ENG-1977 — Page 61

32

Internal Revenue

FINANCIAL STRUCTURE

Tax is levied only on specified sources of income arising in or derived from Hong Kong under the Inland Revenue Ordinance, namely, property, business profits, inter- est and salaries. The standard tax rate of 15 per cent has been in force since April 1, 1966.

Property Tax is charged at the standard rate on the owner of land and/or building in Hong Kong, but there are exemptions, including property occupied by the owner for his residential purposes, vacant premises and property in certain undeveloped parts of the New Territories. Properties owned by corporations carrying on business in Hong Kong are exempted from paying Property Tax because profits from their ownership are chargeable to Profits Tax.

Interest Tax is charged at the standard rate on interest arising in or derived from Hong Kong. This is basically a withholding tax deducted at source unless the interest forms part of the profits of a corporation carrying on a trade or business in Hong Kong, in which case it is subject to Profits Tax. Interest, payable at a rate not exceed- ing 14 per cent a year by the government and licensed banks and 34 per cent by public utilities, is exempt. These rates have been effective from January 14, 1977, and March 1, 1975, respectively.

Profits Tax is charged on profits arising in or derived from Hong Kong from a trade or business carried on in Hong Kong. Profits of unincorporated businesses are chargeable to tax at the standard rate of 15 per cent and corporations at 17 per cent for the year of assessment beginning April 1, 1976, and onwards. Generally, all expenses, to the extent to which they have been incurred in the production of profits chargeable to tax, are deductible. Charitable donations up to a maximum of 10 per cent of net assessable profits also are deductible.

Salaries Tax is charged on emoluments arising in or derived from Hong Kong. Tax is calculated on a sliding scale, which varies from five per cent to 30 per cent on net chargeable income (income after deduction of personal allowances). However, the overall effective rate of tax is limited to 15 per cent of the income before deducting personal allowances. These allowances are $10,000 for the taxpayer; $10,000 for his wife; $4,000 for his first child; $3,000 for his second child; and $2,000 for his third child. The allowance for the fourth to sixth child is $1,000 each and, for the seventh to ninth child, $500 each. From the year of assessment beginning April 1, 1976, single and married taxpayers are given an additional personal allowance of $2,500 and $5,000 respectively, but this allowance will be reduced by 15 per cent of the amount by which the taxpayer's income exceeds the supplemented allowance until the point is reached where the entire additional allowance disappears. Apart from the deduction of ex- penses necessarily incurred in production of the income and charitable donations up to 10 per cent of assessable income, there are no other allowances.

A further feature of the Inland Revenue Ordinance is the right of a taxpayer to elect to be assessed on his total Hong Kong income under what is known as 'personal assessment'. This aggregates his income from the four sources mentioned earlier and gives him the benefit of the same personal allowances and sliding scale of tax as would be applicable for Salaries Tax purposes. A set-off of tax paid on the individual sources of income is allowed.

It is estimated that taxes on earnings and profits will yield $2,926 million in the 1977-8 financial year.