other revenue items:
  - PIT contributes between 2-3 percent of GDP annually (around 10 percent of total revenue),
  - stamp duty on equity transactions contributes about 6 percent of total revenue (fluctuating),
  - gambling taxation contributes around 4-5 percent of total revenue.

### Potential reforms within current revenue framework — Profits tax (CIT)
- Current statutory regime:
  - headline rate for larger corporations: 16.5 percent,
  - tiered regime: first HKD 2 million of annual profit taxed at 8.25 percent before the 16.5 percent rate applies (IBFD, 2025).
  - territorial basis: only profits sourced in Hong Kong SAR are taxed.
  - several tax concessions exist (research and development, reduced rates for insurance and intellectual property (patent box) income).
- GMT/HKMTT:
  - implemented with effect from January 1, 2025, to align with the GloBE framework,
  - in-scope MNE groups: annual consolidated revenue of EUR 750 million or above in at least two of the four fiscal years immediately preceding the current fiscal year,
  - expected additional tax revenue of about HKD 15 billion annually from 2027-28.
- Revenue productivity:
  - CIT productivity has been consistently above 0.35, compared with an average of around 0.2 in other Asia-Pacific economies cited.
  - CIT payments are highly concentrated: 5,300 businesses — 3.3 percent of all businesses operating under the profits tax — accounted for 86 percent of total profits tax revenue in 2021-22.
- Risks and room for reform:
  - high revenue productivity may reflect allocation of global MNE profits to Hong Kong SAR and/or firms earning economic rents.
  - CIT revenue is vulnerable to tax rate competition; an aggressive CIT rate cut by a regional economy could trigger reductions across the region and spillovers.
  - Example estimates:
    - a two percentage-point increase in the CIT rate could generate revenue of around 0.6 percent of GDP after accounting for potential offsetting reduction in MNE profits booked in the territory (approximate estimate based on de Mooij and Liu (2018) and staff analysis).
    - a 2-percentage-point reduction in the statutory tax rate differential of MNE groups might reduce CIT revenue by 0.17 percent of GDP (as an approximate estimate referenced).

### Potential reforms — Personal income tax (PIT) and other features
- PIT system features:
  - schedular approach with two alternative tax rate structures,
  - PIT levied on a territorial basis, excluding foreign income.
  - salaries tax: either applied at progressive rates between two and 17 percent, or under a “standard rate” system with a rate of 15 percent for most taxpayers, rising to 16 percent for income exceeding HKD 5 million.
  - taxpayers pay under the method resulting in lower tax payment.
  - basic allowance (deduction) for the first HKD 145,000 of income.
  - business income (including royalties) is subject to profits tax.
  - interest from banks, dividends, and most capital gains are exempt.
  - rental income is taxed at a flat 15 percent (the “property tax”), after an allowance for repairs and expenses.

### PIT revenue, distributional implications, and reform potential
- PIT revenue level and comparisons:
  - PIT revenue is around 3 percent of GDP.
  - Below Japan, Republic of Korea, and Australia; higher than Singapore (2.2 percent), the Chinese mainland (1.2 percent), Indonesia (1.8 percent), Vietnam (1.7 percent), and Thailand (1.9 percent).
  - OECD average PIT revenue: 8.4 percent.
- Distributional features:
  - two-tiered standard rate alternative with a large standard deduction shields highest income earners from the full impact of the 17 percent marginal rate.
  - Average tax rate switch point between the two systems is approximately HKD 2.1 million.
  - Approximately 30,000 high-income taxpayers enjoy a reduced tax burden relative to what would have been paid under the progressive scale.
- Recent changes:
  - increase to 16 percent for income exceeding HKD 5 million took effect from the 2024-25 year of assessment.
  - basic allowance increased in the 2026-27 Budget (previously HKD 132,000) and a one-off tax rebate up to HKD 3,000 was provided for taxpayers under salaries tax, profits tax, and those taxed under personal assessment (as at April 2026, subject to Legislative Council approval).
- Reform trade-offs:
  - Simulation: raising additional revenue of 2.5-3.0 percentage points of GDP would require a PIT scale with a top marginal tax rate of around 40 percent.
  - Such a large PIT increase could be more growth-distorting than increasing consumption taxation and could risk disincentivizing older workers.
- Specific reform illustrations:
  - Apply the progressive PIT scale to all salaries income and rental income to improve progressivity.
  - Modest rate increases: raising the 10, 14 and 17 percent rates by 2 percentage points each, together with removal of the flat rate alternative, could generate around 0.4 percent of GDP in additional revenue.
  - Broaden PIT base to include domestic capital income (capital gains and dividends) to improve progressivity, with attendant risks of capital income shifting offshore.

