assessing functions - inland revenue department · costs and licence fees. the court of first...

3 assessing Functions

TheDepartment raisesrevenuethroughtaxes,dutiesand fees inaccordancewith therelevantlegislation. Broadly speaking,earningsandprofits taxareassessedby reference to the incomes /profitsofthetaxpayersinthepreviousyear,whereasdutiesandfeesarechargedatthetimetherelevant activities occur. For 2012-13, earnings and profits tax assessed slightly increased by$2.5billion(1.4%)(Schedule 2).Ontheotherhand,thetotalamountofdutiesandfeescollecteddroppedby$1.8billion(2.9%).

PRoFits tax

Profitstaxisleviedonindividuals,corporations,bodiesofpersonsandpartnerships,inrespectofassessableprofitsarisinginorderivedfromHongKong.Fortheyearofassessment2012-13,thetaxratesforcorporationsandnon-corporatepersonsremainedunchangedat16.5%and15%respectively.

Theamountofprofitstaxassessedin2012-13increasedto$120.4billion,whichwas$4.6billion(4.0%)morethanthatofthepreviousyear(Figure 5).Theslightincreasereflectedtheslowdownineconomicgrowth.

TheamountsoffinaltaxassessedinrespectofdifferentbusinesssectorsareshowninSchedules 3 and 4.Ofthetotalfinaltaxassessedfortheyearofassessment2011-12,thepropertyandfinancialsectorstogethercontributed41.5%andthedistributionsectorgenerated27.7%(Figure 6).

Figure 5 Profits tax assessed Figure 6 Ratios of corporation profits tax assessed under 2011-12 final assessments by business sectors

7Annual Report 2012-13

salaRies tax

Salaries tax ischargedonall incomes fromanyoffice (e.g.adirectorship)oremploymentandpensionarising inorderived fromHongKong. The totalamountof taxpayable is restricted to thestandardrateonthenettotalincome(withoutallowances)oftheindividualconcerned.Fortheyearofassessment2012-13,thestandardrateremainedunchangedat15%.

Ascomparedwiththepreviousyear,thenumberofsalariestaxassessmentsmadeduring2012-13increasedby7.3%,buttheamountoftaxassessedwas3.5%lessafterimplementingthesalariestaxreliefmeasuresintroducedinthe2012-13Budget(Figure 7).

Figure 7 Salaries tax assessments

Number Tax assessed

Analyses of salaries tax assessments andallowances granted in respect of taxpayers atvariousincomelevelsfortheyearofassessment2011-12areprovidedinSchedules 5 and 6.

For the year of assessment 2011-12, thenumber of standard rate taxpayers increasedby 1,286 to 28,066. These taxpayers togethercontributed38.8%ofthesalariestaxassessed,aslightdecreaseof0.2%comparedwithlastyear(Figure 8).

Figure 8 Standard rate taxpayers

8 Annual Report 2012-13

Notification Requirements of Employers

Apart fromreportingcommencementsandcessationsofemployments,employersarerequiredtoprepareannualemployer’sreturnstoreporttheemolumentsofeachoftheiremployees.Duringtheyear,290,461employersfiledemployer’sreturnswiththeDepartment.

The Department provides e-Seminars and disseminates tax information to employers on the IRDHomepagetohelpthemunderstandtherelevantstatutoryrequirements.Thecontentscovercompletionofemployer’sreturns,employer’sobligationsandanswerstofrequentlyaskedquestions.Employerscanalsoobtainspecimensofcompletedemployer’sreturnsandnotificationformsthroughtheFax-A-Formservice.

PRoPeRty tax

Property owners (including corporations) are subject to property tax which is charged at thestandardrateinrespectofthenetassessablevalueoftheproperty.Fortheyearofassessment2012-13, thestandardrateremainedunchangedat15%.Propertyownersthatpaypropertytaxinrespectofpremisesusedfortheirbusinessescanhavesuchpaymentssetoffagainsttheirprofitstaxliabilities.Forcorporations, incomearisingfrompropertiesownedbythemisalsosubjecttoprofitstaxatthecorporationrate.Toobviatetheneedforyearlyset-offofpropertytaxagainstprofitstax,acorporationcanapplyforexemptionofpropertytaxonthepropertyconcerned.

