The FS announced a consolidated surplus of HK$66.7 billion for 2011-2012 making this the 8th consecutive year that the government have announced a budget surplus, and far in excess of that previously forecast. The aggregate consolidated surpluses over the 8 year period amount to a staggering HK$386.8bn which, assuming HK has a population of 7 million, represents HK$55,000 per individual. The current year surplus represents 22 months of government expenditure. However the FS anticipates that for the next few years Hong Kong will experience balanced budgets including a small consolidated deficit, in the amount of HK$3.43bn, for 2012-13.

The community had made it known that they had expected the government to tackle poverty, provide relief for the middle class, assist SMEs through the forthcoming turbulent period, deal with Hong Kong’s air pollution and to amend certain aspects of the Inland Revenue Ordinance. How did the FS deal with these issues?

Tackling Poverty
• The government will provide one months extra allowance to those claiming CSSA (social security), old age allowance and disability allowance, at a one-off cost to the government of HK$2.1bn. Hardly generous with no permanent benefit!

• For those people living in public housing or who pay rent to the Hong Kong Housing Authority the government will pay 2 months rent, again a one-off relief. This does not address the plight of those people not living in government accommodation and whose living conditions are very harsh. The government will also subsidize all residential electricity accounts subject to a threshold of HK$1,800. As there is no distinction as to the householder it is envisaged that this will favour 2.5 million households at a cost of HK$4.5bn.

• Other social welfare proposals include the extension and improvement of the short-term food assistance programme, transport concessions, increasing the number of subsidized rental care houses and community centres for the aged.

The list may seem impressive but bearing in mind that an able bodied person over sixty, who satisfies the income and assets tests of eligibility, receives the standard rate of CSSA in the amount of HK$2,660 per month, this is barely enough to live. I would have liked to have seen the government do far more to relieve poverty, as an absolute minimum a substantial and permanent increase to the standard rates of CSSA. Out of ten I would award the Financial Secretary a 3.

Middle Class
The relief and concessions applicable to the middle class are more extensive. As with the elderly this class will benefit from the electricity subsidy, but also a waiver of government rates, subject to a ceiling of HK$2,500 per quarter for each rateable property, a reduction in their salaries tax liability for 2011-12 by 75%, subject to a ceiling of HK$12,000, an increase in personal allowances, HK$108,000 to HK$120,000 and HK$216 to HK$240 for the basic and married persons allowance respectively. There are a number of increases in other personal allowances including the child allowance by HK$3,000 to HK$63,000 and all of the allowances relating to the maintenance of dependent grandparents, parents and siblings. As expected the period of relief for mortgage interest has been extended from 10 to 15 years. Whilst, the increases in the personal allowances may take a number of people outside the charge to salaries tax, the increase in those allowances for the assistance to dependent family members, when translated into cash, will hardly compensate a person for the increased cost of maintaining a dependent. Hence, I would give the government a solid 7 for their efforts but I would have been happier had the FS removed stamp duty on property purchases under HK$5m, making the cost of home ownership cheaper and doubled the allowances for maintaining dependents.

Assistance For SMEs
The measures proposed include an extension and improvement of the current SME Financing Guarantee Scheme, the waiver of the business registration fee, a reduction in profits tax for 2011-12 by 75%, subject to a ceiling of HK$12,000, and a reduction in the charges for import and export declarations. These proposals whilst welcome provide no long term benefits. Sadly, the government shied away from a small companies rate of tax and the abolition of the need for audits for companies with a turnover less than HK$2m. The temporary nature of these reliefs limits the long term value of the proposals for SMEs – at best a 6.

Other Issues
For larger companies, whilst they will benefit from the profits tax reduction of HK$12,000 the Financial Secretary refused to consider the introduction of group relief, the carry back of tax losses, the promised reduction in the standard rate of profits tax or even a general review of the Inland Revenue Ordinance. His week explanations as to why the government will not deal with these issues earns a score of 2.

Improving Hong Kong’s air quality is an issue always on the mind of most Hong Kong people. There were no new announcements, merely a repetition of what was in the Chief Executive’s policy address; a big disappointment, score 1.

The temporary nature of the reliefs, concessions and tax reductions may be explained by the impending end to the current-term government, but with surpluses at their current levels and the plight of the elderly and poor, this budget was a disappointment notwithstanding the measures proposed for the middle class.