### Indirect taxes: current stance and options (excises, motorists, and GST potential)
- No broad-based sales tax; relies on excises and limited indirect taxes.
- Regional context:
  - Most larger regional economies with VAT have indirect tax revenue at 20 percent of total revenue or more.
  - Regional VAT standard rates typically between 10-13 percent; exceptions: Singapore 7 percent, Malaysia (no VAT), India 18 percent, Chinese mainland 16 percent.
- Tobacco excises:
  - Excise increases in the 2023-24 and 2024-25 budgets were HKD 0.6 and HKD 0.8 per stick of cigarette, respectively.
  - Excises now account for approximately 70 percent of the retail price of cigarettes, approaching WHO recommended 75 percent.
  - Despite duty hikes of over 30 percent in both 2023 and 2024, tobacco revenue fell from HK$7.25 billion in 2023-24 to HK$4.32 billion in 2024-25.
  - Example price gap: Hong Kong SAR 20-pack ≈ 100 HKD vs Shenzhen 30 yuan (32 HKD).
- Alcohol and fuels:
  - Excise duty on liquor applies only to beverages with alcohol content exceeding 30 percent by volume; beer and wine are fully exempt.
  - In October 2024 the duty on the value of imported liquor exceeding HKD 200 was reduced from 100 percent to 10 percent for the portion above HKD 200; the portion at or below HKD 200 remained at 100 percent.
  - Fuel excises make up around 20 percent of the retail price of unleaded gasoline.
- Motorist charges and EVs:
  - EVs accounted for 14 percent of vehicles in Hong Kong SAR.
  - FRT EV concession expiry: March 31, 2026.
  - License fee structure based on EV rated power adopted in November 2025.
  - Illustrative calculation: total road usage nearly 40 million vehicle-kilometers per day ⇒ a per-kilometer charge of HK$0.05 per km would yield roughly HK$2 million per day (around HK$730 million annually).
- Excise and motorist policy options:
  - Expand alcoholic excises to cover beer and wine and apply based on alcoholic content.
  - Index per-unit excise rates (e.g., tobacco) annually to inflation.
  - Extend duty to sugar-sweetened beverages.
  - Expand charges on motorists including mileage-based tax.

### Property taxes, stamp duties, land premiums, and reform directions
- Recurrent property taxation:
  - General rates charged at 5 percent of rateable value (RV) for non-domestic tenements.
  - Domestic tenements progressive scale (2024-25 Budget):
    - RV up to HKD 550,000: 5 percent
    - Next HKD 250,000: 8 percent
    - RV amount that exceeds HKD 800,000: 12 percent
  - 2026-27 Budget provided a concession on general rates for the first two quarters of 2026-27 capped at HK$ 500 per quarter.
- Stamp duty and AVD:
  - AVD applies based on the higher of consideration or assessed value; a scale of rates is applied.
  - 2026-27 Budget increased maximum AVD rate to 6.5 percent for residential property transfers valued above HKD 100 million (previously maximum was 4.25 percent) (as at April 2026, subject to Legislative Council approval).
  - AVD (stamp duty) revenue has routinely made up over 10 percent of total revenue, reaching as high as 16 percent in 2018 and 2022.
  - Direct property tax is less than one percent of total revenue; general rates account for around 3-5 percent.
  - AVD revenues are volatile, often fluctuating by one percentage point of GDP year on year; recurrent taxes fluctuate around 0.2 percent of GDP or less.
- Land premium and government rent:
  - Government Rent charge: 3 percent based on RV of the property.
  - Land premiums have historically generated considerable but volatile revenue.
- Efficiency considerations and reform suggestions:
  - High stamp duty rates create distortionary 'lock-in' effects.
  - Recommendation: revenue-neutral reduction in stamp duty in favor of broad-based recurrent property taxes to improve efficiency and stability and to increase taxation of higher-value properties.
  - Phase the transition gradually and examine effects on residents moving from subsidized public domestic premises to private home ownership.

