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Under the generally accepted theory of Income Tax the liability of firms and corporations depends, not on the question where the profits are made, but on the locality of the place from which their operations are controlled. This is not the case under this Bill. Moreover, unlike an Income Tax Bill, this Bill is not concerned with the identity of the individuals constituting a firm, many of whom, as regards firms in the Colony, are non-resident. Again, unlike an Income Tax Bill, it is not concerned with the question as to how long a person has been resident within
SO
the Colony in relation to taxable liability, with the result that elaborate provisions have been omitted which would otherwise have been necessary, and which would be difficult, if not impossible, to enforce in the absence of a system of universal registration of persons or of passports for the whole of the population. In short,
an Income Tax is fundamentally an individual tax, and must entail detailed enquiry! into personal affairs.
This Bill is concerned with the four main classes of income separate-. ly, and deals with them in a way which would be impossible under an ordinary Income Tax measure. As
their operation and effect are fully set out in the Report, and in. the Bill, I need say very little. But in view of certain criticisms which have come to my attention I venture to make a few observations on the Salary Tax, and the Business Profits Tax.
Operation Limited
its
As regards the Salary Tax, operation is obviously limited by the statutory condition of liability, namely, that of a salary of $400 a month and upwards. A salaried man can claim a personal allowance of $3,000; a sum of $2,000 for a wife, ! and a sum of $1,000 for each child, with the proviso that the amount of allowances for wife and children must not exceed $6,000. A married man with four children can there- fore claim a $9,000 allowance, and the tax in excess of this sum is only 4% on the first $5,000 taxable.
rates of of com- of in- over-
As regards the Business Profits Tax, the tax is at 5% in excess of $10,000 and up to $100,000, and at 10% in excess of $100,000. The tax is on the business and not on the individuals constituting the firm, so that no exact individual allowance can be given, The free allowance of $10,000 and the lowered charge are given by way pensation for the absence dividual allowances. The whelming majority of Chinese firms have more than five, many have over ten, and some have over twenty, partners. It has been suggetsed that the Salary Tax is unfair in re- lation to this tax. Let me take an example. Suppose a firm of ten partners in equal shares were to make a profit of $100,000. At 5% on $90,000 the tax comes to $4,500. Now if the profit were taxed under! the Salary Tax, and if each of the partners were married with four children, each could claim allowances, up to $9,000, making a total of. $90,000, so that the balance taxable would be only $10,000. Apart from the provision under the Salary Tax, that 4% is payable upon the first $5,000, it is obvious that such part- ners would be in a more advantage- ous position if taxed under the Salaries Tax.
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Business Profits Difficulty
It true that the tax which will give rise to the greatest difficulty, and will involve the most personal inquiry, is the Business Profits Tax. I have always appreciated the ob- jections to this tax; its probable yield would not, by itself, appear to justify its imposition. But, Sir, I submit that this tax should not be considered in isolation, but only in combination with the other three taxes. After all, the Bill represents on the part of many members of the Committee a compromise of indivi- dual views and opinions for the sake: of a worthy cause, and it is my con- sidered view that the argument that on the ground of equity such a tax must be imposed if there is a Cor- poration Profits Tax, is quite un- answerable.
If
To illustrate the effect of the pro- visions of the Bill let me take an imaginary case of a wealthy refugee, with capital invested in the Colony. If he has shares in companies he has nothing whatever to do, as the tax will be deducted at source. he has invested capital in factories or firms of which he is not the ac- tual managing partner or manager, here again he has nothing to do. He can come and go without any, question of residential liability. If he lends out money on mortgages he has nothing to do, tax to pay. His bank balances are unaffected. If he owns a house he has to do no more than what he has to do already, namely, fill in a return of the net value
the pro- perty, and pay 5% as additional rates.
and has no
Principal Differences Honourable Members of this Coun-; cil may be interested to know that the provisions of this Bill are bas- ed on a draft Bill drawn by Mr. Caine in collaboration with the
Chairman of the Committee, my Hon. friend the Attorney General. would like to quote the following from a statement prepared by Mr. Caine on the "Principal Differences between the War Revenue Bill and the Income Tax Bill":
"1. General. An Income Tax seeks to tax every source of each individual's income and to make al- lowances for his family responsibi- lities and other individual circum- stances. Although much may be collected at the source it is ultim- ately an individual tax and may en- tail much enquiry into personal
affairs.
The new Bill proposes to take
each of the main classes of income separately and tax them at rates adjusted only approximately to capa- city to pay. At some sacrifice of the refinements of an income tax it thus avoids many problems which arise in the administration of those refinements and removes some of the features of income tax which are objectionable to the public.
2. Scope of tax. The taxation imposed by the new Bill will cover incomes from rents of property in Hongkong, salaries of persons em- ployed in Hongkong and profits of all businesses carried on in Hong- kong. Income which would have been liable to a full income tax but will not be affected by the new Bill includes interest (other than divi- dends which will suffer indirectly by the tax on company profits) and all income derived from outside the Colony but remitted into it. Very
much the greater part of the total income will therefore be caught by the new Bill, but the restriction to specified classes of income will sim-
(e.g. plify administration
the pro- blem of 'remittance' will not arise) while the exemption of interest should completely remove any dan- ger of flight of liquid capital."
Mr. Caine's Recommendations On December 4, 1939, Mr. Caine, in view of his pending departure, wrote to each member of the Com- mittee a letter enclosing a draft Re- port of the Committee as represent- ing what he hoped the Committee would be prepared to agree to, rather than what had already so far been agreed. In the course of his draft Report the following observation oc- curred. "The best alternative means of imposing taxation of approximate- ly the same degree of severity and having approximately the same in- cidence as the proposed Income Tax appears to be a combination of taxes assessed on property, on salaries and analogous incomes and on business profits.made in the Colony on bases
and
of
at rates calculated to impose very broadly the same degree of sacrifice on the several classes persons affected. Such a combina- tion of taxes would constitute a par- tial income tax, covering much the greater part of the income which would be liable to a full income tax but freed of many complications owing to its being partial in scope and only approximately adjusted to individual ability to pay. In parti- cular much of the enquiry into per- sonal circumstances which is appre- hended from the administration of income tax should be avoided."
Capacity to Pay
I have stated that, subject to one point, I do not wish to modify in any way the remarks I made in this Council on November 9, and that point concerns my remarks as to the Your capacity of the Colony to pay. Excellency, on November 16, made it quite clear that Government had not determined to raise a War Bud- get Revenue of any predetermined that whatever amount this sum, so Bill will in fact raise, that would constitute the free gift to His Majesty's Government, while engag- ed in a life and death struggle. I therefore agree that no question of the Colony's capacity to pay arises, once the taxing measure has been agreed.
The Committee, in its Report, ex- pressed the hope that "in view of the purpose for which the four taxes will be used, there should be no attempt at evasion." By paying up to the full in accordance with the |legal liability of each, and by assist- ing the administration in every way possible, SO that the maximum amount collectable under the mea- sure may be raised, the Colony will justify the Committee's hope, and honourably carry out its obligation as a part of the British Empire. (Applause).
HON. DR. LI SHU-FAN Hon. Dr. Li Shu-fan: From the perusal of the last Hongkong Hansard, I perceive that during my leave of absence from the Colony, some of the most momentous debates in the annals of this Council took place on the question of a war revenue tax. I am only sorry that owing to my unavoidable absence, I was unable to contribute my humble share in the Council's deliberation.
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