assessing functions - inland revenue department · the total amount of tax payable is restricted to...

6 Annual Report 2015-16

3 Assessing Functions

TheDepartmentraisesrevenuethroughtaxes,dutiesandfeesinaccordancewiththerelevantlegislation.Earnings

andprofitstaxareassessedbyreferencetotheincomes/profitsofthetaxpayersinthepreviousyear,whereas

dutiesandfeesarechargedatthetimetherelevantactivitiesoccur.For2015-16,earningsandprofitstaxassessed

increasedby$5.5billion(2.7%)(Schedule 2)ascomparedwiththepreviousyear.Yet,thetotalamountofduties

andfeescollecteddroppedby$11.5billion(11.9%).

Profits Tax

Profitstaxisleviedonindividuals,corporations,bodiesofpersonsandpartnerships,inrespectofassessableprofits

arisinginorderivedfromHongKong.Fortheyearofassessment2015-16,thetaxratesforcorporationsandnon-

corporatepersonsremainedunchangedat16.5%and15%respectively.

Theamountofprofitstaxassessedin2015-16was$139billion,whichwas$6.8billion(5.1%)morethanthatof

thepreviousyear,reflectingamodestgrowthintheHongKongeconomy(Figure 5).

The amounts of final tax assessed in respect of different business sectors are shown in Schedules 3 and 4. Of the

totalfinaltaxassessedfortheyearofassessment2014-15,thepropertyandfinancialsectorstogethercontributed

44%andthedistributionsectorgenerated24.2%(Figure 6).

Figure 5 Profits tax assessed

140

120

115.2

5.2

127.3

4.9

118.1

4.8

134

5

100

80

60

40

20

0

($b)

2012-13

Corporations Unincorporated Businesses

2013-14 2014-15 2015-16

Figure 6 Ratios of corporation profits tax assessed under 2014-15 final assessments by business sectors

Manufacturing(5.4%)

Distribution(24.2%)

Banking(21.1%)

Public Utilities(5.8%)

Property, Investment & Finance(22.9%)

Others(20.6%)

7Annual Report 2015-16

Salaries Tax

Salariestaxischargedonallincomesfromanyoffice(e.g.adirectorship)oremploymentandpensionarisinginor

derived from Hong Kong. The total amount of tax payable is restricted to the standard rate on the net total income

(withoutallowances)oftheindividualconcerned.Fortheyearofassessment2015-16,thestandardrateremained

unchangedat15%.

Ascomparedwiththepreviousyear,thenumberofsalariestaxassessmentsmadeduring2015-16increasedby

1.7%.However,thetotalamountoftaxassessedwas2.3%lessafterimplementingthesalariestaxreliefmeasures

inthe2015-16Budget(Figure 7).

Figure 7 Salaries tax assessments

2,800

2,700

2,600

2,500

2,575

2,676

2,750

Number

2,797('000)

2012-13 2013-14 2014-15 2015-16

70

60

50

40

30

20

10

0

52.657.7

62.0 60.6

($b)Tax assessed

2012-13 2013-14 2014-15 2015-16

Analyses of salaries tax assessments and allowances

granted in respect of taxpayers at various income levels

fortheyearofassessment2014-15areprovided in

Schedules 5 and 6.

Fortheyearofassessment2014-15,thenumberof

standardratetaxpayersincreasedby1,841to29,692.

Thesetaxpayerstogethercontributed39.5%ofthe

salariestaxassessed,anincreaseof2.5%compared

withlastyear(Figure 8).

Figure 8 Standard rate taxpayers

40

30

1.6 1.7

37.039.5

20

10

02013-14

Final Assessments2014-15

Final Assessments

(%)

%oftotalnumberoftaxpayers %ofsalariestaxassessed


Notification Requirements of Employers

EmployersarerequiredtonotifytheDepartmentofcommencementsandcessationsofemploymentaswellas

employees’impendingdeparturefromHongKongformorethan1month.Besides,employersarerequiredto

prepareannualemployer’sreturnstoreporttheemolumentsofeachoftheiremployees.Duringtheyear,406,264

employers filed employer’s returns with the Department.