### Expanding consumption taxation (GST): design, trade-offs, and administration
- Rationale:
  - Broad-based consumption taxes offer efficiency, revenue stability, resilience to economic fluctuations, and tax coverage of digital services and cross-border e-commerce.
- Political economy and public consultation lessons (2002-2006):
  - Public concerns focused on distributional impacts and need for compensatory measures for lower-income households.
- GST design options and rate considerations:
  - Single-rate GST with a broad base recommended to maintain simplicity.
  - Rate scenarios discussed:
    - 5 percent: increase prospect of broad support and cover administrative costs.
    - 8-10 percent: could finance most expected increase in fiscal spending related to population ageing and Northern Metropolis.
    - Single-rate set at 10 percent (or lower) could improve prospects given high cost of living and proximity of Shenzhen.
  - Interim path: expand domestic consumption taxation (e.g., to tourism-related spending) as a precursor to a broad-based GST.
- Treatment of property and real estate under GST:
  - GST typically applies to supply of new residential property and first sale of existing properties; later resale of owner-occupied properties could be exempted to reduce compliance costs.
  - Residential rental contracts could be exempted to foster neutrality between renting and buying.
  - Commercial real estate: standard practice is to apply GST to sale and use of new and existing commercial properties.
- Taxation of financial services:
  - Margin-based financial intermediation services present challenges for standard credit-invoice GST (common approach: exempt margin-based services, alternative approaches include partial recovery of input GST).
- Administration and enforcement implications:
  - Introducing GST would necessitate reorganization and scale-up of tax administration and customs enforcement (customs assess import values; Inland Revenue Department implement e-invoicing, refunds, and fraud controls).
- Distributional impacts and compensation measures:
  - GST introduction would increase consumer prices with a typical one-off spike in CPI.
  - Recommended compensatory measures:
    - One-off increase in social security payments calibrated to expected CPI increase.
    - Rebates for GST paid on essential goods and services for low-income households.
    - Income tax rebate for low-to-middle income tax filers.
    - Adjustment of duties on already-taxed goods to limit price increases and cross-border incentives (at some revenue cost).
  - For a GST in the range of 8-10 percent, international experience indicates a one-off increase to headline CPI of around 3-6 percentage points in the quarter following commencement (highly variable).

### Fiscal impacts, reform directions, quantitative estimates and scenarios
- Medium-term pressure estimate:
  - Additional fiscal costs from population aging and limited social safety net projected to reach 3.6 percent of GDP annually by 2040.
- Incremental measures potential:
  - Incremental revenue measures within existing tax bases likely to yield about 1 percent of GDP in additional revenue by 2040 (conditional on near-term recovery in government finances).
- GST revenue potential (change in annual fiscal impact in 2040, relative to 2025, pct GDP):
  - GST with 5% standard rate: 1.9-2.5
  - (Alternative) GST with 8% standard rate: 3.0-4.0
  - A GST set at 8 percent could yield between 3-4 percentage points of GDP.
- Near-term economic cost:
  - Conservative estimates suggest near-term impact on GDP growth could be up to -0.5 percentage points, with larger effects during downturns and more muted effects during upswings.
  - Such reform could turn the fiscal balance positive within 2 years and strengthen ability to meet age-related spending pressures and capital expenditure needs.
- Selected entries from Table 1 (change in annual fiscal impact in 2040, relative to 2025, pct GDP):
  - Projected Fiscal Cost of Ageing Population: 3.6
  - PIT – tax all salaries income at progressive rates: 0.1
  - PIT -- extend scale to all salary income, adjust upper end of PIT scale to 27 percent.: 0.5
  - PIT – increase marginal rates to include a top marginal tax rate of 40 percent.: 2.5
  - Increase CIT rate by 2 percentage points: 0.5-0.6
  - GST with 5% standard rate: 1.9-2.5
  - (Alternative) GST with 8% standard rate: 3.0-4.0
  - GST Compensation package — Increase in government payments to low-income households: 0.4
  - GST Compensation package — Tax rebate for income earners below median: 0.8-1.2
  - Note: .. indicates non-zero, but rounded to zero.

### Conclusions and policy implications
- Structural shifts increase fiscal challenges; preparing early is essential.
- Recommended policy mix:
  - Priority on expenditure control complemented by significant revenue mobilization.
  - Incremental measures (extend progressive PIT, broaden excise duties, modestly increase CIT) can generate revenue while preserving low-tax simplicity but are limited (~1 percent of GDP).
  - Major tax reform (GST on domestic consumption) could generate 3-4 percent of GDP and sustainably finance higher future spending, broaden and diversify the tax base, and support investment in strategic priorities.
- Short-term costs should be weighed against securing medium-term fiscal capacity and resilience.

