ACCT3107 Hong Kong Taxation

Tutorial Notes on Unit 1: Tax Administration

Definition of Taxation

 Tax is a compulsory levy made by the government for which nothing is received
directly in return.
 It is the major source of income of the government of the Hong Kong Special
Administrative Region.

Classification of Taxes

1. Direct/Indirect Taxes – whether the taxes are directly assessed on and collected
from organizations/individuals who are intended to bear it.

Types of Taxes

Direct Taxes: Indirect Taxes:

- which are assessed directly - which are passed on to final
on organizations/individuals customers
- examples: - examples:
1. salaries tax 1. betting duty
2. property tax and 2. stamp duty
3. profits tax 3. customs and excise duty

2. Classified by tax bases

- taxes on income:
a. profits tax – charged on business profits (2021/2022: 16.5%* for
corporations and 15%* for others like sole proprietorships and
partnerships)

b. salaries tax – charged on employment and office income (2021/2022:

basically on progressive basis from 2% to 17%; i.e. first $50,000: 2%;
second $50,000: 6%; third $50,000: 10%; fourth $50,000: 14%; above
$200,000: 17%)

c. property taxes – charged on property rental income (2021/2022: standard

tax rate – 15%)

*Under the two-tiered profits tax rates regime commencing from the year of assessment of
18/19, the profits tax rate for the first $2 million of profits of corporations will be lowered to
8.25 per cent. Profits above that amount will continue to be subject to the tax rate of 16.5 per
cent. For unincorporated businesses which are mostly partnerships and sole proprietorships, the
two-tiered tax rates will correspondingly be set at 7.5 per cent and 15 per cent.

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 - taxes on wealth: estate duty 遺 產 稅 [abolished under the Revenue
(Abolition of Estate Duty) Ordinance 2005]. That means, the estate duty is
no longer applied to persons who died after Feb 10, 2006.

- Taxes on documents/instruments: stamp duty 印花稅

 Most of the Hong Kong stamp duty is generated from documents

relating to
▪ purchase and sale of immovable property in Hong Kong ,
▪ the leasing of immovable property in Hong Kong, and
▪ the purchase and sale of HK stock

 e.g. agreements for the purchase and sale of immovable residential

property in Hong Kong
Stamp duty varies with the value of the consideration 代價 or the
value of the property. For instance, if the value of the property is not
more than $2,000,000, the stamp duty is 1.5% of the value of the
property. If the value of the property is above $21,739,130, the stamp
duty is 8.5% of the value of the property (note that the above rates are
applicable to the properties acquired on or after Feb 23, 2013).

 e.g. instruments for the sale and purchase of Hong Kong stock
Stamp duty is 0.1% of the value of the transfer

 e.g. instruments for the lease of immovable property in Hong Kong

The rate of stamp duty on lease increases with the lease period. For
instance, if the lease period is one year or less, the rate of stamp duty is
0.25% of the total rent of the lease. If the lease period is longer than
3 years, the stamp duty is 1% of the average yearly rent.

Basic Features of Hong Kong Tax System For doing tutorial question Q1

 Low tax rates

Using profits tax as an example, HK’s profits tax rate (corporation: 16.5%) is
relatively low as compared to other developed/developing countries
 Australia: 30%
 Japan: 29.74%
 France: 28.41%
 United States 25.75%
 China: 25%
 Korea: 25%
 Taiwan: 20%
 United Kingdom: 19%
 Singapore: 17%

(Source: Corporate Tax Rates Around the World 2021, Tax Foundation)

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 Territorial source concept
Only profits which have a source in Hong Kong are taxable (只有香港境內收入
須納稅). For example, property tax is only charged on owners earning rental
income from land and/or buildings located in Hong Kong.

 Schedular system 以分開稅目徵收入息稅 (i.e. no total income tax 沒有總

入息概念)
Income taxes including salaries tax, property tax and profits tax are separately
charged on different types of income unless the taxpayer has elected for personal
assessment 個人入息課稅 (discussed in the topics of salaries tax).

