ENG-2015 — Page 85

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The Economy

The FF would comprise:

⚫ an initial endowment of $219.7 billion, notionally held against the balance of the Land

Fund;

periodic top-ups from the government as the Financial Secretary may determine each year. This would be notionally held against the GRA; and

⚫ interest on investment of the FF, which shall be calculated and compounded on an

annual basis.

The investment returns arising from the FF during the course of the placement shall be retained by the Exchange Fund for reinvestment. Interests on the FF placement with the Exchange Fund shall be due for payment to the government upon completion of the placement period.

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 (29 per cent), land premium (16 per cent), salaries tax (12 per cent) and stamp duties (16 per cent). All major sources of revenue are presented in chart 1 of Appendix 6.

The Inland Revenue Department collects about 63 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 43 per cent of total government revenue in 2014-15.

Profits tax is charged only on profits arising in, or derived from, Hong Kong from a trade, profession or business carried on within the territory. In 2014-15, 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 adjusted subsequently 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 2014-15, the total profits tax collected was about $137.8 billion, making up about 29 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, which is income less deductions and allowances. In 2014-15, 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 to pay more than the standard rate of 15 per cent of their total income after deductions.

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