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FINANCIAL SYSTEM AND ECONOMY

Earnings and Profits Tax This tax is charged under the Inland Revenue Ordinance. Hong Kong has a schedular system of taxation whereby persons liable are assessed and required to account for tax on four separate and distinct sources of income, namely, business profits, salaries, property and interest. Superimposed upon the schedular system is a form of aggregation called 'personal assessment' whereby a person can voluntarily elect to be assessed on his total Hong Kong income from these sources.

The current standard rate of tax of 15 per cent has been in force since April 1, 1966. Profits tax is charged only on profits arising in, or derived from, Hong Kong from a trade, profession or business carried on in Hong Kong. Profits of unincorporated businesses are taxed at 15 per cent while profits of corporations are now taxed at 161⁄2 per cent. Assessable profits are determined on the actual profits for the year of assessment. There is a system of provisional payment of tax based on the profits of the preceding year of assessment. Like many other countries, profits assessable to profits tax in Hong Kong are the net profits. Generally, all expenses incurred in the production of assessable profits are deductible, as are charitable donations to the extent of 10 per cent of net assessable profits. There is no withholding tax on dividends paid by corporations, and dividends received from corporations are exempt.

Salaries tax is charged on emoluments arising in, or derived from, Hong Kong. The basis of assessment and the system of payment is similar to that under profits tax. Tax payable is calculated on a sliding scale which varies from five per cent to 25 per cent on $10,000 segments of income, that is income after deduction of allowances. However, the overall effective rate is restricted to a maximum of 15 per cent of income before the deduction of allowances. The current levels of the various allowances are: for the taxpayer himself $15,000; for his wife $15,000; for the first child $7,000; for the second child $5,000; for the third child $3,000; for the fourth to sixth child $2,000 each; for the seventh to ninth child $1,000 each; and $7,000 for each of his, or his wife's, dependent parents. In addition, there are supplementary personal allowances of $7,500 for single persons and $15,000 for married persons. Apart from expenses necessarily incurred in the production of income, and charitable donations up to 10 per cent of taxable income, there are no other allowances. For salaries tax purposes the income of a wife is deemed to be that of her husband.

Property tax is charged on the owner of land and/or buildings in Hong Kong at the standard rate of 15 per cent on an amount calculated by reference to estimated rental value, less an allowance of 20 per cent for repairs and maintenance. There are exemptions in respect of property occupied by an owner for residential purposes, vacant premises and property in certain undeveloped parts of the New Territories. If the property is owned by a person carrying on a trade or business and is occupied by him for business purposes, the amount of property tax paid may be deducted from the profits tax payable. Property owned by corporations carrying on business in Hong Kong is exempt from property tax; however, the profits derived from the ownership is chargeable to profits tax.

Interest tax is normally deducted at source through a withholding system at 15 per cent on interest arising in, or derived from, Hong Kong. Interest received by a corporation carrying on a business in Hong Kong is deemed to be part of the trading profits of the corporation and is chargeable to profits tax. There is exemption from interest tax on interest paid by the government, and by licensed banks and public utilities provided it does not exceed a specified rate which varies from time to time.

Personal assessment, which is available to an individual who is a resident of Hong Kong, is a form of relief from the full impact of the standard rate. A taxpayer in receipt of earnings

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