If an individual elects for personal assessment (P.A.), his/her different types of

income (e.g. income from jobs, rental for properties etc.) are aggregated together
for determining his/her tax liability.

Illustration:
Suppose Mr. A has more than one source of income:

1. Salaries income from a job

2. Rental income from letting out a residential property
3. Business income from running an online shop

Without electing the personal assessment:

There will be no aggregation of income. Mr. A needs to pay three types of taxes
separately as he earns three sources of income.

With P.A. elected:

Government will sum all the income earned by Mr. A. Mr. A can then enjoy the
benefits of P.A. by paying lower tax. How? Suppose Mr. A made loss for the
online business, this loss can offset his other sources of income and Mr. A will
pay lower tax.

 No interest income tax

The interest tax provisions were repealed by the Inland Revenue (Amendment)
(No 2) Ordinance 1989. Recipients of interest income from debenture, deposit,
mortgage etc. were formerly subject to interest tax.

 No dividend income tax

Profits tax is not levied on dividend income

 No capital gain tax (沒有資本增值稅)

No capital gain tax is charged on the sale or disposal of a capital asset in Hong
Kong.

 No goods and services tax (沒有銷售稅)

Now refer to Tutorial Question 1  Is the tax base in HK too narrow???

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Sources of Hong Kong Tax Law

The main source of Hong Kong tax law are

1. statutes and
2. case law.

Statutes (法例)
 Statutes are laws passed by a lawmaking body and formally written down.

 There are many tax statutes. Some of the statutes administered by the
Inland Revenue Department include Inland Revenue Ordinance (Chapter
112 – Property Tax, Salaries Tax and Profits Tax are levied under the Inland
Revenue Ordinance), Betting Duty Ordinance (Chapter 108), and Stamp
Duty Ordinance (Chapter 117).

Case Law (案例)

 The doctrine of judicial precedent applies.

 The decisions of Hong Kong courts and those decisions of the Hong Kong
Court of Final Appeal concerning Hong Kong tax cases are binding (具法律
約束力) on Hong Kong courts of lower level.

 If a taxpayer does not satisfy with an assessment, then he/she may appeal to
the BoR (Board of Review 稅務上訴委員會). Further appeal against a
BoR decision may be made to the Court of First Instance, then to the Court
of Appeal and finally to the Court of Final Appeal (also refer to p.7
‘objections and appeals’).

 Here are the different levels of Hong Kong courts:

Court of Final Appeal (終審法院)

Court of Appeal (上訴法庭)

Court of First Instance (原訴法庭)

 Courts in Hong Kong often rely on tax cases of Britain and other
Commonwealth countries (e.g. Australia, New Zealand, Singapore,
Malaysia, and Canada). The decisions of UK and commonwealth courts
are of persuasive authority, however, their decisions are NOT directly
binding.
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Departmental Interpretation and Practice Notes (DIPN)(稅務條例釋義及執行指引)

 The IRD (Inland Revenue Department) has its own practices in interpreting
the tax statutes. Some of these practices are issued to the public for
information and guidance in the form of DIPN.

 However, these notes are of NO binding force (無法律約束力).

Applicable laws Also for doing tutorial question Q1

The following Articles from the “Basic Law” are related to the tax arrangement of the
HKSAR:

Article 8: The laws previously in force in HK will be maintained.

Article 106: HK SAR shall use its financial revenues exclusively for its own
purposes, and they shall not be handed over to the China’s Central
Government, and China’s Central Government will not levy taxes in
the HKSAR.

Article 108: HK SAR will practice an independent taxation system.

The HK SAR, taking the low tax policy previously pursued in HK as a
reference, will enact laws on its own concerning types of taxes, tax
rates, tax reductions, allowances and exemptions, and other matters of
taxation.