*Source: Prepared by Dan Devlin and Yizhi Xu (IMF staff).*

### 1.      Hong Kong SAR has faced persistent fiscal pressures in recent years. Hong Kong SAR

### Hong Kong SAR has faced persistent fiscal pressures in recent years

### Fiscal context and recent developments
- Hong Kong SAR has long adhered to the Hong Kong Basic Law’s balanced-budget principle and sound public financial management.
- Recent drivers of fiscal deterioration:
  - substantial falls in revenue associated with changes in land use (land premiums),
  - reduced stock market initial public offerings,
  - headwinds to corporate profits,
  - weakness in the labor market.
- These factors have contributed to persistent fiscal deficits and a decline in fiscal reserves (Text Figure 1).
- In response, authorities implemented revenue-raising measures including:
  - a global minimum tax (GMT)/Hong Kong Minimum Top-up Tax (HKMTT) framework for in-scope multinational enterprise (MNE) groups,
  - adjustments to stamp duties,
  - a hotel accommodation tax,
  - revisions to the airport passenger departure tax.
- These measures have not been sufficient to restore fiscal balance.

### Medium- to long-term fiscal pressures and projections
- Key structural pressures identified:
  - ageing population,
  - government pensions (including outlays from a now-closed civil service pension scheme),
  - large capital expenditure projects (e.g., Northern Metropolis),
  - expansion needs for social safety nets (higher health care spending, financial assistance to older residents, subsidized long-term care services).
- Projected additional spending by 2040:
  - around 1.8 percentage points of GDP annually for ageing-related spending (Hoyle, 2025),
  - around 0.9 percent of GDP by 2040 from improvements to the social security system (as suggested in Hoyle (2025) raising the OALA’s benefit levels to improve the net replacement rate by 10 percentage points).
- Northern Metropolis is a multi-year, multi-phased mega project that will add to spending pressures with significant uncertainty on timing and magnitude.

### Fiscal stability, monetary linkage, and policy space
- Sustained fiscal discipline supports monetary and financial stability and underpins the Hong Kong dollar’s link to the U.S. dollar.
- A gradual erosion of fiscal buffers or a sustained rise in public debt could reduce policy space to respond to external shocks and increase pressure on capital flows.
- Maintaining prudent fiscal policies and adequate reserves remains important for monetary and financial resilience.

### Revenue structure and concentration risks
- Hong Kong SAR’s tax strategy emphasizes simplicity and investor-friendliness; no VAT/GST exists.
- Two primary revenue “pillars”:
  - corporate profits (profits tax / CIT),
  - property-related revenues (land premiums, government rent, general rates, property tax, stamp duty).
- Non-tax revenues also contribute materially but are highly volatile.
- Profits tax details:
  - typically accounts for about 5-6 percent of GDP,
  - generated roughly 25 percent of total general government revenue between 2010 and 2023.
- Property-related revenues:
  - historically around 6 percent of GDP on average but highly variable,
  - dropped to 3 percent in FY24/25 from higher levels in some years exceeding 8-10 percent.
  - land premium revenues averaged around 4 percent of GDP between 2010 and 2022 but dropped to around 0.7 percent in FY 2023/24 and further to 0.4 percent of GDP FY 2024/25.
- Combined corporate profits and property revenue fluctuated from around 15 percent of GDP in 2018 to under 9 percent in 2024.
- Other revenue items:
  - PIT contributes between 2-3 percent of GDP annually (around 10 percent of total revenue),
  - stamp duty on equity transactions contributes about 6 percent of total revenue (fluctuating),
  - gambling taxation contributes around 4-5 percent of total revenue.

