TAX ADMINISTRATION AND COMPLIANCE IN HONG KONG
Persons Subject to Tax in Hong Kong
Persons, including corporations, partnerships, trustees and
bodies of persons carrying on any trade, profession or business
in Hong Kong, are subject to tax on all profits (excluding profits
arising from the sale of capital assets). If a person sells
his flat or any property as part of a profit-making scheme,
it will be regarded as a business and he must pay tax on any
profit made. The assessable profits (or adjusted loss) are the
net profits, or loss--other than profits (or loss) arising from
the sale of capital assets--for the basis period, arising in
or derived from Hong Kong.
Source of Income
Income is considered sourced where the operation that generates
it takes place. Thus all profits arising in or deriving from
Hong Kong are taxable, except (1) offshore income from operations
that are substantially conducted outside Hong Kong, (2) dividend
receipts and (3) capital gains. In 1996 Hong Kong formally
exempted overseas mutual funds, unit trusts and collective
investment schemes from Hong Kong tax on profits from trading
and interest, extending an exemption already enjoyed by domestic
investment vehicles. Interest accruing to a corporation conducting
business in Hong Kong is taxable unless the credit is made
available to the borrower outside Hong Kong.
Income Tax for Special Industries
Special formulae apply to computing taxable profits for the
airline, shipping and insurance businesses. For example, profits
of life insurance companies are assumed to be 5% of the premiums
received from Hong Kong, unless the insurance company makes
the (irreversible) choice to be assessed on the basis of actuarial
reports. The Inland Revenue (Amendment) Bill approved in April
1998 granted a 50% profits tax concession for the offshore
business of reinsurance companies.
Other Incomes Subject to Tax in Hong Kong
In addition to the above criteria, income from the following
activities is subject to profits tax: (1) fees from the exhibition
or use in Hong Kong of cinema, television, film or tape, or
any sound recording; (2) sums received for the transfer of
certain rights to receive income from property; (3) grants,
subsidies or similar financial assistance connected with a
business conducted in Hong Kong; (4) fees received for rental
of movable property in Hong Kong; (5) Hong Kong-sourced profits
from the sale of or on the redemption of a certificate of
deposit or bill of exchange; and (6) royalties from the use
of or right to use certain types of intellectual property
in Hong Kong.
Foreign Sourced Income
Income claimed to have a foreign source remains a subject
of considerable debate. There is particular confusion about
the source of profit for trading firms known as "re-invoicing"
companies, which take a passive role in executing transactions
but are sometimes held liable for Hong Kong tax. Tax authorities
consider income taxable if the Hong Kong company or branch
makes either purchase or sales contracts for goods. But the
High Court rejected that test in a 1996 case, CIR v Magna
Industrial Company; it said instead that these trading firms
needed to be examined on a case-by-case basis, leaving the
issue unclear.
Tax on Banks and deposit-taking Companies
Banks and deposit-taking companies are taxed on interest
income from offshore lending activities if the interest arises
from conducting the business in Hong Kong without the substantial
intervention of a branch located elsewhere.
Tax on non-resident's Local Agent
A non-resident's local agent in Hong Kong may be assessed
for profits of the non-resident, whether or not the agent
has the receipt of the profits. Resident consignees must furnish
quarterly returns to the Inland Revenue Department showing
the gross proceeds from sales on behalf of their non-resident
consignors and pay a sum equal to 1% of such proceeds, or
a lower agreed sum, usually 0.5%. When a non-resident conducts
business with a resident that results in less than-expected
ordinary profits, the business may be treated as conducted
in Hong Kong by the non-resident through the resident as agent.
If the accounts of a non-resident firm do not disclose the
true profits of the firm's branch in Hong Kong, the branch's
profits will be taken as a proportion of total profits equal
to the proportion of the branch's turnover to total turnover.
Furthermore, if the true profits of a business conducted by
a non-resident in Hong Kong cannot be readily ascertained,
the profits may be computed as a reasonable percentage of
turnover.
Tax on Partnerships
Partnerships are treated as taxable entities in Hong Kong,
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