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LCQ3: Hong Kong's tax system and tax assessment
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Following is a question by the Hon Tam Heung-man and a reply by
the Secretary for Financial Services and the Treasury, Mr Frederick
Ma, in the Legislative Council today (January 5):
Question:
Regarding Hong Kong's tax system and tax assessment, will the Government
inform this Council:
(a) of the time when the last comprehensive review of the Inland
Revenue Ordinance was conducted, and whether it has assessed if
the current Inland Revenue Ordinance confers excessive discretionary
powers on the Commissioner of Inland Revenue; if it has, of the
assessment results; and whether it will consider conducting a comprehensive
review of the Ordinance; if not, the reasons for that;
(b) of the measures to enhance the fairness and transparency in
tax assessment, and whether it will follow the practice of publishing
the Assessors' Manual, which has been adopted in countries such
as the United Kingdom and the United States of America, to inform
taxpayers of the assessment criteria of the Inland Revenue Department;
if not, the reasons for that; and
(c) whether it has assessed if Hong Kong lags behind other developed
economies in its tax system; if the assessment results show that
Hong Kong's tax system so lags behind, of the authorities' strategies
to eliminate such situation?
Reply:
Madam President,
(a) The last comprehensive review of the Inland Revenue Ordinance
was carried out in 1976. Since then, the Administration has kept
the various tax items under constant review in the context of the
annual budget exercises and other policy review exercises. On a
more technical level, the various provisions of the Inland Revenue
Ordinance are also reviewed regularly to make sure that our taxation
system is competitive in the global context. Enhancements are introduced
to meet the ever-changing social and economic environment. All these
amendments are effected after detailed deliberations by the Legislative
Council. The Administration welcomes views from the public on taxation
matters. Every year, the Financial Secretary organises budget consultations
with legislators, political parties, professional bodies and organizations
in related industries as well as members of the public.
In this connection, in 1987, in order to better and more systematically
gauge the views of the practitioners and chambers on tax legislation,
which could be very complex and highly technical, the Administration
initiated and encouraged the establishment of the Joint Liaison
Committee on Taxation (JLCT), the main liaison body between the
Administration and the industry on taxation matters. The JLCT is
an umbrella organisation comprising private sector representatives
nominated by chambers of commerce, the Hong Kong Institute of Certified
Public Accountants, the Taxation Institute of Hong Kong, the Law
Society of Hong Kong, and the International Fiscal Association.
It also invites members from the academic, legal as well as tax-related
fields to attend its meetings from time to time. Representatives
from the Legislative Council, the Financial Services and the Treasury
Bureau, the Inland Revenue Department and the Department of Justice
also attend JLCT meetings on a regular basis.
Invariably, the Administration consults the JLCT on all major amendments
to the Inland Revenue Ordinance and other taxation legislation before
submitting the relevant bills to the Legislative Council in order
to make sure that the views of the industry and business community
are duly reflected in our legislative proposals. The JLCT is functioning
well in providing a constructive forum for liaison between the Administration
and representatives of the private sector, to formulate advice to
the Government, and to conduct or sponsor researches and educational
activities in connection with taxation matters. Various sub-committees
are formed from time to time under the JLCT to study different taxation
topics of interest, contribute to the drafting of the IRD's Departmental
Interpretation and Practice Notes and provide advice on the drafting
of tax legislation.
JLCT has recently invited Hon Tam Heung-man to join, and we note
that Ms Tam nominated a representative to attend JLCT meetings.
Ms Tam is welcome to make use of this channel to provide advice
on taxation matters.
Other well-established consultation channels between the Administration
and taxation professionals include the annual meeting between the
Inland Revenue Department and the Hong Kong Institute of Certified
Public Accountants.
As a result of the regular reviews and after consultation with the
industry and tax professionals, legislative changes were made and
implemented from time to time. For example, a total of 34 bills
have been introduced into the Legislative Council since 1991 proposing
various amendments to the Inland Revenue Ordinance. These amendments
seek to introduce both policy and technical changes to keep our
taxation regime competitive and up-to-date.
The Administration would also establish ad hoc committees and working
parties to undertake in-depth study on specific issues, whenever
there is such a need.
We consider that the present approach of keeping various tax items
under constant review in annual budget exercises and other policy
review exercises and reviewing various provisions of the IRO regularly
with inputs from the industry, the profession and the business community
through the various consultative channels including the JLCT is
effective and efficient. At present, we do not see any genuine need
for conducting an overall review of the Inland Revenue Ordinance.
On the question of whether or not the existing Inland Revenue Ordinance
gives excessive discretion to the Commissioner of Inland Revenue,
the Administration is of the view that all the powers vested in
the Commissioner under the Inland Revenue Ordinance are necessary
for her to discharge the tax assessment and collection duties effectively
in order to protect public revenue. Such powers were carefully deliberated
by the legislature in the course of enactment. Besides, our tax
and legal system has a well defined system of objection and appeal,
which enables taxpayers to contest the judgements or assessments
made by the Commissioner. For instance, the disagreements will be
adjudged by the Board of Review, which is an independent statutory
body established to determine tax appeals, as well as the independent
courts. This mechanism provides very effective checks and balances
on the discretionary power exercised by the Commissioner or other
tax officials and has been operating effectively.
(b) Ensuring integrity and transparency in the exercise of tax-assessing
duties are important objectives. Towards this end, the IRD has published
a series of Departmental Interpretation and Practice Notes (DIPNs)
setting out the Department's view on applications of the tax law
and the usual practices in conducting the tax assessment functions.
To facilitate taxpayers' access to such information, these notes
are also published on the website of the IRD. The Department also
has a statutory scheme of providing advance ruling on taxation matters.
Rulings that may be of interest to the tax-paying public are published
on the website. Other more important policies that may affect taxpayers,
such as the policy of imposing penalty by way of Additional Tax
on tax evasion offences, are also published on the IRD website for
easy reference.
The Assessor's Manual serves as a training tool for newcomers to
the Department and a procedural manual detailing the operation procedures
for day-to-day assessing duties for individual officers. It should
not be of much reference value to taxpayers or their representatives.
The Administration does not think that publishing the Assessor's
Manual will help enhance the transparency of the tax system. We
will continue to work with the JLCT to expand and update the DIPNs
with a view to improving their usefulness and reference value to
taxpayers.
(c) In terms of competitiveness, Hong Kong's tax system compares
favourably with other tax jurisdictions. Hong Kong is well-known
for its simple and low taxes. We adopt the territorial source concept
in taxation. Only income arising in or derived from Hong Kong is
chargeable to tax. These tax rates are very low compared to European,
North American and some Asian countries. They are also lower than
almost all of our neighbours in the Asian region. Besides, we do
not have world-wide tax. Nor do we have any capital gains tax, dividends
tax or interest tax. These other taxes are usually present in other
tax regimes.
Apart from having low tax rates, our tax system is also very simple
and fair. Certainty and simplicity in the taxation system are very
important to foreign investors. We rank the first in 2005 amongst
161 places as the freest economy in the world by the Index of Economic
Freedom published jointly by the Heritage Foundation and the Wall
Street Journal. One of the criteria adopted in determining the ranking
is taxation.
We are mindful that these advantages of Hong Kong's taxation regime
should be maintained, and that we have to stay ahead of the global
competition for investments. We have assessed and kept under constant
review our tax system and our competitiveness with other tax jurisdictions.
Ends/Wednesday, January 5, 2005
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