Hong Kong Taxation. Upon completion of this chapter, students should be able to:

Transcription

1 Hong Kong Taxation Learning Objectives Upon completion of this chapter, students should be able to: Understand the functions of tax; Describe the main features of Hong Kong tax system; Explain the territorial source principle of taxation and standard rate; Discuss sources of income tax; Explain the nature of Property Tax; Compute Property Tax payable; Explain Salaries Tax and exemption; List Salaries Tax allowances and deductions; Compute Salaries Tax payable; Explain Profits Tax, exemption and deductions; Describe Personal Assessment; Compute income tax payable under personal assessment method; Explain the nature of Stamp Duty; Describe the different types of Stamp Duties; and Discuss the benefits of abolition of Estate Duty. Acknowledgement Materials were obtained from Chapter 8 Hong Kong Taxation, of FChFP Programme Business Environment and Taxation module. 1

2 Contents: Page 1 Economic Functions of Tax 3 2 Overview of Hong Kong Tax System 4 3 Income Tax Property Tax Salaries Tax Profits Tax Personal Assessment 26 4 Stamp Duty Sale Conveyance Agreement for Sale of Residential Property Lease of Immovable Property in Hong Kong Transfer of Hong Kong Stock 30 5 Estate Duty 31 2

3 One of the main problems in economic study is For Whom to Produce? This involves the allocation of resources and distribution of income. Taxation plays an important role in this area. In this chapter, we will first discuss the economic functions of taxation, then Hong Kong tax system, followed by detailed explanation of various major types of taxes in Hong Kong. 1 Economic Functions of Taxation One of the main functions of taxation is to finance government expenditures, keep the civil servants operating, and provide resource for different government projects. According to the year 2005/06 fiscal budget, total government expenditures amounted to HK$24.78 billion and tax revenue is HK$14 billion. Other sources of income include land premium, investment return and income from government services. Moreover, government tax policy, such as taxing whom, by how much, and how the tax money is used, has very important economic implication which affects the re-distribution of income, re-allocation of resources and promotion of macroeconomic performance. (i) Redistribution of Income One of the common problems of market based capitalist economy is the riches are getting richer and the poors poorer. Wealthy and highincome individuals have many advantages, such as better education opportunity and ability to share economic prosperity through investment. Charging higher taxes on wealthy and higher income groups to provide social welfare and security to the less privileged citizens serves to re-distributed income. Currently, Hong Kong Government is providing a safety net for people who cannot support themselves financially through the Comprehensive Social Security Assistance (CSSA) Scheme, nine years free education and inexpensive public medical services for all citizens, so that everyone has the right to receive proper education and medical treatment. All such policies help to close up the differences between the haves and the have-nots and promote a more harmonious and stable society. 3

4 (ii) Re-allocation of Resources In Chapter 6, we have discussed the concept of public goods. Under market economy, there is always shortage in the supply of public goods. Through taxation, government could re-allocate resource to provide public goods and services such as roads, police, fire service etc. which would otherwise not be available through market mechanism. Furthermore, government could regulate external economies by levying special type of taxes so that resource can be utilized more effectively and efficiently. (iii) Promotion of Macro-economic Goals Theoretically speaking, tax cut or increase would have important impact in the macroeconomic performance of an economy. As such, government would take into consideration of macroeconomic goals in the formulation of tax policies. For detailed discussion on how government could affect economic performance through taxation, please refer to Chapter 5. 2 Overview of Hong Kong Tax System There are both direct and indirect taxes in Hong Kong. Direct taxes include Property Tax, Salaries Tax and Profits Tax whereas indirect taxes include Stamp Duty, Government Rates, Betting Duty, Business Registration Fee, Hotel Accommodation Tax, Motor Vehicles First Registration Tax, Air Passenger Departure Tax and Cross Harbour Tax. Table 1 shows the major tax revenues of Hong Kong. The major sources of revenue tax are Profits and Salaries taxes. For fiscal year , they represent 45.9% and 26.6% respectively, total above 70% of the total tax revenue of Hong Kong. It is also worth mentioning that revenues from Betting Tax on Mark Six, horse racing and football betting, as well as Stamp Duty from sale and purchase of properties and Hong Kong securities are important, representing more than 20% of total tax revenue. 4