### Potential reforms within current revenue framework — Profits tax (CIT)
- Current statutory regime:
  - headline rate for larger corporations: 16.5 percent,
  - tiered regime: first HKD 2 million of annual profit taxed at 8.25 percent before the 16.5 percent rate applies (IBFD, 2025).
  - territorial basis: only profits sourced in Hong Kong SAR are taxed.
  - several tax concessions exist (research and development, reduced rates for insurance and intellectual property (patent box) income).
- GMT/HKMTT:
  - implemented with effect from January 1, 2025, to align with the GloBE framework,
  - in-scope MNE groups: annual consolidated revenue of EUR 750 million or above in at least two of the four fiscal years immediately preceding the current fiscal year,
  - expected additional tax revenue of about HKD 15 billion annually from 2027-28.
- Revenue productivity:
  - CIT productivity has been consistently above 0.35 (amount of revenue received as a percentage of GDP from each percentage point of the CIT rate), compared with an average of around 0.2 in other Asia-Pacific economies cited.
  - CIT payments are highly concentrated: 5,300 businesses — 3.3 percent of all businesses operating under the profits tax — accounted for 86 percent of total profits tax revenue in 2021-22.
- Risks and room for reform:
  - high revenue productivity may reflect allocation of global MNE profits to Hong Kong SAR and/or firms earning economic rents.
  - CIT revenue is vulnerable to tax rate competition; an aggressive CIT rate cut by a regional economy could trigger reductions across the region and spillovers.
  - A moderate statutory rate increase could raise material revenue but would increase concentration risks; example estimate:
    - a two percentage-point increase in the CIT rate could generate revenue of around 0.6 percent of GDP after accounting for potential offsetting reduction in MNE profits booked in the territory (approximate estimate based on de Mooij and Liu (2018) and staff analysis).
    - a 2-percentage-point reduction in the statutory tax rate differential of MNE groups might reduce CIT revenue by 0.17 percent of GDP (as an approximate estimate referenced).

### Potential reforms — Personal income tax (PIT) and other features
- PIT system features:
  - schedular approach with two alternative tax rate structures,
  - PIT levied on a territorial basis, excluding foreign income.
  - salaries tax: either applied at progressive rates between two and 17 percent, or under a “standard rate” system with a rate of 15 percent for most taxpayers, rising to 16 percent for income exceeding HKD 5 million.
  - taxpayers pay under the method resulting in lower tax payment.
  - basic allowance (deduction) for the first HKD 145,000 of income.
  - business income (including royalties) is subject to profits tax.
  - interest from banks, dividends, and most capital gains are exempt.
  - rental income is taxed at a flat 15 percent (the “property tax”), after an allowance for repairs and expenses.

### Policy options and fiscal strategy considerations
- Multiple policy paths to address rising fiscal pressures:
  - increased revenue mobilization,
  - expenditure control,
  - preparatory government saving (e.g., dedicated savings vehicle or sovereign wealth fund) if future needs exceed regular budget capacity.
- Recent consolidation measures highlighted in budgets:
  - public-sector pay freeze,
  - reductions in the civil service establishment,
  - adjustments to transport subsidy schemes.
- The paper proceeds to assess key taxes and potential policy options (Section C), considers larger reforms including a possible broad-based consumption tax (Section D), examines fiscal implications (Section E), and concludes (Section F).

*Source: Prepared by Dan Devlin and Yizhi Xu (IMF staff).*

### 22.      PIT revenue is broadly in line with that of several Asian economies but remains well

### 22. PIT revenue is broadly in line with that of several Asian economies but remains well below the OECD average.

### PIT revenue: international comparison and level
- PIT revenue is "around 3 percent of GDP".
- PIT revenue is below Japan, Republic of Korea, and Australia, but higher than:
  - Singapore: "2.2 percent"
  - the Chinese mainland: "1.2 percent"
  - Indonesia: "1.8 percent"
  - Vietnam: "1.7 percent"
  - Thailand: "1.9 percent"
- OECD average PIT revenue: "8.4 percent".

### PIT structure, distributional implications, and current incidence
- Hong Kong SAR applies a dual system: a progressive scale and a two-tiered standard (flat) tax rate alternative.
- The two-tiered standard tax rate alternative with a large standard deduction shields highest income earners from the full impact of the 17 percent marginal rate.
- Most taxpayers face lower taxes under the progressive PIT scale, but the average tax rate under the two systems switches at approximately "HKD 2.1 million" (Text Figure 4), above which the standard rate system would apply.
- Approximately "30,000" high-income taxpayers enjoy a reduced tax burden relative to what would have been paid under the progressive scale.
- Note on recent changes and allowances:
  - An increase to "16 percent" for income exceeding "HKD 5 million" took effect from the 2024-25 year of assessment.
  - A basic allowance increased in the 2026-27 Budget (previously "HKD 132,000") and the Budget provided a one-off tax rebate up to "HKD 3,000" for taxpayers under salaries tax, profits tax, and those taxed under personal assessment. As at April 2026, these measures remained subject to Legislative Council approval.

