2002-03 Annual Report, Inland Revenue Department
(Text Only)

Assessing Functions

Profits Tax | Salaries Tax | Notification Requirements of Employers | Property Tax | Personal Assessment | Advance Ruling | Objections | Appeals to the Board of Review | Appeals to the Courts | Business Registration | Stamp Duty | Estate Duty | Betting Duty | Hotel Accommodation Tax | Tax Reserve Certificates

The Department raises revenue through taxes, duties and fees in accordance with the relevant legislation. While the duties and fees collected for a year are based on the actual results of the year, the Earnings and Profits Tax assessed are principally computed by reference to the incomes/profits of the taxpayers in the previous year. In 2002-03, the Earnings and Profits Tax assessed dropped by $7.9 billion (9%), as compared with the previous year. The total of duties and fees collected also fell by 15%.

Profits Tax

Profits Tax is levied on individuals, corporations, bodies of persons and partnerships, in respect of assessable profits arising in or derived from Hong Kong. In 2002-03, the Profits Tax rates for corporations and non-corporate persons remained unchanged at 16% and 15% respectively.

Reflecting Reflecting a downward adjustment of the economy towards the latter half of 2001, Profits Tax of $41.3 billion was assessed during the year 2002-03, representing a decline of $7.5 billion (15%) from that assessed in the previous year (Figure 5). Of the total tax assessed, the property and banking sectors together contributed 36.3% (Figure 6). Further statistics relating to the tax assessed in respect of different business sectors are shown in Schedules 3 and 4.

Figure 5 Profits Tax assessed
Type of tax 1998-99 (Dollars billion) 2000-01 (Dollars billion) 2001-02 (Dollars billion) 2002-03 (Dollars billion)
Corporations 30.9 40.5 43.2 36.4
Unincorporated Businesses 5.2 4.2 5.6 4.9
Total 36.1 44.7 48.8 41.3

Figure 6 Profits Tax assessed ratio by business sectors,
Public Utilities

Salaries Tax

Salaries Tax is charged on all income arising in or derived from Hong Kong from any office (e.g. a directorship), employment or pension. The total tax payable is restricted to an amount not exceeding 15% (i.e. the standard rate of Salaries Tax) of the net total income (without allowances) of the individual concerned.

As compared with the previous year, the number of assessments made increased slightly. However, 0.2% less tax was assessed than in the previous year (Figure 7). Analyses of tax assessed and allowances granted in respect of taxpayers at various income levels are provided in Schedules 5 and 6.

Figure 7 Salaries Tax assessments
Fiscal Year 1999-2000 2000-01 2001-02 2002-03
Number (in thousands) 2,165 2,121 2,092 2,108
Tax assessed (Dollars billion) 26.5 28.6 31.0 31.0

With the decrease in the level of salaries, there was a decrease of 7.6% in the number of standard rate taxpayers, from 13,343 last year to 12,328 this year. These taxpayers together contributed 21.5% of the Salaries Tax assessed, compared to 24.0% last year (Figure 8).

Figure 8 Standard rate taxpayers
Final Assessments 2000-01 2001-02
Percentage of standard rate taxpayers 1.1% 1.0%
Percentage of Salaries Tax assessed 24.0% 21.5%


Notification Requirements of Employers

Apart from reporting commencements and cessations of employments, employers are required to prepare annual returns to report the emoluments of each of their employees. During the year, 215,471 employers filed employer's returns with the Department.

The Department perceives seminars on the Internet as a more effective means to promote tax compliance by employers than holding seminars in community halls. Merits are :

The first "e-Seminar for Employers" was uploaded in April 2003.

Property Tax

Property owners (including Corporations) are subject to Property Tax which is charged at the standard rate of 15% in respect of the net assessable value of the property. Incorporated and unincorporated businesses that pay Property Tax in respect of their business premises can have such payments set off against their Profits Tax liabilities. As for corporations, income arising from properties owned by them is also subject to Profits Tax at the corporate rate. To obviate the need for yearly setoff of Property Tax against Profits Tax, a corporation can apply for exemption of Property Tax on the property concerned. Statistics on the classification and ownership of properties, based on the records of the Department, are provided in Schedule 7. The number of assessments made during the year increased by 1.0%, as compared with the previous year. Reflecting a general reduction in rental income, the amount of Property Tax assessed dropped by 5.1% (Figure 9).

Figure 9 Property Tax assessments
Fiscal Year 1999-2000 2000-01 2001-02 2002-03
Number (in thousands) 474 488 472 476
Tax assessed (Dollars billion) 1.45 1.36 1.31 1.24

Personal Assessment

An individual may elect Personal Assessment in respect of his or her total income. Under Personal Assessment, all of the income of the taxpayer and his or her spouse is aggregated into a single sum and, after the deduction of all allowances, is assessed at the marginal tax rates. In appropriate circumstances, this reduces the total tax liability of the individual (e.g. an individual who would otherwise be chargeable at the standard rate on each separate income source). As a result of a decrease in the number of elections, the number of assessments made in 2002-03 was 5.9% less than the previous year. The amount of tax assessed decreased by 7.0% (Figure 10).

Figure 10 Assessments made under Personal Assessment
Fiscal Year 1999-2000 2000-01 2001-02 2002-03
Number (in thousands) 341 355 364 342
Tax assessed (Dollars billion) 3.27 3.53 3.63 3.37

Advance Ruling

The advance ruling service allows a person to apply for a ruling on how a provision of the Inland Revenue Ordinance applies in relation to a particular arrangement.

A fee is charged for the service on a "cost recovery" basis. Initially, the applicant is required to pay an application fee of $30,000 for a ruling concerning the "Territorial Source Principle", or $10,000 for a ruling on any other matter.