5 Table 1 Summary of Hong Kong Tax Revenue Type of Tax (million HK$) (million HK$) (million HK$) Profits Tax Corporation 33, , ,562.2 Profits Tax Unincorporated Businesses 5, , ,077.5 Total Profits Tax 38, , ,639.7 Salaries Tax 29, , ,990.5 Property Tax 1, ,115.6 Personal Assessment 3, , ,963.4 Total Earnings and Profits Tax 73, , ,709.2 Estate Duty # 1, , ,468.4 Stamp Duty 7, , ,851.4 Betting Duty 10, , ,057.2 Business Registration Fee , ,348.7 Hotel Accommodation Tax Total Revenue Collected 93, , ,682.3 % Change over Previous Year -8.1% +14.0% +20.2% #Estate Duty was abolished on 11 th February Source: Inland Revenue Department, HKSAR Government Generally speaking, Hong Kong s tax system has the following characteristics: (i) Simple Tax System There are only a few types of taxes in Hong Kong and the tax system is simple and clear. The Inland Revenue Department is efficient and the cost of handling tax matters for individuals and corporations is relative low. (ii) Low Tax Rate Hong Kong is one of the lowest tax regions among developed countries. The direct tax rate never exceeds 20%. For assessment year , the Profits Tax rate for corporation is only 17.5% whereas that for un-incorporated business is 16%. Also, there are progressive rates in the computation of personal income tax, but the maximum tax 5

6 payable is capped at the standard rate of 16%, no person has to pay a tax higher than 16% of his net total income. (iii) Territorial Source Taxation Principle Hong Kong adopts the territorial source taxation principle where only income and profits arising in or derived from Hong Kong are taxable. In other words, any person carrying on a business in Hong Kong derives his/her profits abroad is not subjected to Hong Kong Profits Tax. (iv) No Capital Gain, Dividend or Interest Taxes Unlike most countries, Hong Kong does not charge any tax on the gain on disposal of capital asset. Moreover, there are neither dividend nor interest tax. (v) Standard Rate The government of Hong Kong charges a fixed standard rate for Profits and Property Taxes. Although salaries tax and personal assessment tax are charged on progressive rates, the tax a person has to pay will never exceeds the standard rate times his/her net total income. Currently there is so far no Goods and Services Tax (GST) in Hong Kong. However, as Hong Kong has incurred huge fiscal deficits between fiscal years to , the government has been considering whether to levy such tax in Hong Kong. In his budget speech, the Financial Secretary has proposed to launch a public consultation in the middle of The consultant will last about nine months and the Financial Secretary will prepare a report and submit their proposals for consideration by the Government of the next term. 3 Income Taxes Based on the Inland Revenue Ordinance (IRO), there are three major types of direct taxes, namely, Property Tax, Salaries Tax and Profits Tax. Apart from that, 6

7 an individual may elect for Personal Assessment so that his/her income chargeable to Property Tax, Salaries Tax and Profits Tax are aggregated and the tax is assessed based on total income. 3.1 Property Tax Property tax is charged on persons who own any land and /or buildings situated in Hong Kong. The amount of Property Tax is charged on the rental income received or receivable within a year of assessment. The definition of land and building also covers piers, wharves and other structures as well as any part of a building. Rental income includes: (i) (ii) (iii) (iv) (v) (vi) Gross rent received or receivable; Payment for the right of use of premises under licence; Service charges or management fees paid to the owner; Owner's expenditure borne by the tenant, e.g. repairs and Property Tax paid by the tenant; Sums previously deducted as irrecoverable rent and now recovered; and Lump sum premium. Property Tax is charged at the standard rate on the net assessable value of the rental income from the property. [A] Rental Income [B] Less: Allowable Deductions, e.g. Rates [C] (A - B) [D] Less: 20% Allowance for repairs and outgoings (C x 20%) [E] Net Assessable Value (C - D) [F] Property Tax = Net Assessable Value Standard Rate The owner of land and/or building may first deduct Rates paid or to be paid to the government (excluding rent) and irrecoverable consideration from gross rental income. Based on this balance, the owner is entitled to a 20% statutory deduction 7

8 for maintenance and expenditures. Then we arrive at the net assessable value and Property Tax is computed by multiplying the standard rate to this amount. Example 1: Mr. Chan has leased out a residential property and received a total rental income of $240,000 in Year , he also spent $18,000 on maintenance and paid $10,000 government rates. Based on the standard rate of 16%, how much Property Tax should Mr. Chan pay? Computation of property tax: (A) Total Rental Income $240,000 (B) Less: Rates 10,000 (C) Assessment Value $230,000 (D) Less: Statutory Deduction 46,000 (= $230,000 20%) (E) Net Assessment Value $184,000 (F) Property Tax Payable $29,440 (= $184,000 16%) There are a few points worth noting regarding Property Tax: (i) Under the provisions of the Inland Revenue Ordinance, each and every joint owner or owner in common is responsible for reporting rental income on tax return and pay Property Tax as if he/she is the sole owner. (ii) Property Tax is also charged based on territorial source principle, all lands and building located in Hong Kong are subject to Property Tax. Even though the owner is not Hong Kong resident or citizen, he/she has to pay Property Tax on the rental income of his/her property. (iii) Property Tax is charged on provisional basis. Provisional Property Tax is based on the annual Net Assessable Value of previous assessment year times the standard rate. (iv) According to the Inland Revenue Ordinance, mortgage interest 8

