ENG-2002 — Page 101

THE ECONOMY

The Housing Authority, operating through the Housing Department, is financially autonomous. The Government provides the authority with capital and land on concessionary terms to finance housing loans to eligible families and to build public housing for rent and for sale.

A trading fund is a department or part of one—providing services on a commercial or quasi-commercial basis through the operation of a separate accounting system. Unlike a vote-funded department, trading funds are allowed to retain revenue generated to meet expenditure in providing the services and to finance future expansion.

Revenue Sources

Hong Kong's tax system is simple and relatively inexpensive to administer. Tax rates are low, and the Government accords a high priority to curbing tax evasion and minimising opportunities for tax avoidance. The major sources of revenue are profits tax, salaries tax, utilities, fees and charges for services provided by the Government. Other significant sources include revenue from rates, betting duty, investment returns and land transactions. (For major sources of revenue, see Appendix 6, Chart 2)

The Inland Revenue Department collects about 57 per cent of total revenue, including profits tax, salaries tax, property tax, stamp duty, betting duty, estate duty and hotel accommodation tax. Profits, salaries and property taxes, which together accounted for about 44 per cent of total revenue in 2001-02, are levied under the Inland Revenue Ordinance. Persons liable to these taxes may be assessed on three separate and distinct sources of income: business profits, salaries and income from property.

Profits tax is charged only on net profits arising in or derived from Hong Kong, from a trade, profession or business carried on in Hong Kong. In 2001-02, profits of unincorporated businesses were taxed at 15 per cent and profits of corporations at 16 per cent.

Profits tax is paid initially on the basis of profits made in the year preceding the year of assessment and is subsequently adjusted according to profits actually made in the assessment year. Generally, all expenses incurred in the production of assessable profits are deductible. There is no withholding tax on dividends paid by corporations. Interest income, other than that received by financial institutions, and dividends received from corporations are exempt from profits tax. In 2001-02, the Government received about $44.4 billion in profits tax, or about 25 per cent of total revenue.

Salaries tax is charged on emoluments arising in, or derived from, Hong Kong. The basis of assessment and method of payment (including provisional payments) are similar to the system for profits tax. Tax payable in 2001-02 was calculated on a sliding scale that progressed from 2 per cent, 7 per cent and 12 per cent on the first, second and third segments of net income (that is, income after deduction of allowances) of $35,000 each, respectively, and then to 17 per cent on the remaining net income. No one, however, needed to pay more than the standard rate of 15 per cent of his or her total income. The earnings of husbands and wives are reported and assessed separately. However, where either spouse has allowances that exceed his or her income, or when separate assessments would result in an increase in salaries tax payable by the couple, they may elect to be assessed jointly. Salaries tax contributed some $28.6 billion, or about 16 per cent of total revenue, in 2001-02. Owing to

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