TheDepartmentprovidese-SeminarsanddisseminatestaxinformationtoemployersontheIRDwebsitetohelp

themunderstandtherelevantstatutoryrequirements. Thecontentscovercompletionofemployer’sreturns,

employer’sobligationsandanswerstofrequentlyaskedquestions. Employerscanalsoobtainspecimensof

completedemployer’sreturnsandnotificationthroughtheFax-A-Formservice.

Property Tax

Propertyowners (includingcorporations)aresubject

to property tax which is charged at the standard rate

in respect of the net assessable value of the property.

For the yearofassessment2015-16, the standard

rate remainedunchangedat15%. Rents received

from properties solely owned by individuals should be

declaredinTaxReturns-Individuals(BIR60);whilstrents

receivedfrompropertiesjointlyownedorco-ownedby

individuals or properties held by corporations / bodies

of persons should be declared in Property Tax Returns

(BIR57/BIR58).Propertyownersthatpaypropertytax

in respect of premises used for their businesses can have

such payments set off against their profits tax liabilities.

Forcorporations,incomearisingfrompropertiesowned

by them is also subject to profits tax at the corporation

rate.Toobviatetheneedforyearlyset-offofproperty

taxagainstprofits tax,acorporationcanapply for

exemption of property tax on the property concerned.

Statistics on the classification of properties and

classif ication by number of owners, based on

the records of the Department, are provided in

Schedule 7. The number of assessments made in

2015-16wasmorethanthat inthepreviousyearby

4.5%.Thetotalamountofpropertytaxassessedalso

increasedby3.1%(Figure 9).

Figure 9 Property tax assessments

600

550

500

552

571 573

Number599('000)

2012-13 2013-14 2014-15 2015-16

4

3

2

1

0

2.502.81

3.233.33

($b)Tax assessed

2012-13 2013-14 2014-15 2015-16


Personal Assessment

Ifanindividualhasincomechargeabletoprofitstaxand/orpropertytax,he/shemayelectforpersonalassessment.

Underpersonalassessment,alltheincomesofthetaxpayerandhisorherspouse(ifmarried)areaggregatedand,

afterdeductionofallallowances,areassessedattheprogressivetaxratesapplicabletosalariestax.Inappropriate

circumstances,thiswouldreducethetotaltaxliabilityofthetaxpayerandhisorherspouse.

In2015-16,boththenumberofassessmentsmadeandthe totalamountof taxassessedunderpersonal

assessmentweresimilartothoseoflastyear(Figure 10).

Figure 10 Assessments made under personal assessment

400

350

300

353

375

360

Number

362

('000)

2012-13 2013-14 2014-15 2015-16

5

4

3

2

1

0

4.044.41

4.87 4.85($b)

Tax assessed

2012-13 2013-14 2014-15 2015-16

Tax Treaty Network

Double taxation arises where the same item of income or profit of a taxpayer is subject to tax in Hong Kong as well

as in another tax jurisdiction. To establish a tax treaty network can help minimise exposure of Hong Kong residents

andresidentsofthetaxtreatypartnerstodoubletaxation. Itwillalsofacilitatetheflowsoftrade,investment

andtalentbetweenHongKongandtherestoftheworld,andenhanceHongKong’scompetitivenessasan

internationalfinancial,investmentandcommercialhub.

Asat31March2016,HongKonghassignedcomprehensivedoubletaxationagreements(coveringvarioustypes

ofincome)with34jurisdictions.TheyareAustria,Belgium,Brunei,Canada,theCzechRepublic,France,Guernsey,

Hungary,Indonesia,Ireland,Italy,Japan,Jersey,Korea,Kuwait,Liechtenstein,Luxembourg,theMainlandofChina,

Malaysia,Malta,Mexico,theNetherlands,NewZealand,Portugal,Qatar,Romania,Russia,SouthAfrica,Spain,

Switzerland,Thailand,theUnitedArabEmirates,theUnitedKingdomandVietnam.

HongKong,asaresponsiblememberoftheinternationalcommunity,iscommittedtoenhancingtaxtransparency

andpreventingcross-border taxevasion. Tocomplywiththe latest internationalstandardonexchangeof

information,HongKongenteredintotaxinformationexchangeagreementswithappropriatepartnerssince2014.