9 incurred on the acquisition of the property is not deductible when computing Property Tax. However, mortgage interest deduction may be claimed by owner eligible to and electing Personal Assessment or business owner who elects to be assessed under Profits Tax. 3.2 Salaries Tax Any income arising in or derived from Hong Kong from an office or employment or any pension is chargeable to Salaries Tax in Hong Kong Scope of Salaries Tax Assessable income includes: (i) Salaries / wages, director's fees These should be the gross amount before deducting the employee's contributions to a recognized occupational retirement scheme or a mandatory provident fund scheme. (ii) Commission (include "Dim Yung"), bonus, leave pay, end-of-contract gratuities Generally speaking, with the exception of a handful of exempt items (e.g. payments in lieu of notice of termination of employment, compensation for injuries, payments specially exempted under the Inland Revenue Ordinance), almost all payments made by the employer to the employee are taxable, regardless of whether the amount was paid according to or in excess of the terms of employment, and whether the amount was paid pre-commencement, post-cessation or during the course of employment. (iii) Allowances, perquisites or fringe benefits These include cash allowances, liability of employee discharged by employer, convertible benefits, education benefits, holiday journey benefits. (iv) Tips from any person For example, tips paid by the customers to the waiters of a restaurant, 9

10 tour guide tips. (v) Salary tax paid by employer (vi) Value of a place of residence This value is normally computed as 10% of your income from the employer after deduction of outgoings and expenses (but not self-education expenses). (vii) Share options and share awards (viii) Back pay, gratuities, any terminal/retirement awards and gratuities One may apply to have the whole sum of money related back to the earning period, up to a maximum of 36 months. (ix) Termination payments and retirement benefits (x) Pensions Nevertheless, there are certain types of income that are not taxable and taxpayers need not report the following income in their tax return: (i) Payment in lieu of notice; (ii) Jury fees; and (iii) Severance payments and long service payments Severance Payments/Long Service Payments that are required to be paid under the Employment Ordinance are not assessable to Salaries Tax. If one have been paid gratuities or retirement benefits, the severance payment/long service payment to be paid under the Employment Ordinance is to be reduced by the aforesaid amounts. He/she should only exclude the reduced amount. Exemption will not be extended to that part of the gratuities and retirement benefits used to offset the severance payment/long service payment. The whole amount of gratuities and retirement benefits should be reported in the usual manner. 10

11 3.2.2 Conditions for Application for Full/Partial Exemption of Income under Salaries Tax (i) Director Directorship is regarded as an office. In this context, the term "director", in relation to a Hong Kong company, means a person having duties and responsibilities under the Companies Ordinance, or of similar nature under a corresponding foreign legislation for a director of an overseas company. In general, if one is director of a company resident in Hong Kong, his/her full income derived from such office in Hong Kong is chargeable to Salaries Tax irrespective of the number of days he/she stayed in Hong Kong and neither exemption nor relief is available. (ii) Employee Source of Employment The Hong Kong tax system is based on the territorial concept. Salaries Tax is imposed on all income arising in or derived from Hong Kong from an office or employment or any pension irrespective of whether tax on the income has been paid in other jurisdictions. In determining the source of employment, the following three factors are relevant: (a) Where the contract of employment was negotiated and entered into, and is enforceable; (b) The place of residence of the employer; and (c) The place of payment of the employee's remuneration. In general, the employment is regarded as located outside Hong Kong if all the above three factors take place outside Hong Kong. In the greater majority of cases, the question of the source of employment will be resolved by considering these three factors. However, the Inland Revenue Department reserves the right, in appropriate cases, to look beyond these factors. (iii) Employee Hong Kong Employment 11

12 If one s source of employment is Hong Kong, e.g. he/she is employed by a Hong Kong company to work in Hong Kong, his/her full income is chargeable to Salaries Tax even though part of his/her duties are performed outside Hong Kong. However, one may claim exemption and relief on a year-by-year basis under certain circumstances. (iv) Employee Non-Hong Kong Employment If one s source of employment is outside Hong Kong, e.g. he/she is assigned to work in Hong Kong for a few years by his/her overseas employer and he/she has to perform part of the services in different countries in the Asia Pacific Region, he/she is only assessed on his/her income attributable to his/her services rendered in Hong Kong including leave pay attributable to such services and in general, according to the number of days he/she was in Hong Kong (day-in-day-out basis) in a year of assessment. Exemption of income is available on a year-by-year basis. (v) Full / Partial Exemption of Income or Relief Full or partial exemption of income or relief from tax may be available, with supporting documents, if one satisfies one of the following conditions: (a) Only part of income was arising in or derived from Hong Kong from an employment This exemption is only applicable for employees having a source of employment outside Hong Kong. As Salaries Tax is in this circumstance levied on income derived from services rendered in Hong Kong, income attributable to services rendered outside Hong Kong is exempt from tax. The amount of income exempted is generally computed by time-basis apportionment by reference to the number of days spent outside Hong Kong. (b) All services were rendered outside Hong Kong during the year 12