Statisticsontheclassificationofpropertiesandclassificationbynumberofowners,basedontherecordsoftheDepartment,areprovidedinSchedule 7.Thenumberofassessmentsmadein2012-13wasslightlymorethanthatinthepreviousyearby0.2%.Reflectingacontinuousrisingtrendinrent,thetotalamountofpropertytaxassessedincreasedby19.1%(Figure 9).

Figure 9 Property tax assessments

Number Tax assessed

9Annual Report 2012-13

PeRsonal assessment

An individualmay elect for personal assessment in respect of his or her total income. Underpersonalassessment,alltheincomesofthetaxpayerandhisorherspouseareaggregatedand,afterdeductionofallallowances,areassessedatthegraduatedtaxrates.Inappropriatecircumstances,thiswouldreducethetotaltaxliabilityofthetaxpayerandhisorherspouse.

Ascomparedwiththepreviousyear,thenumberofassessmentsmadein2012-13increasedby4.2%.Theamountoftaxassessed,however,wasreducedby12.1%aftereffectingthetaxreductionforpersonalassessmentintroducedinthe2012-13Budget(Figure 10).

Figure 10 Assessments made under personal assessment

Number Tax assessed

tax tReaty netwoRk

DoubletaxationariseswherethesameitemofincomeorprofitofataxpayerissubjecttotaxinHongKongaswellasinanothertaxjurisdiction.ToestablishataxtreatynetworkcanhelpminimiseexposureofHongKongresidentsandresidentsofthetaxtreatypartnerstodoubletaxation.Itwillalsofacilitatetheflowsoftrade,investmentandtalentbetweenHongKongandtherestoftheworld,andenhanceHongKong’scompetitivenessasaninternationalfinancial,investmentandcommercialhub.

10 Annual Report 2012-13

As at 31 March 2013, Hong Konghas signed comprehensive double taxationagreements(coveringvarioustypesofincome)with 27 jurisdictions. They are Belgium,Thailand,theMainlandofChina,Luxembourg,Vietnam,Brunei, theNetherlands, Indonesia,Hungary,Kuwait,Austria,theUnitedKingdom,Ireland, Liechtenstein, France, Japan, NewZealand, Switzerland, Portugal, Spain, theCzech Republic, Malta, Jersey, Malaysia,Mexico,CanadaandItaly.

advanCe Rulings

TaxpayersmayapplyforanadvancerulingonhowaprovisionoftheInlandRevenueOrdinanceappliesinrelationtoaparticulararrangement.Afeeischargedfortheserviceona“costrecovery”basis.Theapplicantisrequiredtopayaninitialapplicationfeeof$30,000forarulingconcerningtheapplicationofthe“TerritorialSourcePrinciple”inaprofitstaxcase,or$10,000forarulingonanyothermatter.Anadditionalfeeispayableiftheprocessingtimeexceedsthespecifiedlimit.TheDepartmentendeavourstorespondwithin6weeksofthedateofapplication,providedthatallrelevantinformationissuppliedwiththeapplicationandfurtherinformationfromtheapplicantisnotrequired.

During 2012-13, the Department completed the processing of 45 advance ruling applications(Figure 11).Mostoftheapplicationswereforrulingsonprofitstaxmatters.

Figure 11 Advance rulings

2011-12 2012-13 Number Number

Awaiting decision at the beginning of the year 18 15

Add: Applications received during the year 50 41

68 56

Less: Disposed of —

Rulings made 35 27

Applications withdrawn 14 11

Rulings declined

Awaiting decision at the end of the year

4 53

15

7 45

11

11Annual Report 2012-13

objeCtions

AtaxpayerwhoisaggrievedbyanassessmentmaylodgeanoticeofobjectiontotheCommissionerwithintheprescribedtimelimit.Iftheobjectionisagainstanestimatedassessmentissuedbecauseofthefailuretolodgeataxreturnontime,aproperlycompletedreturn,togetherwiththesupportingaccountswhereapplicable,mustalsobesubmittedwiththenoticeofobjection. Asignificantproportionof the objections received each year arise fromestimated assessments. Most of theseobjectionsaresettledpromptlybyreferenceto thereturnssubsequently received. Manyof theother typesofobjectionsarealsosettledbyagreementbetweenthetaxpayersandtheassessorsconcerned.OnlyrelativelyfewobjectionsareultimatelyreferredtotheCommissionerfordetermination.During2012-13,theDepartmentcompletedtheprocessingof70,120objections(Figure 12).