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Obligations of the Taxpayers (Inland Revenue Ordinance Section 51)

IRO S51 (Returns and information to be furnished 須提交的報稅表及資料) imposes

obligations on the taxpayers to supply information to the Inland Revenue Department
under different circumstances. Below is a summary.

Section 51 Contents of the Section Time limit

51(1) Submit the Tax Returns Within the time specified by
If a person receives a tax return the assessor
 he should complete and submit
the return

51(2) Notify the CIR that you are within 4 months from the end
chargeable to tax of the basis period for that
If a person is liable to tax for any year of assessment
year of assessment
 he should inform the
Commissioner in writing that he is
chargeable to tax

51(3) Submit fuller Tax Returns Within the time specified by

An assessor may require a taxpayer the assessor
to submit a fuller tax returns

51(6) Notify the CIR for the cessation of Within 1 month after
the sources of chargeable income cessation
If a person ceases to own any source
of income
 he should inform the CIR in
writing

51(7) Notify the CIR for the departure 1 month before the expected
from HK date of departure
If a person who is chargeable to tax
and about to leave HK for over 1
month (other than business trips)
 he should inform the CIR in
writing

51(8) Notify the CIR about the change Within 1 month of change
of address
If a person who is chargeable to tax
changes his address
 he should inform the CIR in
writing
51C A person carrying on a trade, Not less than 7 years after the
profession or business in HK is completion of transactions
required to keep business records

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51D A person who is owner of land or Not less than 7 years after
buildings situated in HK is required completion of transactions
to keep rent records

Obligations of Employer (IRO S52)

Obligations of employers are stated in Section 52 (Information to be furnished by

officials and employers (人員及僱主所須提交的資料).

Section 52 Contents of the Section Time Limit

52(2) Submit employer’s return Time specified by the
 stating the names, places of residence assessor
and the full amount of remuneration of all
employees

52(4) When a employer commences to employ in within 3 months after

HK an individual the date of
 he should inform the CIR in commencement
writing about the
a) name and address of the individual,
b) date of commencement, and
c) the terms of employment

52(5) When a employer ceases to employ in HK 1 month before

an individual cessation
 he should inform the CIR in writing
about the
a) name and address of the individual, &
b) the expected date of cessation

52(6) Notification of departure from HK 1 month before

 An employer of an individual who is employee’s departure
chargeable to salaries tax and is about to
leave HK for over 1 month (other than
frequent business trips) should inform the
CIR in writing
 of the expected date of departure of such
individual

52(7) Not to make payment to employee 1 month from the date

If an employee has ceased or is about to of giving s52(6) notice
cease employment
 an employer is required to inform the
CIR (s52(6)) in writing AND

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  to withhold all the payment to the
employee for one month from the date on
which the employer gave notice under
s52(6).

Now refer to Tutorial Question 2 to discuss the obligations of taxpayer and employer.

Objections and Appeals

If a taxpayer objects against an assessment

 notice of objection in writing stating the grounds of objection must be lodged
within 1 month after the date of the notice of assessment.

In cases where no agreement is possible, valid objection will be referred to the

Commissioner of IRD for her determination (稅務局長單方面決定).

If a taxpayer disagrees with the CIR’s determination (局長裁決書), he can appeal to

the Board of Review (稅務上訴委員會). Appeal must be lodged within 1 month
after the issue of the CIR’s determination. After a taxpayer has lodged an appeal
with the BoR, he can give notice in writing that he desires the appeal to be transferred
to the Court of First Instance without going through the BoR.

If a taxpayer is dissatisfied with the decision of the Board, he may make an

application requiring BoR to state a case (呈述案件) for the opinion of the Court of
First Instance (原訴法庭) within 1 month of the Board’s decision. However, once
a case has been determined by the BoR, the taxpayer can bypass the Court of First
Instance and appeal directly to the Court of Appeal provided that the Court of Appeal
grants leave for such an application.

Court of Appeal (上訴法庭)

Court of Final Appeal (終審法院)