13 This exemption is generally available to employees irrespective of the locality of the employment. Attending trainings, meetings or reporting in Hong Kong is regarded as services rendered in Hong Kong for the purpose of the exemption. One is exempt from Salaries Tax for a year of assessment if he/she rendered all his/her services outside Hong Kong in that year of assessment, unless he/she is a civil servant, or a crew member of a ship or an aircraft. Income from services rendered in Hong Kong during visits not exceeding a total of 60 days in the year is also excluded from tax. (c) Part of income has already been charged to tax in the Mainland of China or other countries during the year This exemption is generally only applicable for employees having a source of employment in Hong Kong. If one has paid tax of substantially the same nature as Hong Kong Salaries Tax to a territory outside Hong Kong in respect of income relating to services rendered by him/her in that territory, that part of the income which has already been subject to foreign tax will be exempt from Hong Kong Salaries Tax under section 8(1A)(c) of the Inland Revenue Ordinance. Evidence of foreign tax payment is required. If a Hong Kong resident provides services both in the Mainland and in Hong Kong, the income derived from his Hong Kong employment will be fully assessable but he may either apply for tax exemption under section 8(1A)(c) in respect of that part of income already subject to Individual Income Tax in the Mainland or apply for a tax credit under the Arrangement between the Mainland of China and the HKSAR for the Avoidance of Double Taxation on Income. Evidence of the payment of Individual Income Tax is required. In general, tax exemption under section 8(1A)(c) provides greater relief than would be provided by tax credit. 13

14 Table 1 Salaries Tax Allowances and Deductions for the Assessment Year of Personal Allowances Amount (HK$) Basic Allowance 100,000 Married Person Allowance 200,000 Child Allowance: 1 st to 9 th Child (Each) 40,000 Dependent Parent (Aged 60 or above) Allowance (Each): Not Resided with Taxpayer 30,000 Resided with Taxpayer 60,000 Dependent Parent (Aged 55 or above but below 60) Allowance (Each): Not Resided with Taxpayer 15,000 Resided with Taxpayer 30,000 Dependent Grandparent (Aged 60 or above) Allowance (Each): Not Resided with Taxpayer 30,000 Resided with Taxpayer 60,000 Dependent Grandparent (Aged 55 or above but below 60) Allowance (Each): Not Resided with Taxpayer 15,000 Resided with Taxpayer 30,000 Single Parent 100,000 Dependent brother/sister (Each) 30,000 Disabled Dependent (Each) 60,000 Deductions Outgoings and Expenses - Depreciation Allowances on Plant and Machinery - Self-education Expenses (Maximum Deduction) 40,000 Approved Charitable Donations (The aggregate deduction of approved charitable donations must not be less than $100 and shall not exceed 25% of the income after allowable expenses and depreciation allowances) Contributions to Mandatory Provident Fund Scheme or Recognized Occupational Retirement Scheme (Maximum Allowable Deduction per Year) - 12,000 Home Loan Interest (Maximum Allowable Deduction per Year) 100,000 Elderly Residential Care Expenses (No dependent parent/grandparent allowance will not be granted for the same person) (Maximum 60,000 14

15 Allowable Deduction per year) Tax Allowances and Deductions Table 1 lists out the personal allowances and deductions of Hong Kong Salaries Tax for the assessment year of The main allowances include basic, married person, child, dependent grandparent, parent, sister and brother; there are also special allowances for single parent and disabled dependent. On the other hand, deductions consist of outgoings and expenses, depreciation allowances on plant and machinery, self-education expenses, approved charitable donations, contributions to Mandatory Provident Fund Scheme or Recognized Occupational Retirement Scheme, home loan interest as well as elderly residential care expenses Salaries Tax Rates Hong Kong Salaries Tax adopts progressive rates. Generally speaking, the higher the salaries a person earns, the more salaries tax he/she has to pay. Table 2 lists the progressive Salaries Tax rates for the assessment years of and The government do adjust the tax rates from time to time according to the financial condition of Hong Kong. Apart from that, if the salaries tax liability calculated with the progressive rates exceeds the amount computed by multiplying the standard rate (being 16% for the assessment years of and ) to the net total income, the taxpayer only pays the lower of the two (see Example 3). Table 2 Hong Kong Salaries Tax Rates Net Chargeable Income Progressive Rates (%) (Net of Allowances) On the first $30, On the next $30, On the next $30, Remainder Standard Rate (%) Net Total Income (No Allowances) Computation of Salaries Tax 15