Figure 12 Objections

2011-12 2012-13 Number Number

Being processed at the beginning of the year 26,689 28,986

Add: Received during the year 72,662 72,299

99,351 101,285

Less: Disposed of —

Settled without determination 69,637 69,628

Determinations:

Assessments confirmed 398 290

Assessments reduced 228 117

Assessments increased 92 79

Assessments annulled

Being processed at the end of the year

10 728 70,365

28,986

6 492 70,120

31,165

12 Annual Report 2012-13

aPPeals to the boaRd oF Review

AtaxpayerwhoisdissatisfiedwiththeCommissioner’sdeterminationofhisobjectionmayappealtotheBoardofReview(InlandRevenueOrdinance)(theBoard).TheBoardisanindependentstatutorybody.Asat31March2013,theBoardconsistedofachairmanand4deputychairmen,whohavelegaltrainingandexperience,aswellas70othermembers.During2012-13,theBoardsettled67appealcases(Figure 13).

Figure 13 Appeals to the Board of Review

Number

Awaiting hearing or decision as at 1 April 2012 82

Add: Received during the year 46

128

Less: Disposed of —

Withdrawn 14

Decided:

Assessments confirmed 33

Assessments reduced in full 2

Assessments reduced in part 4

Assessments increased 13

Assessments annulled 1 53 67

Awaiting hearing or decision as at 31 March 2013 61

13Annual Report 2012-13

aPPeals to the CouRts

A decision of the Board is final, provided that either the taxpayer or the Commissionermay,pursuanttosection69(1)oftheInlandRevenueOrdinance,makeanapplicationrequiringtheBoardtostateacaseonaquestionoflawfortheopinionoftheCourtofFirstInstance.ApartfromappealingtotheBoardandthenfurtherappealingtotheCourtofFirstInstancebywayofcasestated,wherebothpartiesagree,anappealcanbetransferredtotheCourtofFirstInstancedirectundersection67oftheInlandRevenueOrdinancewithoutahearingbeforetheBoard.

During 2012-13, theCourt of First Instance ruled on one casewhichwas transferred under section67of InlandRevenueOrdinance. The issues involvedwere thechargeabilityof technicalcostsandlicencefees.TheCourtofFirstInstanceallowedthetaxpayer’sappealonlytotheextentofthetechnicalcosts.ThetaxpayerhaslodgedanappealtotheCourtofAppealagainsttheadversejudgmentonlicencefees.

During2012-13,theCourtofAppealhandeddownthreejudgmentsconcerningtheInlandRevenueOrdinance.OnejudgmentwasrelatedtoanappealagainsttheBoard’sdecision,whichwasmadedirectlytotheCourtofAppealpursuanttosection69AoftheInlandRevenueOrdinance.Theissueinvolvedwasthedeductibilityofmouldexpensesundersection16GoftheInlandRevenueOrdinance.TheCourtofAppealruledinfavouroftheCommissioner.ThetaxpayerhasappliedforleavetoappealtotheCourtofFinalAppeal.

TheothertwojudgmentsbytheCourtofAppealwererelatedtothetaxabilityofunrealizedgainsarisingfromrevaluationoftradinginvestmentsandthetaxabilityofalumpsumreceivedbythetaxpayerpursuanttoafranchiseagreementrespectively.AgainsttheadversejudgmentsoftheCourtofAppeal,theCommissionerhasappealedtotheCourtofFinalAppealinrespectoftheformercaseandappliedforleavetoappealtotheCourtofFinalAppealinrespectofthelattercase.

Figure 14setsoutthestatisticsconcerningappealstotheCourtsduring2012-13.

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 2012 5 5 0 10

Add: Lodged during the year 0 1 1 2

5 6 1 12

Less: Disposed of —

Decided 1 3 0 4

Discontinued 0 1 0 3 0 0 0 4

Awaiting hearing or decision as at 31 March 2013 4 3 1 8

business RegistRation

TheDepartment aims tomaintain an efficientbusinessregistrationsystem.ApersoncarryingonabusinessinHongKongmustregisterthebusinessandpaytherequiredfeeandlevy.Thenumberofbusinessregistrationsasat31March2013stoodat1,223,587,whichwasanalltimehigh.Itwas89,555morethanthatasat31March2012(Figure 15).