### PIT reform potential: revenue and equity trade-offs
- PIT reform could generate additional revenue and help reduce income inequality; current low PIT rates limit redistributive capacity.
- Simulation analysis suggests that raising additional revenue of "2.5-3.0 percentage points of GDP" would require a PIT scale with a top marginal tax rate of around "40 percent" (Text Figure 5).
- Such a substantial PIT increase:
  - Would align Hong Kong SAR broadly with advanced economy practices.
  - Could be more growth-distorting than alternative options such as increasing consumption taxation.
  - Could risk disincentivizing older workers in the context of population ageing.
- Previous research cited indicates increasing income taxation while reducing consumption and property taxes is associated with slower long-run growth.

### Specific PIT reform options and illustrative revenue outcomes
- Apply the progressive PIT scale to all salaries income and rental income (remove flat rate alternative):
  - Would improve progressivity without affecting lower-income households.
  - Would remove shielding of very high-income earners from the top marginal rate.
  - Rationale: properties tend to be held by higher income earners; taxing rental income at marginal rates would increase progressivity.
- Modest rate increases at the upper end:
  - Illustration: raising the "10", "14" and "17 percent" rates by "2 percentage points" each, together with removal of the flat rate alternative, could generate around "0.4 percent of GDP" in additional revenue from higher income earners while shielding lower income taxpayers.
- Medium-term harmonization:
  - Tax all income at progressive rates to reduce distortions and income recharacterization incentives.
  - Broaden PIT base to include domestic capital income (capital gains and dividends) to improve progressivity; note risk of capital income shifting offshore in response to higher taxation.

### Indirect taxes: current stance and options
- Hong Kong SAR has no broad-based sales tax; relies on excises for goods and services.
- Indirect tax revenue is low relative to other economies in the region; most larger regional economies with VAT have indirect tax revenue at "20 percent of total revenue or more".
- Regional VAT standard rates typically between "10-13 percent", with exceptions: Singapore "7 percent", Malaysia (no VAT), India "18 percent", Chinese mainland "16 percent".
- Excises are applied to tobacco, fuels (gasoline and diesel), and some alcoholic products.

Tobacco excises
- Excise increases in the 2023-24 and 2024-25 budgets were "HKD 0.6" and "HKD 0.8 per stick of cigarette", respectively.
- Excises now account for approximately "70 percent" of the retail price of cigarettes, approaching WHO recommended "75 percent".
- Tobacco excises are not routinely adjusted for inflation.
- Despite duty hikes of over "30 percent" in both 2023 and 2024, tobacco revenue fell from "HK$7.25 billion" in 2023-24 to "HK$4.32 billion" in 2024-25.
- Widening price gap with the Chinese mainland (example price: Hong Kong SAR 20-pack ≈ "100 HKD" vs Shenzhen "30 yuan (32 HKD)") increases incentive for arbitrage and smuggling.

Alcohol and fuels
- Excise duty on liquor applies only to beverages with alcohol content exceeding "30 percent" by volume; beer and wine are fully exempt.
- In October 2024 the duty on the value of imported liquor exceeding "HKD 200" was reduced from "100 percent" to "10 percent" for the portion above "HKD 200"; the portion at or below "HKD 200" remained at "100 percent".
- Fuel excises generate only modest revenue given high urban density, extensive public transport, and high retail gasoline prices. Fuel excise makes up around "20 percent" of the retail price of unleaded gasoline.

Options for excises and motorist charges
- Expand alcoholic excises to cover beer and wine and apply based on alcoholic content to address externalities and simplify excise.
- Index per-unit excise rates (e.g., tobacco) annually to inflation to maintain real value.
- Extend duty to sugar-sweetened beverages to curb consumption.
- Expand existing charges on motorists including for electric vehicle (EV) owners:
  - EVs accounted for "14 percent" of vehicles in Hong Kong SAR.
  - FRT EV concession expiry: March 31, 2026.
  - License fee structure based on EV rated power adopted in November 2025.
  - Consider mileage-based tax; illustrative calculation: total road usage nearly "40 million vehicle-kilometers per day" ⇒ a per-kilometer charge of "HK$0.05 per km" would yield roughly "HK$2 million per day" (around "HK$730 million annually").

### Property taxes, stamp duties, land premiums, and reform directions
Recurrent property taxation
- General rates charged at "5 percent" of rateable value (RV) for non-domestic tenements.
- For domestic tenements, the 2024-25 Budget introduced a progressive scale:
  - RV up to "HKD 550,000": "5 percent"
  - Next "HKD 250,000": "8 percent"
  - RV amount that exceeds "HKD 800,000": "12 percent"
- 2026-27 Budget provided a concession on general rates for the first two quarters of 2026-27 capped at "HK$ 500 per quarter".