16 We are going to cite two examples to demonstrate the computation of salaries tax. At the same time, Example 2 will show the difference between separate taxation and joint assessment of husband and wife, and Example 3 shows the difference between tax payables under progressive taxation and standard rate. Example 2: Mr. Cheung, married with two children aged 9 and 13. In the assessment year of , Mr. Cheung received total salaries of $460,000 and a bonus of $40,000 while the total salaries of Mrs. Cheung is $240,000. The employer of Mr. Chan provides a non-contributory pension fund while Mrs. Cheung contributed $12,000 for the year to the Mandatory Provident Fund scheme. They paid total home loan interest $50,000 for assessment year. Mr. & Mrs. Cheung lived with Mr. Cheung s mother who is over 60 years old. At the same time, Mr. & Mrs. Cheung also maintains Mrs. Cheung s parents who are 58 and 53 years old. In this assessment year, Mr. Cheung has incurred $20,000 self-education expenses and $2,000 approved charities donation. How much Salaries Tax should Mr. & Mrs. Cheung pay for the assessment year of ? Here we first calculated the Salaries Taxes of Mr. Cheung and Mrs. Cheung separately and then we compute their salaries based on joint assessment to see which method is more favourable to them. 16

17 (i) Separate Assessment Table3 Computation of Mr. Cheung s Salaries Tax Payable for Assessment Year Mr. Cheung s Income (Salaries + Bonus = $460,000+$40,000) $500,000 Less: Self-education Expenses $20,000 Approved Charitable Donations 2,000 Home Loan Interest 50,000 72,000 Chargeable Income $428,000 Less: Basic Allowance $100,000 Child Allowance (2 $40,000) 80,000 Dependent Parent Allowance ($60,000 + $15,000) 75, ,000 Net Chargeable Income $173,000 Tax Payable under Progressive Rates: 2% = $600 7% = 2,100 13% = 3,900 19% = 15,770 Tax Payable = $22,370 Tax Payable based on Standard Rate: $428,000 16% = $68,480 Mr. Cheung s Salaries Tax for the Assessment Year of $22,370 17

18 Table 4 Computation of Mrs. Cheung s Salaries Tax Payable for Assessment Year Mrs. Cheung s Income $240,000 Less: Contribution to MPF 12,000 Net Income $228,000 Less: Basic Allowance 100,000 Net Chargeable Income $128,000 Tax Payable under Progressive Rates: 2% = $600 7% = 2,100 13% = 3,900 19% = 7,220 Tax Payable = $13,820 Tax Payable based on Standard Rate: $228,000 16% = $38,480 Mr. Cheung s Salaries Tax for the Assessment Year of = $13,820 18

19 (ii) Joint Assessment Table 5 Computation of Mr. & Mrs. Cheung s Salaries Tax Payable for Assessment Year Mr. & Mrs. Cheung s Total Income ($460,000+$40, ,000) $740,000 Less: Self-education Expenses $20,000 Approved Charitable Donation 2,000 Contribution to MPF 12,000 Home Loan Interest 50,000 84,000 Net Total Income $656,000 Less: Basic Allowance $100,000 Married Person Allowance 100,000 Child Allowance (2 $40,000) 80,000 Dependent Parent Allowance ($60,000 + $15,000) 75, ,000 Net Chargeable Income $301,000 Tax Payable under Progressive Rates: 2% = $600 7% = 2,100 13% = 3,900 19% = 40,090 Tax Payable = $46,690 Tax Payable based on Standard Rate: $656,000 16% = $104,960 Mr. & Mrs. Cheung s Salaries Tax for the Assessment Year of = $46,690 Based on the above calculations, we can see Mr. & Mrs. Cheung need to pay only $36,190 Salaries Tax together if the elect to be assessed separately. This amount is less than $46,690 if joint assessment was performed. Thus, separate assessment is preferred. 19

20 Example 3: Miss Wong, single, earned a salary of $1,200,000 and received $100,000 bonus in the assessment year of Miss Wong joined the Recognized Occupational Retirement Scheme sponsored by her employer and contributed 5% of her monthly salary to the scheme (i.e. $5,000 per month). During the assessment year of , Miss Wong incurred $120,000 home loan interest and $50,000 self-education expenses. Suppose Miss Wong is not eligible for dependent parent/grandparent allowance, how much Salaries Tax should Miss Wong pay for the assessment year of ? Table 6 Computation of Miss Wong s Salaries Tax Payable for the Assessment Year of Miss Wong s Total Income ($1,200,000+$100,000) $1,300,000 Less: Self-education Expenses (Maximum Deduction) $40,000 Contribution to Retirement Scheme (Maximum Deduction) 12,000 Home Loan Interest (Maximum Deduction) 100, ,000 Net Total Income $1,148,000 Less: Basic Allowance $100,000 Net Chargeable Income $1,048,000 Tax Payable under Progressive Rates: 2% = $600 7% = 2,100 13% = 3,900 19% = 182,020 Tax Payable = $188,620 Tax Payable based on Standard Rate: $1,148,000 16% = $183,680 Miss Wong s Salaries Tax for the Assessment Year of = $183,680 20