Business registration certificates are validforoneyear,butbusinessesmayelectfor3-yearcertificates. As at 31 March 2013, 15,986businessesheld3-yearcertificates.

Figure 15 Number of business registrations

14 Annual Report 2012-13

Tohelpbusinessenterprises,theAdministrationwaivedthebusinessregistrationfeesfor2012-13.Businesseswerestillrequiredtopaythelevyontheirbusinessregistrationcertificates.Fora1-yearcertificate,the levywas$450.Forbusinesseselectingfor3-yearcertificates,theywererequiredtopay$3,200forthebusinessregistrationfeeand$1,350forthelevy.

Businessesthatwerenotrequiredtorenewtheirregistrationcertificatesin2012-13couldapplyforconcessionaryrefundsiftheyhadpaidtheregistrationfeesforthatyear.Upto31March2013,theDepartmenthadissuedconcessionaryrefundsto10,856businessestotalling$16.3million.

Duetothewaiverofbusinessregistrationfeesforthewholefinancialyear2012-13,theamountofbusinessregistrationfeesandpenaltiescollectedin2012-13wasreducedto$122.9million.Itrepresentsasignificantdecreaseof90%ascomparedtolastyear’s,notwithstandingthat9%morecertificateswereissuedduringtheyear(Figure 16).BusinessregistrationstatisticsaresetoutinSchedule 8.

Figure 16 Certificates issued and fees collected

2011-12 2012-13Increase/Decrease

Number of certificates issued (Main and Branch) 1,158,838 1,264,736 +9%

Fees (inclusive of penalties) ($m) 1,292.9 122.9 -90%

15Annual Report 2012-13

Under theBusinessRegistrationOrdinance, a small businesswith averagemonthly sales orreceiptsbelowaspecifiedlimit, i.e.$10,000forbusinessesderivingprofitsmainlyfromthesaleofservices,and$30,000 forotherbusiness,canapply forexemption frompaymentof thebusinessregistrationfeeandlevy.Whereanapplicationforexemptionisnotallowed,thebusinessoperatormayappealtotheAdministrativeAppealsBoard.Thenumberofexemptionsgrantedduring2012-13was11,907,representingadecreaseof13%fromthepreviousyear.NoappealcasewasreceivedbytheBoardduringtheyear.

stamP duty

Stamp duty is charged on instrumentseffectingpropertytransactions,stocktransactionsandleasingofpropertyinHongKong(Figure 17).

Due to the environment of persistently lowinterestratesandabundantliquidity,thepropertymarkethadbeenexuberant.Theoverallresidentialproperty prices rose significantly during the firstsixmonthsof2012-13,causinganincreasedriskofanassetbubble. TheGovernmentintroducedanumberofdemand-sidemanagementmeasuresincluding some proposed amendments to theStampDutyOrdinancetoaddresstheoverheatedproperty market. In 2012-13, the stamp dutycollections from property transactions increasedby9%to$22.4billion.Thestampdutycollectionsfromleasesandotherdocumentsalsoincreasedby7%to$643million.

Figure 17 Composition of stamp duty collections

Theunstableglobaleconomicconditionshadcausedastagnantstockmarket formostof thetimein2012-13.Thestampdutycollectionsfromsharetransactionsin2012-13were$19.9billion,adecreaseof15%fromthepreviousyear.

Overall,therewasaslightdecreaseof3%inthetotalstampdutycollectedduringtheyearandthenumberofdocumentsstampedalsodecreasedby4%(Figure 18 and Schedule 9).

Figure 18 Stamp duty collections

2011-12($m)

2012-13($m)

Increase/Decrease

Immovable Properties 20,448 22,355 +9%

Shares 23,306 19,882 -15%

Leases and other documents 602 643 +7%

Total 44,356 42,880 -3%

16 Annual Report 2012-13

estate duty

Estateduty ischargedonthatpartofadeceasedperson’sestatesituated inHongKong.Thethresholdforlevyingdutyis$7.5millionandthedutyratesrangefrom5%to15%,dependingonthevalueoftheestate.

TheRevenue (AbolitionofEstateDuty)Ordinance2005came intoeffecton11February2006abolishing estate duty in respect of persons passing away on or after that date. The estate dutychargeableinrespectofestatesofpersonsdyingbetweentheperiod15July2005to10February2006,with theprincipal valueexceeding$7.5million, is reduced toanominalamountof$100. With theabolitionofestateduty,thenumberofnewcasesreducedgraduallyto1,099in2012-13,adropof15.5%fromthelastyear(Figure 20).