Asat31March2016,HongKonghassignedtaxinformationexchangeagreementswith7jurisdictions.Theyare

Denmark,theFaroes,Greenland,Iceland,Norway,SwedenandtheUnitedStatesofAmerica.

Advance Rulings

Taxpayers may apply for an advance ruling on how a provision of the Inland Revenue Ordinance applies in relation

toaparticulararrangement.Afeeischargedfortheserviceona“costrecovery”basis.Theapplicantisrequired

topayan initialapplicationfeeof$30,000forarulingconcerningtheapplicationofthe“TerritorialSource

Principle”inaprofitstaxcase,or$10,000forarulingonanyothermatter.Anadditionalfeeispayableifthe

processingtimeexceedsthespecifiedlimit.TheDepartmentendeavourstorespondwithin6weeksofthedateof

application,providedthatallrelevantinformationissuppliedwiththeapplicationandfurtherinformationfromthe

applicantisnotrequired.

During2015-16,theDepartmentcompletedtheprocessingof29advancerulingapplications(Figure 11).Mostof

the applications were for rulings on profits tax matters.

Figure 11 Advance rulings

2014-15 2015-16Number Number

Awaiting decision at the beginning of the year 7 20

Add: Applicationsreceivedduringtheyear 46 35

53 55

Less: Disposedof-

Rulings made 19 16

Applications withdrawn 9 12

Rulings declined 5 33 1 29

Awaiting decision at the end of the year 20 26

Advance Pricing Arrangement

AnAdvancePricingArrangement(APA)isanarrangementthatdeterminesinadvanceanappropriatesetofcriteria

forthedeterminationofthetransferpricingofcross-bordertransactionsbetweenassociatedenterprises.TheAPA

process gives enterprises the opportunity to reach agreements with tax administrations on the method of applying

thearm’slengthprinciplesothattransferpricingissuescanbemoreefficientlydealtwithinrealtime,thusavoiding

the risk of transfer pricing audit later. This arrangement enables enterprises to better assess their tax exposure and

facilitates their business operation.

A unilateral APA is an arrangement between the Commissioner and the enterprise concerning the transfer pricing

ofitscross-bordertransactionswithanassociatedenterprise.AstheAPAprocessdoesnotinvolvetheagreement


withacomprehensiveavoidanceofdoubletaxationagreement (CDTA)partner, itdoesnotguaranteethe

agreement of the CDTA partner to the arrangement made.

A bilateral APA is an arrangement between the Commissioner and a CDTA partner concerning the transfer pricing

oftheabovementionedcross-bordertransactions.Itthereforeprovidescertaintytoenterprisesthatdoubletaxation

will not arise. The same also applies to a multilateral APA which is a similar arrangement involving the partners of

two or more CDTAs.

TheDepartmentrolledouttheAPAprogrammeinApril2012.Atpresent,theDepartmentwillonlyconsider

bilateral or multilateral APA applications due to resource constraints and the deficiency of a unilateral APA. Up to

31March2016,theDepartmenthasreceivedquiteanumberofapplicationsinrelationtoCDTAwithdifferent

partnersincludingtheMainlandofChina,Japan,MalaysiaandtheNetherlands.Thesecasesarecurrentlyunder

different stages of the APA programme and a few of them have already been completed.

Objections

A taxpayer who is aggrieved by an assessment may lodge a notice of objection to the Commissioner within the

prescribedtimelimit.Iftheobjectionisagainstanestimatedassessmentraisedintheabsenceofataxreturn,a

properlycompletedreturn,togetherwiththesupportingaccountswhereapplicable,mustalsobeaccompanied

with the notice of objection. A significant proportion of the objections received each year arise from estimated

assessments.Mostoftheseobjectionsaresettledpromptlybyreferencetothereturnssubsequentlyreceived.

Many of the other types of objections are also settled by agreement between the taxpayers and the assessors

concerned. Only relatively few objections are ultimately referred to the Commissioner for determination. During

2015-16,theDepartmentcompletedtheprocessingof79,999objections(Figure 12).