21 The Inland Revenue Department has developed a simple tax computation program to help taxpayers calculate their tax liability under Salaries Tax or Personal Assessment. Interested party may refer to the following website: Profits Tax Profits Tax is the most important source of tax revenue in Hong Kong. Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits arising in or derived from Hong Kong from such trade, profession or business. There is therefore no distinction made between residents and non-residents. A resident may therefore derive profits from abroad without suffering tax; conversely, a non-resident may suffer tax on profits arising in Hong Kong. Furthermore, if a person sells his/her flat or any property as part of a scheme of profit-making, it will be regarded as a business and he is required to pay tax on any profit he may make Territorial Source Taxation Principle Hong Kong adopts the territorial source principle of taxation where any person carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits arising in or derived from Hong Kong from such trade, profession or business. In other words, a person carrying on a business in Hong Kong but derives his/her profits from abroad would not be subject to Profits Tax Exemptions The following income and profits are excluded from the assessable profits: (i) Dividends received from a corporation which is subject to Hong Kong Profits Tax; (ii) Amounts already included in the assessable profits of other persons chargeable to Profits Tax; (iii) Interest on Tax Reserve Certificates; 21

22 (iv) Interest on, and any profit made in respect of a bond issued under the Loans Ordinance or the Loans (Government Bonds) Ordinance, or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument; (v) Interest income and trading profits derived from long term debt instruments; and (vi) Sums received or accrued in respect of a specified investment scheme by or to the person as: (a) A person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance; or (b) A person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime Deductions Generally speaking, all outgoings and expenses, to the extent to which they have been incurred by the taxpayer in the production of chargeable profits, are allowed as deductions. For certain item, the Inland Revenue Department has the following requirements. (i) Expenditure on Building Refurbishment Any person who incurs capital expenditure on the renovation or refurbishment of business premises is allowed to deduct that expenditure over a period of 5 years in equal installments commencing in the year in which the expenditure is made. 22

23 (ii) Depreciation Allowances (a) Industrial Building Allowances on Industrial Buildings and Structures - Initial allowance: 20% on the cost of construction of the premises; - Annual allowance: 4% on the cost of construction of the premises; - Balancing allowance or charge will be due upon disposal of the premises. (b) Commercial Building Allowances on Commercial Buildings and Structures: - Annual allowance: 4% on the cost of construction of the premises; - Balancing allowance or charge will be due upon disposal of the premises. (c) Plant and Machinery: - Initial allowance: 60% on the cost; - Annual allowance: at rates of 10%, 20% or 30% as prescribed by the Board of Inland Revenue in the Inland Revenue Rules, on the reducing value of the asset. Items qualifying for the same rate of annual allowance are grouped under one "pool". - A balancing allowance is available only on cessation of a business to which there is no successor. A balancing charge can, however, arise whenever the disposal proceeds of one or more assets exceed the reducing value of the whole "pool" of assets to which the disposed items belong. (iii) Donations Charitable donations made to approved charitable institutions or trusts of a public character or to the Government of the Hong Kong Special Administrative Region, amounting in aggregate not less than $100 but not exceeding 25% of the assessable profits, are allowable for deduction from the assessable profits. 23

24 On the other hand, in the computation of assessable profits, certain deduction items are prohibited, such as: (i) Domestic or private expenses and any sums not expended for the purpose of producing the profits; (ii) Any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature; (iii) Any sum recoverable under insurance or contract of indemnity; (iv) Rent of or expenses relating to premises not occupied or used for the purpose of producing the profits; (v) Taxes payable under the Inland Revenue Ordinance, except Salaries Tax paid in respect of employees' remuneration; (vi) Any remuneration or interest on capital or loans payable to or contribution made to a mandatory provident fund scheme in respect of the proprietor or the proprietor's spouse or, in case of a partnership, to its partners or their spouses Treatment of Losses Losses made in an accounting year can be carried forward and set off against future profits of that trade but a corporation carrying on more than one trade may have losses in one trade offset against profits of the other. For gains or losses which are subject to concessionary tax rate, there are special provisions on the adjustment of losses between concessionary trading activities and normal trading activities. An individual who incurs a trading loss and claims Personal Assessment (See Section 3.4) will have the loss allowed as a deduction from his total income Profits Tax Rate All taxpayers are subject to the same corporation or unincorporated business tax rate irrespective of their residential status. In the assessment year of , the Profits Tax rate for corporation is 17.5% whereas that for unincorporated business is 16%. Table 7 lists the Profits Tax rates for the last 8 years. Hong Kong has always 24