Most, if not all, of the recommended revisions to our tax system are based on a perceived need to maintain Hong Kong’s competitiveness. Reference is made to the World Bank’s report which places Hong Kong’s effective tax rate above the average for East Asia, Singapore, Taiwan, Korea and Malaysia.

Notwithstanding that, I question whether taxation is that important in the minds of CEOs and CFOs when a decision needs to be made as to the most favourable location for an Asian regional office. Other significant considerations are likely to include;

• Infrastructure
• Legal System
• Availability of Education
• Location
• Transportation
• Financial Services
• Quality and availability of the workforce
• Languages spoken
• Stability and convertibly of the domestic currency
• Cost of Living

As stated above I am yet to be convinced that taxation, and hence a reduction in the standard rate of profits tax, is likely to materially influence Hong Kong’s attractiveness as a place to establish an office. I would also raise the question as to which companies would benefit from a reduction in the standard rate of profits tax. In the year of assessment 2009/10 (the latest available statistics) 60% of those companies paying profits tax paid less than HK$25,000, whilst the vast majority of the profits tax collected was paid by a very small number of corporations. A two-tiered system, whereby a lower rate of tax would be payable by those companies with a low level of profit, would certainly benefit the majority without causing a huge loss in revenue by the Government. The implementation of such a proposal is unlikely to be an arduous task to either the Government or the Inland Revenue Department.

Equally, whilst there are numerous reasons to support the introduction of group relief and/or the carry back of tax losses this has been dismissed by past Financial Secretaries on grounds that such an amendment to Hong Kong’s tax legislation would diminish the Government’s revenues, over complicate the Inland Revenue Ordinance and open the door to tax avoidance. All these contentions can be easily refuted.

Sadly, very few of the General Public’s proposals are likely to be adopted. Notwithstanding that the level of reserves remains high, the latest statistics show that they are equal to 24 months of Government expenditure, and it is likely that the run of seven consecutive years of consolidated surpluses will not be broken in 2011/2012, the gloomy economic outlook for Europe and its effect on Hong Kong will provide the Financial Secretary with the weapon he needs to keep the purse strings tightly tied.

I sincerely hope that the Financial Secretary will not have to face another embarrassing situation, as he did in 2011, and be forced to significantly amend his budget in order to gain the Legislative Council’s approval.

The Introduction to DIPN21, as with all other DIPNs issued by the Inland Revenue Department, states:

“These notes are issued for the information of taxpayers and their tax representatives. They contain the Department’s interpretation and practice in relation to the law as it stood at the date of publication.”

Given these remarks, a taxpayer has a legitimate expectation that the Inland Revenue Department will actually stand by the information and guidance it is providing. Otherwise, what is the point of issuing DIPNs in the first place? The introduction continues with the following advice:

“Taxpayers are reminded that their right of objection against the assessment and their right of appeal to the Commissioner, the Board of Review or the Court are not affected by the application of these notes.”

The introduction gives no indication that the Inland Revenue Department can choose whether and when it will follow its own stated practice.

The issue of “Revenue guidance” was also considered in the case of R (Davies and James and Gaines-Cooper) v HMRC [2011] a case better known for its decision on the determination of residency for UK tax purposes. Nonetheless, the taxpayer was reliant on the HMRC practice stated in its booklet, “IR20”.

In considering the issue of “Revenue guidance”, Lord Wilson, in his judgment on the Supreme Court hearing, referred to the judgment of Moses LJ in the Court of Appeal:

”12. The importance of the extent to which thousands of taxpayers may rely upon guidance, of great significance as to how they will manage their lives, cannot be doubted. It goes to the heart of the relationship between the Revenue and the taxpayer. It is trite to recall that it is for the Revenue to determine the best way of facilitating collection of the tax it is under a statutory obligation to collect. But it should not be forgotten that the Revenue itself has long acknowledged that the best way is by encouraging co-operation between the Revenue, and frank and open dealing by the public.”

