Hong Kong Taxation: Law and Practice 2012–13 Edition

1. General Scheme of Taxation in Hong Kong

Chapter 1 ■ General Scheme of Taxation in Hong Kong 1.1 Law, Interpretation and Policy 2 1.2 The Taxes in General 9 1.3 Estate Duty (EDO) 14 1.4 Stamp Duty (SDO) 14 1.5 Income Taxes 16 1.5.1 Year of assessment (Sec. 2) 18 1.5.2 Property Tax (Part II) 18 1.5.3 Salaries Tax (Part III) 19 1.5.4 Profits Tax (Part IV) 20 1.5.5 Depreciation allowances (Part VI) 22 1.5.6 Rates of Tax (Sch. 2) 23 1.5.7 Personal allowances (Sch. 4) 24 1.5.8 Personal Assessment (Part VII) 25 1.5.9 Returns and information (Part IX) 27 1.5.10 Assessments and payment of Tax (Parts X, XA, XB, XC, and XII) 28 1.5.11 Objections and appeals (Part XI) 29 1.5.12 Board of Inland Revenue (Sec. 3) 30 1.6 Inland Revenue Department 31 1.7 Taxation System from 1 July 1997 33 1.7.1 The Basic Law 33 1.7.2 The Hong Kong Reunification Ordinance 34 2 Hong Kong Taxation 1.1 Law, Interpretation and Policy The law governing the imposition of income based taxes in Hong Kong is contained in the Inland Revenue Ordinance (IRO) and its subsidiary legislation , the Inland Revenue Rules (IRR), and in various orders made by the Chief Executive in Council. The IRO, which was enacted in 1947 to impose income taxes in Hong Kong, is based on a legislative package developed by the UK for its colonies. The same package was the basis of the taxation system in many Commonwealth countries, although those countries have generally modified their legislation to such an extent that its original form is barely recognisable. Nonetheless, the IRO contains similar, and in some cases, identical wording to taxation legislation currently in use in the UK, Australia, South Africa and various other Commonwealth countries, which is why interpretation of the IRO is influenced by legal decisions in those countries . The IRO has in fact been changed relatively little from its original form and the reasons for this can be easily understood by considering the policies of successive Government administrations as regards taxation of income in Hong Kong. The following terms of reference given to the Third Inland Revenue Ordinance Review Committee in 1976 speak for themselves and the sentiments have been reiterated in various Government speeches up to the present time:— “Having regard to the economic circumstances of Hong Kong which dictate:— (a) a comparatively low level of direct taxation; (b) that the system at given tax rates should be as productive of revenue as possible; and (c) that the relevant legislation should be simple and inexpensive to administer; To consider the present system of taxation of profits and other forms of income contained in the Inland Revenue Ordinance …” Apart from income based taxes, Hong Kong imposes Stamp Duty under the Stamp Duty Ordinance (SDO). The SDO is based on past UK legislation, as is equivalent legislation in a number of Commonwealth countries; accordingly, decisions of the courts in those jurisdictions can provide useful guidance in interpreting the Hong Kong provisions. Additionally , the Estate Duty Ordinance (EDO) under which duty is imposed on assets passing on death still exists but has no application in respect of persons dying after 10 February 2006. As such, this book no longer contains an analysis of Estate Duty. All laws, including amendments to the IRO, IRR and SDO are enacted by the Legislative Council. As such, any amendments are first tabled (and published in the Gazette) as a Bill. It is common for professional bodies Chapter 1 General Scheme of Taxation in Hong Kong 3 and other interested parties to make comments and representations to the Government on Bills once tabled. Indeed, in some cases, the Bills are circulated to professional bodies for comment prior to them being tabled. The Government will generally take into account legitimate and reasoned views when formulating the final versions of, or amendments to, a Bill. It is important to appreciate that, despite their collective title, the IRR are not unilateral rules formulated by the Inland Revenue Department (IRD) but are effectively additional sections of the IRO which are subject to exactly the same legislative process as the IRO itself. Nevertheless, the IRD has a number of extra-statutory practices and concessions both published and unpublished and these are discussed in this...