Stamp duty and AVD
- AVD applies based on the higher of consideration or assessed value; a scale of rates is applied.
- 2026-27 Budget increased maximum AVD rate to "6.5 percent" for residential property transfers valued above "HKD 100 million" (previously maximum was "4.25 percent"). As at April 2026, this measure was subject to Legislative Council approval.
- AVD (stamp duty) revenue has routinely made up over "10 percent" of total revenue, reaching as high as "16 percent" in 2018 and 2022.
- Direct property tax is less than "one percent" of total revenue; general rates account for around "3-5 percent".
- AVD revenues are volatile, often fluctuating by "one percentage point of GDP" year on year; recurrent taxes fluctuate around "0.2 percent of GDP or less".

Land premium and government rent
- Substantial non-tax revenue is generated from land premiums and payments associated with Government leases.
- Government Rent charge: "3 percent" based on RV of the property.
- Land premiums have historically generated considerable but volatile revenue.

Efficiency considerations and reform suggestions
- High stamp duty rates create distortionary 'lock-in' effects, deterring transactions and efficient use of housing stock.
- Recommendation: revenue-neutral reduction in stamp duty in favor of broad-based recurrent property taxes to:
  - Improve efficiency and stability of revenue.
  - Promote more efficient use of housing stock.
  - Reinforce efforts to combat inequality by increasing taxation of higher-value properties.
  - Phase the transition gradually to limit large tax increases.
- Changes could be complemented by examining effects on residents transitioning from subsidized public domestic premises to private home ownership to minimize disincentives.

### Expanding consumption taxation (GST) as a revenue diversification option
- Domestic consumption is a clear opportunity to broaden the tax base and diversify the tax system.
- Broad-based consumption taxes (e.g., GST) offer efficiency, revenue stability, and resilience to economic fluctuations; help tax domestic consumption of digital services and cross-border e-commerce.
- Hong Kong SAR has explored a broad-based consumption tax over past decades (Advisory Committee on New Broad-Based Taxes in 2002; public consultation in 2006) but reforms were not pursued due to absence of public consensus.
- A GST would be compatible with the territory’s emphasis on encouraging saving and investment and could provide a durable revenue source to meet growing spending pressures.

*Source: IMF staff analysis, chapter on tax policy and revenue instruments in the Hong Kong SAR country chapter.*

### 42.      The 2002-2006 reform experience can inform any renewed consideration of a GST.

### 42.      The 2002-2006 reform experience can inform any renewed consideration of a GST.

### Public consultation and political economy
- Advisory Committee process in 2002 established that GST could strengthen fiscal sustainability, but public consultation revealed disagreement over how the rest of the tax system might adjust to ensure progressivity.
- Key concerns raised:
  - Assurances that reform would not impose a substantially higher burden on households.
  - Need to communicate distributional impacts and the role of compensatory measures for lower-income households.
  - Preservation of progressivity, fairness, and simplicity within the broader tax system.

### GST design options and trade-offs
- Single-rate GST with a broad base recommended to fit the territory’s goal of maintaining a simple tax system.
- Rate considerations:
  - 5 percent: would increase the prospect of broad support while remaining sufficient to cover administrative costs of implementation.
  - 8-10 percent: would offer the possibility of reducing other taxes that can be more damaging to growth (e.g., transaction taxes on equity purchases) and could finance most of the expected increase in fiscal spending related to population ageing and the Northern Metropolis project.
  - Single-rate set at 10 percent (or lower) could improve prospects of successful implementation given high cost of living and proximity of Shenzhen.
- Interim path: expand domestic consumption taxation (e.g., to tourism-related spending) as a precursor to a broad-based GST.

### Treatment of property and real estate
- Typical practice: GST applies to the supply of new residential property and the first sale of existing properties to tax future stream of housing services.
- To reduce compliance costs for owner-occupiers:
  - Later resale of those properties could be exempted.
  - Residential rental contracts could be exempted to foster neutrality between renting and buying.
  - Existing property tax instruments could be adjusted on taxable sales (e.g., a once-off stamp duty discount for each first home buyer).
- Supply of commercial real estate:
  - Standard international practice is to apply GST to sale and use of new and existing commercial properties.
  - Most businesses registered for GST could recover GST paid on construction inputs, limiting flow-through to construction costs.
  - Complexity arises for businesses spanning GST-exempt and GST-taxable activities (e.g., REITs with mixed-use properties).

