ENG-2014 — Page 84

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The Economy

growth. The working group also recommended that a savings scheme for Hong Kong (the 'Future Fund') be established.

The working group reconvened in July to follow up on its findings and recommendations, including options for the 'Future Fund' and how the government can improve the management of its assets.

Revenue Sources

Hong Kong's tax system is simple. Tax rates and the cost of administration are low. To protect tax revenue, the government takes vigorous measures to combat tax evasion and prevent tax avoidance. The major sources of revenue include profits tax (27 per cent), land premium (19 per cent), salaries tax (12 per cent) and stamp duties (9 per cent). All major sources of revenue are presented at Appendix 6, Chart 1.

The Inland Revenue Department collects about 54 per cent of total government revenue, including profits tax, salaries tax, property tax, stamp duties and betting and sweeps tax. Profits, salaries and property taxes (including tax under personal assessment) are levied under the Inland Revenue Ordinance and together accounted for about 41 per cent of total government revenue in 2013-14.

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. In 2013-14, profits of unincorporated businesses were taxed at 15 per cent and profits of corporations at 16.5 per cent. Profits tax is charged provisionally on the basis of profits made in the year preceding the year of assessment and is subsequently adjusted according to the 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 from deposits placed with banks or deposit-taking companies, other than that received by financial institutions, and dividends received from corporations are exempt from profits tax. In 2013-14, the total profits tax collected was about $120.9 billion (about 27 per cent of total government revenue).

Salaries tax is charged on emoluments arising in, or derived from, Hong Kong. As with profits tax, a provisional tax mechanism is in place. Salaries tax is calculated at progressive rates on the net chargeable income (ie income less deductions and allowances). In 2013-14, the first, second and third segments of net chargeable income of $40,000 each were taxed at 2 per cent, 7 per cent and 12 per cent respectively, and the remainder at 17 per cent. No one, however, need pay more than the standard rate of 15 per cent of their total income after deductions.

The earnings of husbands and wives are reported and assessed separately. However, where the deductions and allowances of either spouse exceed that spouse's income, or when separate assessments would result in an increase in their total salaries tax payable, the couple may elect to be assessed jointly. Salaries tax contributed some $55.6 billion (about 12 per cent of total government revenue) in 2013-14. Due to the generous personal allowances under the Hong Kong tax law, only about 1.6 million people, or 43 per cent of the workforce, were liable to salaries tax for the year of assessment 2012-13.

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