25 been maintaining a low tax policy, however, pressured by severe budget deficits between years and , the government has decided to raise the Profits Tax rate from 16% to 17.5% for corporation and from 15% to 15.5% for unincorporated business in year (which is raised to 16% in year ). Though the government has recorded a fiscal surplus in year , the Profits Tax rates remain unchanged for year Table 7 Hong Kong Profits Tax Rates ( to ) Assessment Year Tax Rate for Corporation Tax Rate for Unincorporated Business to % 16.0% % 15.5% to % 15.0% Source: Inland Revenue Department, Hong Kong SAR Government. On the other hand, the Inland Revenue Department does have some concessionary tax measures. For instance, A tax rate at 50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments issued in Hong Kong, and to offshore business of professional reinsurance companies. Also, any permanent or temporary resident of Hong Kong except a person under the age of 18 (unless both his parents have passed away) may obtain relief from the standard rate of tax on his profits and income by electing to be assessed under Personal Assessment. An election may offer relief where the tax computed under Personal Assessment is less than the aggregate amount of the tax charged separately under Profits Tax, Salaries Tax and Property Tax (See Section 3.4) Provisional Profits Tax Profits Tax is chargeable on the actual profits of the year. As the profits for any particular year cannot be known until after the year end, a provisional tax charge is raised during the course of the year. In the following year, when the profits of the previous year are ascertained, an assessment is made and credit is given for the provisional tax paid. 25

26 3.4 Personal Assessment Personal assessment is not a type of tax but a relief for certain individual taxpayers who are chargeable to Profits Tax and Property Tax. Generally speaking, it is applicable to sole-proprietor or partners of a business and property owners who receive rental income are assessed to Profits Tax and Property Tax respectively at standard rate. Under personal assessment, income of the individual taxpayer chargeable to Salaries Tax, Profits Tax and Property Tax are aggregated, and from this total, the following may be deducted: (i) Interest payable on money borrowed for the acquisition of the property let, (the amount deductible for each property would not exceed the assessed income from that property); (ii) Approved charitable donations; (iii) Elderly residential care expenses; (iv) Home loan interest; (v) Mandatory contributions paid to a Mandatory Provident Fund Scheme as an employee; (vi) Contributions paid to a Recognized Occupational Retirement Scheme; (vii) Business losses incurred in the year of assessment; (viii) Losses brought forward from previous years under personal assessment, and (ix) Personal allowances. Salaries Tax. The balance, if any, will then be taxed at the same rates as those used for With reference to Example 4, Table 8 lists out the computations of Miss Lee s Salaries Tax and Property Tax if she elects to be assessed separately whereas Table 9 26

27 shows the computation based on Personal Assessment. The results show that Miss Lee will have to pay an income tax of $25,600 under Personal Assessment, which is much lower than the sum of Salaries and Property Taxes of $35,260 if assessed separately. However, generally speaking, high-income individuals may not be able to reduce their tax liability by Personal Assessment. Example 4: Miss Lee, single, employed by a company and received an annual salary of $260,000 in assessment year 2006/07. For the same period, Miss Lee has let an apartment and received total rental income $120,000 and paid $90,000 interest on the mortgage loan of the apartment. How much tax should Miss Lee pay for this assessment year? Table 8 Miss Lee s Tax Payable on Separate Assessment of Salaries and Property Tax for Assessment Year (a) Salaries Tax: Salary $260,000 Less: Personal Allowances 100,000 Net Assessable Income $160,000 Computation of Tax Payable for : 2% = $600 7% = 2,100 13% = 3,900 19% = 13,300 Salaries Tax Payable $19,900 (b) Property Tax: Total Rental Income $120,000 Less: Statutory Deduction (20% of $120,000) 24,000 Net Assessable Value $96,000 Property Tax Payable (16%) $15,360 27

28 Total Tax Payable (a) + (b) = $19,900 +$15,360 $35,260 Table 9 Miss Lee s Tax Payable under Personal Assessment for Assessment Year Salary $260,000 Rental Income 120,000 Total assessable Income $380,000 Less: Personal Allowances $100,000 Home Loan Interest 90, ,000 Net Assessable Income $190,000 Computation of Tax Payable for : 2% = $600 7% = 2,100 13% = 3,900 19% = 19,000 Total Tax Payable = $25,600 4 Stamp Duty According to the provisions of the Stamp Duty Ordinance, Chapter 117 of the Hong Kong Laws, documents relating to immoveable property and Hong Kong stock transaction need to be stamped and the Stamp Duty in order to become legal binding. These documents include Conveyance on Sale (i.e. Assignment), Agreement for Sale of Residential Property, Lease of Immovable Property (i.e. Tenancy Agreement), and Transfer of Hong Kong Stock. For certain documents, the Stamp Duty is fixed while for others, Stamp Duty is charged on ad valorem basis, according to the value or consideration of the transaction. 4.1 Conveyance on Sale Conveyance on sale refers to every conveyance whereby any immoveable property, upon the sale thereof, is transferred to or vested in a purchaser. Table 10 lists the rates of Stamp Duty imposed on sale of immoveable 28

