ENG-1987 — Page 87

THE ECONOMY

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Hotel accommodation tax of five per cent is imposed on expenditure on accommodation by guests in hotels and guest houses.

The Stamp Duty Ordinance imposes fixed and ad valorem duties on different classes of documents relating to assignments of immovable property, leases and share transfers.

Earnings and profits tax are levied under the Inland Revenue Ordinance. Hong Kong has a schedular system of taxation whereby persons liable to tax may be assessed on four separate and distinct sources of income, namely business profits, salaries, income from property, and interest income. Personal assessment is a form of aggregation superimposed upon the schedular system. The standard rate of tax is 16.5 per cent.

Profits tax is charged only on profits arising in Hong Kong, or derived from Hong Kong from a trade, profession or business carried on in Hong Kong. Profits of unincorporated businesses are taxed at 16.5 per cent whereas profits of corporations are taxed at 18 per cent. Assessable profits are determined on the actual profits for the year of assessment. The tax is paid provisionally on the basis of profits of the year preceding the year of assessment. As in many 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. There is no withholding tax on dividends paid by corporations, and dividends received from corporations are exempt from profits tax.

Salaries tax is charged on emoluments arising in or derived from Hong Kong. The basis of assessment and the method of payment are similar to the system for profits tax. Tax payable is calculated on a sliding scale which progresses from five per cent to 25 per cent at multiples of five per cent on segments of net income (that is, income after deduction of allowances) ranging from $10,000 (for the first two tax bands) to $20,000 (for the remaining two tax bands). However, the overall effective rate is restricted to a maximum of 16.5 per cent of income before the deduction of personal and other allowances.

Property tax is charged on the owner of land or buildings in Hong Kong at the standard rate of 16.5 per cent on the actual rent received, less an allowance of 20 per cent for repairs and maintenance. A system of provisional payment of tax similar to that under the profits tax and salaries tax applies. Property owned by a corporation carrying on a business in Hong Kong is exempt from property tax but the profits derived from the ownership are chargeable to profits tax.

Interest tax is charged 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. The rate of interest tax on chargeable interest is 16.5 per cent. Interest paid on deposits with financial institutions carrying on business in Hong Kong is exempt from tax. Interest paid or payable by the government and the public utilities is also exempt from tax, provided it does not exceed a specified rate, which varies according to the prevailing level of interest rates.

Business registration fees, which form part of the revenue from fees and charges, are also collected by the Inland Revenue Department. Business registration is compulsory for companies incorporated in Hong Kong, overseas companies with a place of business in Hong Kong, and businesses operating in Hong Kong, except those run by charitable institutions and licensed hawkers. The annual registration fee is $550, but exemption from payment is granted where the business is small. Every branch of a business is required to obtain a branch registration certificate and pay an annual registration fee of $15. In addition, a levy of $100, payable to the Protection of Wages on Insolvency Fund, is imposed on each business registration certificate issued to a business or its branch.