Lord Wilson later states:

“27. The Revenue accepts first that, were it in the booklet to have made the representations about the circumstances necessary for the achievement of non-residence for which either the first appellants or the second appellant contend, such would have been within its powers; and second that, for so long as the representations remained operative, an individual would have had, and therefore have been able to reference, a legitimate expectation that it would appraise his case by reference to them notwithstanding that they failed to reflect the ordinary law.”

It is very clear that CG Lighting Limited had a legitimate expectation that the Inland Revenue Department would accept that CG Lighting Limited’s mode of operation was in accordance with its own DIPN and that it should have applied the concession stated in DIPN 21 to CG Lighting Limited’s tax affairs. This should have been done “notwithstanding that (the DIPN) failed to reflect the ordinary law”.

In my opinion, there is no doubt that the behaviour of the Commissioner in this case left a lot to be desired. CG Lighting Limited should have been entitled to press its case for the 50% concessionary tax treatment. The Commissioner’s denial of this right was, at best, unfortunate.

“I fully appreciate that Board members give up their valuable time in order to render voluntary public service for little or no remuneration. But it seems to me that by any standard, a delay of 3½ years in handing down a decision must be unacceptable.”

Reyes rightly suggested that six months from the date of the hearing was quite sufficient for the Board of Review to hand down its decision.

The Inland Revenue Department was also taken to task in the judicial review, Yue Yuen Marketing Company Ltd & Ors v CIR [2010] HACL 49/2009. The case concerned the Inland Revenue Department’s practice of issuing protective assessments shortly before the expiry of the six-year statutory time limited for raising assessments. Furthermore, the assessments ignored the taxpayer’s offshore claims, and the Commissioner of Inland Revenue demanded that the taxpayer purchase tax reserve certificates for the full amount of the tax in dispute. At the time of the judicial review, which was more than 10 years after the first year of assessment under objection, the taxpayer’s affairs had not been finalised. Reyes J concluded that there had been an “inordinate delay” and that a determination should be made within six months from the date a taxpayer objected to an assessment.

Surprisingly, a similar failure to determine a taxpayer’s affairs was brought to the attention of the Court of First Instance in Kong Tai Shoes Manufacturing Company Limited v CIR [2011] HCAL 34/2011. In this case, the Commissioner of Inland Revenue had failed to respond to the taxpayer’s objections for periods ranging from 3.5 to 6.5 years. Again, Reyes J suggested that six months was more than enough time for the Commissioner of Inland Revenue to determine an objection.

Sadly, whilst these cases highlight the delay that can occur in determining an objection, they do not illustrate the frustration that many taxpayers face in having to answer six-page standard letters, large parts of which are frequently irrelevant, several years after tax returns have been filed. As if this was not hard enough, a taxpayer might have to wait many months for a response.

I sincerely hope that the Commissioner of Inland Revenue takes notice of Reyes J’s comments and endeavours to ensure that his staff conclude taxpayers’ affairs with greater alacrity.

On May 5, Professor Chan advised that revenue collections by the Inland Revenue Department from Salaries Tax and Profits Tax were estimated to be $179.1 billion, 6% less than for 2008-2009.  The total amount of Salaries Tax paid by the top 10 salary taxpayers was estimated at $367 million, a decrease of $92 million as compared to the previous year.  As for Profits Tax, the top 10 taxpayers paid $11.07 billion, which was $8.63 billion less than in 2008-2009.  Interestingly, had the top 10 corporate taxpayers, who accounted for 6.2% of the direct tax collected in 2009-2010, maintained their 2008-2009 level of assessable profits, the fall in revenue would have been only around 1.5%.  If my arithmetic is correct, the contribution by the top 10 corporate taxpayers for 2009-2010 is likely to fall from approximately 10% to 6.2% of the direct tax collected.

On May 12, Professor Chan responded to concerns that G20 members may impose sanctions on Hong Kong because the Government had not concluded agreements with 12 other countries for the exchange of tax information.  He highlighted the considerable pace of development in this area, which started with the amendment to the Inland Revenue Ordinance that gave the Commissioner of Inland Revenue the authority to collect information not otherwise required for Hong Kong tax purposes.  Furthermore, as of May 13, the Government had signed 10 CDTA’s, with the magical number of 12 in sight.

Professor Chan’s concluding comments were clear, and echo my own views: “Hong Kong has never been a tax haven.  We will continue to expand our CDTA network with a view to enhancing Hong Kong’s position as an international financial and business centre.”