Figure 12 Objections

2014-15Number

2015-16Number

Being processed at the beginning of the year 32,871 35,422

Add: Receivedduringtheyear 82,293 82,237

115,164 117,659

Less: Disposedof-

Settled without determination 79,323 79,483

Determinations:

Assessments confirmed 246 313

Assessments reduced 93 113

Assessments increased 66 86

Assessments annulled 14 419 79,742 4 516 79,999

Being processed at the end of the year 35,422 37,660


Appeals to the Board of Review

A taxpayer who is dissatisfied with the Commissioner’s determination of his objection may appeal to the Board

ofReview(InlandRevenueOrdinance)(theBoard).TheBoardisanindependentstatutorybody.Asat31March

2016,theBoardconsistedofachairmanand8deputychairmen,whohavelegaltrainingandexperience,aswell

as68members.During2015-16,theBoardsettled56appealcases(Figure 13).

Figure 13 Appeals to the Board of Review

Number

Awaiting hearing or decision as at 1 April 2015 48

Add: Receivedduringtheyear 53

101

Less: Disposedof-

Withdrawn 21

Decided:

Assessments confirmed 23

Assessments reduced in full 6

Assessments reduced in part 1

Assessments increased 4

Others 1 35 56

Awaitinghearingordecisionasat31March2016 45

Appeals to the Courts

AdecisionoftheBoardisfinal,providedthateitherthetaxpayerortheCommissionermay,pursuanttosection

69oftheInlandRevenueOrdinance,makeanapplicationrequiringtheBoardtostateacaseonaquestionoflaw

arisingfromitsdecisionfortheopinionoftheCourtofFirstInstance.Witheffectfrom1April2016,thesection

69wasamendedtoallowthetaxpayerortheCommissionertoapplyfor leavetoappealdirectlytothecourt

againstthedecisionoftheBoardonquestionsof lawwithouthavingtheBoardtostateacaseforthecourt’s

consideration.

During2015-16,theCourtofFirstInstanceruledontwocasesrelatingtotheInlandRevenueOrdinance.Inan

appealfromtheCommissioner,theCourtofFirstInstanceremittedthecasewithitsopiniontotheBoard.Inthe

otherappealconcerningchargeabilityofbenefitsaccrueduponterminationofemployment,theCourtofFirst

Instance dismissed the taxpayer’s appeal.

Duringtheyear,theCourtofAppealruledagainstataxpayer inanappealastowhether licencefeeswere

chargeable to tax.


TheHongKongCourtofFinalAppealOrdinanceprovidesthat,ataxpayerortheCommissionermay,withthe

leaveoftheCourtofAppealortheCourtofFinalAppeal,appealagainstthejudgmentoftheCourtofAppeal.

During2015-16,theCourtofFinalAppealgrantedtheCommissionertheleavetoappealagainstjudgmentsofthe

CourtofAppealin2relatedcases,however,therelevantappealsconcerningwhethercertainprofitsweretrading

innatureweresubsequentlydismissedbytheCourtofFinalAppeal.

Figure 14setsoutthestatisticsconcerningappealstotheCourtsduring2015-16.

Figure 14 Appeals to the Courts

Court of First Instance

Court of Appeal

Court of Final Appeal Total

Awaiting hearing or decision as at 1 April 2015 4 1 0 5

Add: Lodgedduringtheyear 1 0 2 3

5 1 2 8

Less: Disposedof-

Decided 2 1 2 5

Discontinued 1 0 0 1

Awaitinghearingordecisionasat31March2016 2 0 0 2

Business Registration

The Department aims to maintain an efficient business

registration system. A person carrying on a business

in Hong Kong must register the business and pay

therequiredfeeand levy. Thenumberofbusiness

registrationsasat31March2016stoodat1,427,064,

whichwasanalltimehigh.Itwas21,362morethan

thatasat31March2015(Figure 15).

Business registration certificates are generally valid

foroneyear,butbusinessesmayelect for3-year

certificates.Asat31March2016,20,819businesses

held3-yearcertificates.

