Revenue Sources

Hong Kong's tax system is simple and relatively inexpensive to administer.
Tax rates are low, and the government accords a high priority to curbing
tax evasion and minimising opportunities for tax avoidance. The major
sources of revenue are profits tax, salaries tax and revenue from land
transactions. Other significant sources include stamp duty on property
and stock transactions, betting duty, fees and charges for services
provided by the government, returns on properties and investments and
duties on certain specified commodities. (For major sources of revenue,
see Appendix 15).

The Inland Revenue Department collects about 50 per cent of total
revenue, including profits and salaries taxes, stamp duty, betting duty,
estate duty and hotel accommodation tax. Profits and salaries taxes,
which alone accounted for about 40 per cent of total revenue in 1996-97,
are levied under the Inland Revenue Ordinance. Persons liable to 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 Hong Kong, or derived
from a trade, profession or business carried on in Hong Kong. In 1997,
profits of unincorporated businesses were taxed at 15 per cent and profits
of corporations at 16.5 per cent. Tax is payable on the actual profits for
the year of assessment.

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, and dividends received
from corporations are exempt from profits tax. In 1996-97, the
government received about $50 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 is calculated on a sliding scale which progressed from 2 per cent,
8 per cent and 14 per cent on the first, second and third segments of net
income (that is, income after deduction of allowances) of $30,000 each,
respectively, and then to 20 per cent on the remaining net income. No
one, however, needs to pay more than 15 per cent of his or her total
income. 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 $28.7 billion, or about 14 per cent of total
revenue, in 1996-97. Due to generous personal allowances under Hong
Kong tax law, about 53 per cent of the territory's workforce has no
salaries tax liability at all.

Owners of land or buildings in Hong Kong are charged property tax at the
standard rate of 15 per cent of the actual rent received, less an allowance
of 20 per cent for repairs and maintenance. 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 totalled about $1.6
billion in 1996-97.

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 10 per cent of total revenue, or about $20.5 billion,
in 1996-97.

A duty is imposed on bets at the Hong Kong Jockey Club and on the
proceeds of Mark Six lotteries - the only legal forms of betting in Hong
Kong. The rate of duty is 12 per cent or 18 per cent of the amount of the
bet (depending on the type of bet placed) and 20 per cent on the proceeds
of lotteries. The yield in 1996-97 totalled some $12.2 billion, and
accounted for about 6 per cent of total revenue.

Estate duty is imposed on estates valued at over $7 million, at levels
ranging from 6 per cent to a maximum of 18 per cent, while a hotel
accommodation tax of 5 per cent is imposed on expenditure on
accommodation by guests in hotels and guest-houses.

Under the Dutiable Commodities Ordinance, duties are levied on only four
types of commodities - hydrocarbon oil, alcoholic beverages, methyl
alcohol and tobacco. The Customs and Excise Department collects duties
on these products irrespective of their geographical origin. In 1996-97,
the department collected duties worth $8.5 billion or about 4 per cent of
total revenue.

The Rating and Valuation Department is responsible for the billing and
collection of rates, which are levied on landed properties at a fixed
percentage of their rateable value. The prevailing overall rates percentage
charge is 5 per cent. The revenue raised helps to finance the various
public services provided by the Municipal Councils, and provides a stable
and reliable revenue stream for the government.

The Rating and Valuation Department is also responsible for the
assessment of rateable value which is an estimate of the annual rent at
which a property might be expected to be let, as at a designated date, and
general revaluations are conducted at regular intervals to keep rateable
values of properties up-to-date. The current Valuation Lists took effect on
April 1, 1997, and the rateable values reflect rental values at July 1, 1996.

The number of assessments in the Valuation Lists as at March 31, 1996,
stood at about 1 563 000. In 1996-97, the total revenue from rates was
$15.6 billion. Of this amount, $5.5 billion, collected from Hong Kong
Island and Kowloon, was credited to the Urban Council and $3.8 billion,
collected from the New Territories, went to the Regional Council. The
remaining $6.3 billion, was credited to the government's General Revenue
Account.

Government rent is payable from July 1, 1997, for all land leases granted
on or after May 27, 1985, and on the extension of non-renewable leases.
The latter comprise all land leases in the New Territories and New
Kowloon north of Boundary Street which were renewed on June 28,
1997. The rent is equivalent to 3 per cent of the rateable value of the lot
and is adjusted in step with changes in the rateable value. The Rating and
Valuation Department is also responsible for the billing and collection of
government rent.

The government derives significant amounts of revenue from other
sources. Fees and charges for services provided by government
departments generated about $10.8 billion, or about 5 per cent of total
revenue, in 1996-97. It is government policy that fees should in general
be set at levels sufficient to recover the full cost of providing the
services. Certain essential services are, however, subsidised by the
government or provided free.

Also, in 1996-97, the government collected $9.3 billion, amounting to
about 5 per cent of the total revenue, from investments and rents from
government properties. A further $6.6 billion was generated by
government-operated public utilities, accounting for about 3 per cent of
the total revenue. The most important of these, in revenue terms, are
waterworks and the airport.

Lastly, some $27 billion, or about 13 per cent of the total revenue in
1996-97, was generated from land transactions. In accordance with
Annex III to the Sino-British Joint Declaration, revenue from land
transactions decided upon before the coming into force of the Joint
Declaration, and from those conferring a benefit that expired on or before
June 30, 1997, was credited to the General Revenue Account. This
amounted to $451 million in 1996-97. All revenue from other land
transactions was credited to the Suspense Account of the Capital Works
Reserve Fund for sharing with the HKSAR Government Land Fund. The
sharing arrangements in 1996-97 and in the first quarter of 1997-98,
i.e. up to June 30, 1997, resulted in the transfer of $71 billion to the
Works Account of the Capital Works Reserve Fund and a total of
$65 billion to the HKSAR Government's Land Fund. Since July 1, 1997,
the government receives revenue from land transactions in full. 

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