29 property in Hong Kong effective on 1 st April or value of the consideration. The rates vary with the amount Table 10 Stamp Duty on Conveyance on Sale Amount or Value of the Consideration Rate Does not Exceeds exceed - $1,000,000 $100 $1,000,000 $1,080,000 $100+10% of excess over $1,000,000 $1,080,000 $2,000, % $2,000,000 $2,176,470 $15,000+10% of excess over $2,000,000 $2,176,470 $3,000, % $3,000,000 $3,290,320 $45,000+10% of excess over $3,000,000 $3,290,320 $4,000, % $4,000,000 $4,428,570 $90,000+10% of excess over $4,000,000 $4,428,570 $6,000,000 3% $6,000,000 $6,720,000 $180,000+10% of excess over $6,000,000 $6,720, % 4.2 Agreement for Sale of Residential Property Unlike non-residential properties, Stamp Duty is paid only when a conveyance on sale is executed, an agreement for sale of a residential property is subject to ad valorem Stamp Duty. The government introduced this Stamp duty in 1992 so as to fend off the then speculative activities in the residential property market. Currently, the rates of Stamp Duty on agreement for Sale of Residential Property are the same as that of Conveyance on Sale of Immoveable Property in Hong Kong, (see Table 10). 4.3 Lease of Immovable Property in Hong Kong Lease and agreement for lease of immoveable property in Hong Kong are subject to Stamp Duty. The rates vary according to the terms of the lease. Table 11 shows the detail of the rates. 29

30 Table 11 Stamp Duty on Lease of Immovable Property in Hong Kong Term Rate Not defined or is uncertain 0.25% x of the yearly or average yearly rent Exceeds Does not exceed - 1 year 0.25% x of the total rent payable over the term of the lease 1 year 3 years 0.5% x of the yearly or average yearly rent 3 years - 1% x of the yearly or average yearly rent 3.75% of the consideration if rent is also Key money, construction fee etc. payable under the lease. Otherwise, same duty mentioned in the lease as for a sale of immovable property Duplicate or counterpart $5 each 4.4 Transfer of Hong Kong Stock Contract notes are required to be executed and stamped within a specific period after the sale or purchase of Hong Kong stocks is effected. Stamp Duty is charged by reference to the price paid. If the price paid is substantially below the market value of the shares, Stamp Duty will be assessed based on the market value of the shares as at the date of sale or purchase/transfer. Contract notes are not required in the case of transferring shares as a gift. In such a scenario, the instrument of transfer is chargeable to a fixed duty of $5 plus the full ad valorem by reference to the value of shares transferred. Table 12 Stamp Duty on Transfer of Hong Kong Stock Nature of Document Rate Contract Note for sale or purchase 0.1% of the amount of the consideration or of its of any Hong Kong stock value on every sold note and every bought note Transfer operating as a voluntary $ % of the value of the stock disposition inter vivos Transfer of any other kind $5 Table 12 shows the rates of Stamp Duty on sale or purchase of any Hong Kong stock since 1 st September The Stamp Duty is charged based on the amount or value of the consideration. 30

31 Stamp Duty is an important source of income for the Hong Kong government. In fiscal year , total Stamp Duty received amounted to HK$15.85 billion, or 12.4% of total tax revenue. However, Stamp Duty is heavily dependent on the performance of local property and stock markets. During fiscal year when the property and stock markets were very slow, Stamp Duty amounted to HK$745.8 million only, being 8% of total tax revenue. 5 Estate Duty Estate Duty is a kind of wealth tax. Previously, Estate Duty was charged on the total value of property situate in Hong Kong which passed or was deemed to pass in connection with a person s death if the total value of the property exceeded HK$7.5 million. Depending on the value of the estate, Estate Duty was charged on a sliding scale of rates. However, on 2 nd November 2005, the Legislative Council had passed the Revenue (Abolition of Estate Duty) Ordinance which came into effect on 11 th February No Estate Duty will be charged on estates of persons dying on or after that date. The Estate Duty chargeable in respect of estates of persons dying on or after 15 July 2005 and before 11 February 2006 ("transitional estates") with the principal value exceeding $7.5 million was reduced to a nominal amount of $100. Hong Kong government s decision to abolish the Estate Duty is widely welcomed by most parties. In fiscal year , revenue from Estate Duty is HK$1.468 billion, representing only 1.15% of total tax revenue collected. Most wealthy people in Hong Kong have already made arrangements, such as setting up trust, to avoid paying Estate Duty after they pass away. Abolition of Estate Duty does cost the government a couple of billion of tax revenue, but the benefit is tremendous. It will induce the return of capital flowed out previously due to Estate Duty consideration, and thus enhances and solidifies the position of Hong Kong as an international financial and asset management centre. 31