Figure 15 Number of business registrations

1,600

1,400

1,149,197 1,176,220

256,505 250,8441,200

1,000

800

600

200

400

031.3.2015 31.3.2016

('000)

1,405,702 1,427,064

Corporations Unincorporated Businesses


Theamountofbusinessregistrationfeesandpenaltiescollected in2015-16 increasedto$2,607million. It

representsanincreaseof5.1%comparedwithlastyear(Figure 16).Businessregistrationstatisticsaresetoutin

Schedule 8.

Figure 16 Business registration statistics

2014-15 2015-16 Increase

Numberofcertificatespaid(MainandBranch) 1,382,214 1,402,548 +1.5%

Fees(inclusiveofpenalties)collected($m) 2,481 2,607 +5.1%

UndertheBusinessRegistrationOrdinance,asmallbusinesswithaveragemonthlysalesorreceiptsbelowa

specifiedlimit($10,000forbusinessesderivingprofitsmainlyfromthesaleofservices,and$30,000forother

businesses)canapplyforexemptionfrompaymentofthebusinessregistrationfeeandlevy.Whereanapplication

forexemptionisnotallowed,thebusinessoperatormayappealtotheAdministrativeAppealsBoard.Thenumber

ofexemptionsgrantedduring2015-16was16,103,representinganincreaseof16.4%fromthepreviousyear.No

appeal case was received by the Board during the last two years.

Stamp Duty

Stamp duty is charged on instruments effecting

propertytransactions,stocktransactionsandleasing

ofpropertyinHongKong(Figure 17).

TheStampDuty (Amendment) (No.2)Ordinance

2014 (“AmendmentOrdinance”)wasgazetted

on25 July2014. TheAmendmentOrdinance

introduced higher rates of ad valorem stamp

duty (“AVD”)oncertain instruments relating to

immovableproperties executedonor after23

February2013;andadvancedthechargingofAVD

oninstrumentsrelatingtonon-residentialproperty

transactionsfromtheconveyanceonsaletotheagreementforsaleexecutedonorafterthatdate.One-offreceipt

of additional stamp duty chargeable on certain instruments relating to immovable properties executed during the

transitionalperiod(from23February2013to24July2014)uponpassageoftheAmendmentOrdinanceresulted

insignificantlylargecollectionsin2014-15.Ontheotherhand,thenumberofimmovablepropertytransactions

hasbeendecreasingsinceAugust2015.Asaresult,thestampdutycollectionsfromimmovablepropertiesin

2015-16significantlydecreasedby42%ascomparedtothatof2014-15.

Figure 17 Composition of stamp duty collections

Leases etc.(1%)

Shares(53%)

ImmovableProperties(46%)2015-16


Thenumberofsecuritiestransactionshas increasednoticeably inthefirsthalfof2015-16. Thestampduty

collectionsfromsharetransactions in2015-16were$33.4billion,representinganincreaseof34%fromthe

previous year.

Overall,therewasadecreaseof16%inthetotalstampdutycollectedduringtheyear.Thenumberofdocuments

stampedalsodecreasedby8%(Figure 18 and Schedule 9).

Figure 18 Stamp duty collections

2014-15($m)

2015-16($m)

Increase/Decrease

Immovable Properties 49,215 28,494 -42%

Shares 24,885 33,410 +34%

Leasesandotherdocuments 745 776 +4%

Total 74,845 62,680 -16%

Estate Duty

Estate duty is charged on that part of a deceased person’s estate situated in Hong Kong. The threshold for levying

dutyis$7.5millionandthedutyratesrangefrom5%to15%,dependingonthevalueoftheestate.

TheRevenue(AbolitionofEstateDuty)Ordinance2005cameintoeffecton11February2006abolishingestate

duty in respect of persons passing away on or after that date. The estate duty chargeable in respect of estates

ofpersonsdiedbetweentheperiod15July2005to10February2006,withtheprincipalvalueexceeding$7.5

million, isreducedtoanominalamountof$100.Withtheabolitionofestateduty,thenumberofnewcases

reducedgraduallyto771in2015-16,adropof14%fromthelastyear(Figure 20).

Figures 19 and 20 show the composition of estates and cases processed for the past two years.