“On 15 April 2010, Hong Kong and Switzerland had initialed an agreement for the avoidance of double taxation (CDTA) between Hong Kong and Switzerland in Berne.  Both sides had reached a consensus on all the provisions of the agreement after the 2nd round of talks held this week, which lasted for 4 days.  Both sides will arrange to have the agreement formally signed and put into effect as soon as practicable.

This is the 10th CDTA that Hong Kong has concluded so far that adopts the latest international standard on exchange of information.”

With 10 down, there are just two to go; any guesses as to which two countries will be next and when the CDTAs will be concluded?  As I’ve stated in previous “Rants”, the Department’s only negotiation tool has been the adoption of the 2004 OECD Exchange of Information Article.  Taxpayers should be aware of this, and also of the power the Department now has to ascertain financial information about a taxpayer and its ability to report this information to a treaty partner if it receives an appropriate request.

http://www.quamnet.com/newscontent.action?articleId=1478961

My first appearance was on the 24th of February edition of Hong Kong Today, the morning of the HK Budget’s release.

Click HERE to listen;

The following day I was asked onto the show Back Chat, as a panellist, to review and discuss the content of the Financial Secretary’s Budget.

Click HERE to listen;

Please let me know your opinions in the comment box below.

As expected the leaked “one off” giveaways proved to be correct i.e. the Government will;

• Pay two months rent on behalf of public housing tenants,
• provide an additional one month of CSSA payment, old age allowance and disability allowance,
• waive rates for 2010-11, subject to a cap of HK$1,500 per quarter
• reduce salaries tax by 75%, subject to a cap of HK$6,000
• waive the business registration fee
• provide a $1,000 allowance to students receiving CSSA or student financial assistance

Sadly, as predicted the Government has chosen to use the tax system for social engineering i.e. increasing stamp duty on property transactions valued over $20 million as a means to dampen the luxury property market, it also stated that it may increase the duty on tobacco to discourage smoking.  In my view the increase in stamp duty will have no impact on the decision of most people to purchase luxury properties, however it is only sad that having made the decision to tinker with stamp duty the Government did not take this opportunity to reduce the rate of stamp duty on properties valued below HK$6 million as a means of assisting first time buyers and lower income earners.  Similarly, people should be able to make up their own minds whether they wish to smoke tobacco without this sort of Government intervention.

Our hopes and aspirations for SME’s did not materialize either, no reductions in tax rates nor an agreement to carry back tax losses for a three year period.  Of more significance was the fact that there was no immediate willingness to extend the Government loan guarantee schemes.  However, the Financial Secretary did appear to acknowledge the inequity of not giving tax relief for capital expenditure incurred on the cost of registering trademarks, copyrights and registered designs.  Perhaps the financial services industry had more clout as they were able to obtain a stamp duty concession in the trading of exchange traded funds and a profits tax concession applicable to income and gains from qualifying debt instruments.

Perhaps I should not complain too much as I am fully supportive of the measures announced to strengthen public health care and to provide additional care and financial assistance to the needy, the only doubt I have is whether these proposals have gone far enough.

Hong Kong’s fiscal reserves are budgeted to increase to $508.2 billion by 31st March 2010 dropping to $470 billion by 31st March 2015, the equivalent of 15 months of Government expenditure.  The Financial Secretary’s conservative, perhaps political approach, is keeping the boat steady but, I just hope that land transactions continue to bear fruit as very little attempt is being made to stimulate entrepreneurs or encourage businesses to expand their operations in Hong Kong.

Mr Chu became an Assistant Assessor in July 1975 and has been employed by the Inland Revenue Department (“IRD”) ever since.  Mr Chu has had considerable experience working with various departments within the IRD but, in my opinion, the most significant being his direct involved with the assessment, objection and appeal procedures relating to corporate taxpayers.  Mr Chu is very familiar with the problems and issues which taxpayers face and find very frustrating.

I wait with interest to see the impact that he will have on the IRD and whether he will be able to facilitate a mutual understanding between the IRD and taxpayers as to the correct interpretation of the provisions of the Inland Revenue Ordinance and case law precedents, in particular those relating to offshore profits and income.

I wish Mr Chu well in his new office.