Figures 19 and 20showthecompositionofestatesandcasesprocessedforthepasttwoyears.

Figure 19 Composition of estates

Figure 20 Estate duty cases

2011-12 2012-13Number Number

New cases 1,301 1,099

Cases finalised

— Dutiable 35 19

— Exempt 1,293 1,075

1,328 1,094

17Annual Report 2012-13

Estatedutyof$138millionwascollectedduringtheyear(Schedule 10),anincreaseof$44million(47%)comparedwiththepreviousyear.

Estatedutyispayableondeliveryofanestatedutyaffidavitoraccount(orwithin6 monthsfromthedateofthedeceased’sdeath,whicheveristheearlier).$0.5millionwasreceivedduringtheyearinadvanceoftheissueofformalassessments(Schedule 10).

betting duty

BettingdutyischargedonthenetstakereceiptsfrombettingonhorseracesandfootballmatchesandontheproceedsofMarkSixlotteries,alladministeredbytheHongKongJockeyClub. In2012-13,theratesofbettingdutyonthesebettingactivitiesremainedunchanged(Figure 21).

Figure 21 Rates of betting duty in 2012-13

Rate

Horse racing Net stake receipts

the first $11billion 72.5%*

the next $1 billion 73%

the next $1 billion 73.5%

the next $1 billion 74%

the next $1 billion 74.5%

the remainder 75%

Mark Six lotteries Proceeds 25%

Football betting Net stake receipts 50%

Note: * For overseas bets, the discount rate for specified places (e.g. Macau) is 40%, whereas the discount rate for a place outside Hong Kong (other than specified places) is 50%.

In2012-13,bettingdutycollectionsfromhorseracingandfootballbettingincreasedby4.6%and10.7%respectivelywhilethebettingdutycollectionsfromMarkSixlotteriesdecreasedby3%(Schedule 11).Thetotalbettingdutycollectedin2012-13was5.1%higherthanthepreviousyear(Figure 22).

Figure 22 Betting duty collections

2011-12($m)

2012-13($m)

Increase/Decrease

Horse racing 10,002.4 10,465.4 +4.6%

Mark Six lotteries 2,013.6 1,953.0 -3.0%

Football betting 3,744.6 4,146.4 +10.7%

Total 15,760.6 16,564.8 +5.1%

18 Annual Report 2012-13

tax ReseRve CeRtiFiCates

TaxpayersmaypurchaseTaxReserveCertificates(TRCs)undertwosituations.

The first situation applies to taxpayerswhowish to save for the payment of their future taxliabilities.TheDepartmenthassetuptwoschemes,namelythe“ElectronicTaxReserveCertificatesScheme” forall taxpayersand the “Save-As-You-Earn” (SAYE)Scheme forcivil servantsandcivilservice pensioners. With a Tax Reserve Certificate account, taxpayers may purchase TRCs byvariouschannels,includingbankauto-pay,telephone,theInternetandbankATM.Underthe“SAYEScheme”,civilservantsandcivilservicepensionerscanpurchaseTRCsthroughmonthlydeductionsfromtheirsalaries/pensions.InterestispayableontheTRCswhentheyareredeemedforsettlementoftaxliabilities,basedontheinterestrateprevailingatthetimeofpurchase,foramaximumperiodof36monthsfromthedateofpurchase.

Ascomparedwithlastyear,therewasanincreaseof2.5%and10.4%respectivelyinthenumberandtheamountofTRCssoldunderthe“ElectronicTaxReserveCertificatesScheme”butadecreaseof1.6%and2.3%respectivelyforthe“SAYEScheme”in2012-13(Schedule 12).Overall,thetotalamountofTRCssoldincreasedby7.7%(Figure 23).

Thesecondsituationapplies to taxpayerswhoobject to taxassessmentsandare required topurchaseTRCsinrespectofthetaxindispute.SuchTRCsareusedtosettleanytaxfoundpayableuponthefinalisationoftheobjectionorappeal.InterestisonlypayableontheamountoftheTRC,ifany,subsequentlyrequiredtoberepaidtothetaxpayer,andiscomputedatfloatingratesoverthetenureoftheTRC.

Figure 23 Certificates sold

19Annual Report 2012-13