ENG-2004 — Page 100

70 The Economy

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 2003-04, profits of unincorporated businesses were taxed at 15.5 per cent and profits of corporations at 17.5 per cent. For 2004-05, profits of unincorporated business will be taxed at 16 per cent while the rate for corporations will remain at 17.5 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 03-04, the Government received about $48.8 billion in profits tax, or about 24 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 03-04 was calculated on a sliding scale that progressed from 2 per cent, 7.5 per cent and 13 per cent on the first, second and third segments of net income (that is, income after deduction of allowances) of $32,500 each, respectively, and then to 18.5 per cent on the remaining net income. No one, however, needed to pay more than the standard rate of 15.5 per cent of his or her total income. For 2004-05, the respective rates will be 2 per cent, 8 per cent, 14 per cent and 20 per cent with segments of $30,000 each and a standard rate of 16 per cent. 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 $28.0 billion, or about 13 per cent of total revenue, in 2003-04. Owing to generous personal allowances under Hong Kong tax law, only 37 per cent of the workforce had to pay salaries tax.

Owners of land or buildings in Hong Kong were charged property tax in 2003- 04 at the standard rate of 15.5 per cent of the actual rent received, less an allowance of 20 per cent for repairs and maintenance. The standard rate for 2004-05 is 16 per cent. There is a system of provisional payment of tax similar to that for profits tax and salaries tax. Property owned by a corporation carrying on a business in Hong Kong is exempt from property tax (but profits derived from ownership are chargeable to profits tax). Receipts from property tax accounted for about 0.5 per cent of total revenue, or about $1 billion in 2003-04.

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. The revenue from stamp duties accounted for about 5 per cent of total revenue, or about $11.2 billion, in 2003-04.