Figure 19 Composition of estates

10.6%

25.8%0.7%1.7%

10.4%

52.9%18.9%

0.4%4.7% 73.9%

Immovable Properties QuotedShares UnquotedShares Bank Deposits Others

2014-15

2015-16


Figure 20 Estate duty cases

2014-15 2015-16Number Number

New cases 897 771

Cases finalised

-Dutiable 7 17

-Exempt 868 763

875 780

Estatedutyof$30millionwascollectedduringtheyear (Schedule 10),adecreaseof$148million (83%)

compared with the previous year.

Estatedutyispayableondeliveryofanestatedutyaffidavitoraccount(orwithin6monthsfromthedateofthe

deceased’sdeath,whicheveristheearlier).$6.3millionwasreceivedduringtheyearinadvanceoftheissueof

formalassessments(Schedule 10).

Betting Duty

Betting duty is charged on the net stake receipts from betting on horse races and football matches and on the

proceedsofMarkSixlotteries,alladministeredbytheHongKongJockeyClub.In2015-16,theratesofbetting

dutyonthesebettingactivitiesremainedunchanged(Figure 21).

Figure 21 Rates of betting duty in 2015-16

Rate

Horse racing

Localbetsonlocalhorseraces Net stake receipts

thefirst$11billion 72.5%

thenext$1billion 73%

thenext$1billion 73.5%

thenext$1billion 74%

thenext$1billion 74.5%

the remainder 75%

Localbetsonnon-localhorseraces Net stake receipts 72.5%

Mark Six lotteries Proceeds 25%

Football betting Net stake receipts 50%

Thetotalbettingdutycollected in2015-16was3.3%higherthanthatofthepreviousyear(Figure 22 and

Schedule 11).


Figure 22 Betting duty collections

2014-15($m)

2015-16($m)

Increase

Horse racing 11,932.5 12,316.5 +3.2%

Mark Six lotteries 1,970.3 2,032.2 +3.1%

Football betting 5,576.5 5,778.5 +3.6%

Total 19,479.3 20,127.2 +3.3%

Tax Reserve Certificates

TaxpayersmaypurchaseTaxReserveCertificates(TRCs)

under two situations.

The first situation applies to taxpayers who wish to

save for the payment of their future tax liabilities.

TheDepartmenthas setup twoschemes,namely

the“ElectronicTaxReserveCertificatesScheme”for

all taxpayersand the“Save-As-You-Earn” (SAYE)

Scheme for civil servants and civil service pensioners.

WithaTaxReserveCertificateaccount,taxpayersmay

purchaseTRCsbyvariouschannels, includingbank

auto-pay, telephone, the InternetandbankATM.

Under the“SAYEScheme”,civil servantsandcivil

service pensioners can purchase TRCs through monthly

deductions from their salaries / pensions. Interest is

payable on the TRCs when they are redeemed for

settlementoftaxliabilities,basedontheinterestrate

prevailingat thetimeofpurchase, foramaximum

periodof36monthsfromthedateofpurchase.

In2015-16,therewasanincreaseof2.6%and23.1%

respectively in the number and the amount of TRCs

soldunder the“ElectronicTaxReserveCertificates

Scheme”butaslightdecreaseof0.8%inthenumber

andanincreaseof3.5%intheamountofTRCssold

underthe“SAYEScheme”(Schedule 12).Overall,the

totalamountofTRCssolddecreasedslightlyby0.5%

(Figure 23).

Figure 23 Certificates sold

100

60

80

20

40

01,604 1,812

89,480 90,299

Number

2014-15 2015-16

('000)

429.1 513.3

2014-15 2015-16

3,000

2,000

1,000

0

2,203.72,106.1

($m)Amount

Certificates relating to Objections and Appeals

Certificates other than for Objections and Appeals


ThesecondsituationappliestotaxpayerswhoobjecttotaxassessmentsandarerequiredtopurchaseTRCsinrespect

of the tax in dispute. Such TRCs are used to settle any tax found payable upon the finalisation of the objection or

appeal.InterestisonlypayableontheamountoftheTRC,ifany,subsequentlyrequiredtoberepaidtothetaxpayer,

andiscomputedatfloatingratesoverthetenureoftheTRC.

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