### Taxation of financial services
- Standard credit-invoice GST cannot readily be applied to intermediation services where remuneration arises from spreads rather than explicit fees.
- Common approach: exempt margin-based financial services, which leads to embedded tax in business costs because inputs cannot be recovered.
- Alternative approach (example: Singapore): effectively zero-rate financial services by allowing partial recovery of input GST to reflect share of services provided to taxed businesses.

### Administration, customs, and enforcement implications
- Introducing GST would necessitate reorganization and scale-up of tax administration and customs enforcement.
- Expanded roles would include:
  - Customs and Excise Department: assess import values for import GST.
  - Inland Revenue Department: implement e-invoicing and reporting systems, process refunds, and combat fraud.
- These issues are substantial but outside the scope of this paper.

### Distributional impacts and compensation measures
- Introducing a GST would increase consumer prices; typically a one-off spike in the CPI.
- Recovery of input tax by firms means GST should not be embedded into production costs, but consumers may need protection from undue price rises and profiteering at introduction.
- Lower-income households likely to incur a relatively larger impact on consumption, especially if supply of residential property (rentals) is exempted.
- Compensation measures recommended:
  - One-off increase in social security payments, calibrated to expected increase in the CPI.
  - Rebates for GST paid on essential goods and services for low-income households.
  - Income tax rebate for low-to-middle income tax filers (see Table 1 estimates).
  - Adjustment of duties on goods already taxed to limit price increases and mitigate incentives for cross-border consumption (at some revenue cost).
- For a GST in the range of 8-10 percent, international experience indicates a one-off increase to headline CPI of around 3-6 percentage points in the quarter following commencement (highly variable).

### Fiscal impacts, reform directions, and quantitative estimates
- Medium-term pressures:
  - Additional fiscal costs from population aging and limited social safety net projected to reach 3.6 percent of GDP annually by 2040.
  - Northern Metropolis infrastructure spending: not zero but remains uncertain in timing and scale.
- Incremental revenue measures within existing tax bases likely to yield about 1 percent of GDP in additional revenue by 2040 (conditional on near-term recovery in government finances).
- GST revenue potential:
  - GST with 5% standard rate: 1.9-2.5 (change in annual fiscal impact in 2040, relative to 2025, pct GDP).
  - (Alternative) GST with 8% standard rate: 3.0-4.0 (change in annual fiscal impact in 2040, relative to 2025, pct GDP).
  - A GST set at 8 percent could yield between 3-4 percentage points of GDP.
- Near-term economic cost:
  - Conservative estimates suggest near-term impact on GDP growth could be up to -0.5 percentage points, with larger effects during downturns and more muted effects during upswings.
  - Such reform could turn the fiscal balance positive within 2 years and strengthen ability to meet age-related spending pressures and capital expenditure needs.

### Selected entries from Table 1 — potential revenue impacts (change in annual fiscal impact in 2040, relative to 2025, pct GDP)
- Projected Fiscal Cost of Ageing Population: 3.6
- PIT – tax all salaries income at progressive rates: 0.1
- PIT -- extend scale to all salary income, adjust upper end of PIT scale to 27 percent.: 0.5
- PIT – increase marginal rates to include a top marginal tax rate of 40 percent.: 2.5
- Increase CIT rate by 2 percentage points: 0.5-0.6
- GST with 5% standard rate: 1.9-2.5
- (Alternative) GST with 8% standard rate: 3.0-4.0
- GST Compensation package — Increase in government payments to low-income households: 0.4
- GST Compensation package — Tax rebate for income earners below median: 0.8-1.2
- Note: .. indicates non-zero, but rounded to zero.

### Conclusions and policy implications
- Hong Kong SAR’s long-standing prudent fiscal management could be increasingly challenged by structural shifts; preparing early is essential.
- Policy mix recommendation:
  - Priority on expenditure control complemented by significant revenue mobilization.
  - Incremental measures (extend progressive PIT, broaden excise duties, modestly increase CIT) can generate revenue while preserving low-tax simplicity but are limited (~1 percent of GDP).
  - Major tax reform (GST on domestic consumption) could generate 3-4 percent of GDP and sustainably finance higher future spending, broaden and diversify the tax base, and support investment in strategic priorities.
- Short-term costs should be weighed against securing medium-term fiscal capacity and resilience.

*Source: sipea2026047 - 42.      The 2002-2006 reform experience can inform any renewed consideration of a GST.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026047.pdf_