The Department endeavours to provide a ruling within 6 weeks of the date of application, provided that all relevant information is furnished with the application and further consultation with the applicant is not required.

During the year, 68 advance ruling applications were processed (Figure 11). Most of the applications were for rulings on Profits Tax matters.

Figure 11 Advance Ruling
Number of Applications 2001-02 2002-03
Awaiting decision at the beginning of the year 6 7
Add: Applications received during the year 78 70
Less: Disposed of - Ruling made 66 56
Less: Disposed of - Application withdrawn 8 6
Less: Disposed of - Ruling declined 3 6
Awaiting decision at the end of the year 7 9


A taxpayer who is aggrieved by an assessment made under the Inland Revenue Ordinance may lodge an objection to the Commissioner. A significant proportion of the objections received each year arises from estimated assessments issued to taxpayers who have failed to lodge returns in time. An objection of this nature must be supported by a completed return and, where applicable, by supporting accounts. Most of these objections are settled promptly by reference to the returns submitted. Most of the other types of objections are also settled by agreement between the taxpayer and the assessor. Only a small percentage of objections are ultimately referred to the Commissioner for determination. During the year, the Department processed over 77,000 objections (Figure 12).

Figure 12 Objection Statistics
Number of Objections 2001-02 2002-03
Awaiting settlement at the beginning of the year 21,781 22,598
Add: Received during the year 70,203 79,548
Less: Disposed of - Settled or withdrawn 68,407 76,723
Less: Disposed of - Assessment confirmed 534 482
Less: Disposed of - Assessment reduced 252 265
Less: Disposed of - Assessment increased 175 164
Less: Disposed of - Assessment annulled 18 13
Awaiting settlement at the end of the year 22,598 24,499

Appeals to the Board of Review

A taxpayer who is dissatisfied with the Commissioner's determination of his objection may appeal to the Board of Review (Inland Revenue Ordinance) to have the Commissioner's determination reviewed. As at 31 March 2003, the Board consisted of a chairman and 9 deputy chairmen who have legal training and experience as well as 142 other members. During the year, the Board processed 225 appeals (Figure 13).

Figure 13 Appeals to the Board of Review
Appeals to the Board of Review Number
Awaiting hearing or decision as at 1 April 2002 111
Add: Lodged during the year 212
Less: Disposed of -Withdrawn 61
Less: Disposed of -Assessment confirmed 103
Less: Disposed of -Assessment reduced in full 14
Less: Disposed of -Assessment reduced in part 28
Less: Disposed of -Assessment increased 13
Less: Disposed of -Assessment annulled 4
Less: Disposed of -Others 2
Total number of cases disposed 225
Awaiting hearing or decision as at 31 March 2003 98

Appeals to the Courts

The appellant or the Commissioner may appeal to the Courts against a decision of the Board of Review. During 2002-03, the Court of First Instance and the Court of Appeal ruled on 4 cases and 2 cases respectively. The issues considered by the Courts included whether profits received from disposal of properties were taxable; whether payment to an employee was an allowance or rent reimbursement; whether fees in respect of an underwriting contract relating to the sales of properties located in the PRC were taxable; whether the taxpayer could claim a married person allowance and a single parent allowance; and whether income received by an individual from service company arrangement was chargeable to Salaries Tax. The Court of First Instance ruled the 4 cases in favour of the Commissioner. The Court of Appeal also confirmed the 2 decisions in favour of the Commissioner as previously decided by the Court of First Instance.

Figure 14 sets out statistics concerning appeals to the Courts for 2002-03.

Figure 14 Appeals to the Courts
Appeals to the Courts Court of First Instance Court of Appeal Court of Final Appeal Total
Awaiting hearing or decision as at 1 April 2002 14 1 0 15
Add: Lodged during the year 9 2 0 11
Less: Disposed of - Decided 4 2 0 6
Less: Disposed of - Discontinued 12 0 0 12
Awaiting hearing or decision as at 31 March 2003 7 1 0 8

Business Registration

The Department aims to maintain an efficient business registration system. Every person carrying on business in Hong Kong must register the business and pay the required fee. Registered businesses may renew their registration certificates either annually or once every 3 years. Up to 31 March 2003, 8,755 businesses had taken the 3-year certificates.

As a budgetary measure to reduce the operating cost of business, the business registration fee was waived in 2002-03. For those who elected for 1-year certificates, the business and branch registration fees were waived. For 3-year certificates, registration fees were reduced by $2,000 and $73 to $3,200 and $116 respectively. The concessionary rates applied to certificates commencing during the period 1 April 2002 to 31 March 2003.

Businesses which had already paid registration fees for 2002-03 and were not required to renew their registration certificates during the year could apply for concessionary refund on a pro-rata basis before 30 September 2003. They included businesses holding 3-year certificates with expiry dates on or before 31 March 2003 and ceased businesses or ceased branches, which last held a registration certificate with an expiry date between 1 April 2002 and 31 March 2003. Up to 31 March 2003, the Department had issued a total of 49,806 application forms to businesses eligible to make the application, of which 13,482 had been returned. 10,343 successful applicants had been issued with refunds totaling $12.03 million.

Despite the waiver of registration fees in 2002-03, business operators were still required to pay the levy for the Protection of Wages on Insolvency Fund when they renewed their registration certificates. For the first time since 1991, the levy was adjusted upward on 16 May 2002, from $250 to $600 for 1-year certificates and from $750 to $1,800 for 3-year certificates. It was expected that the adjustment could bring in more than $200 million a year for the Fund.

The waiver of business registration fee had brought the number of new registrations in 2002-03 up by 25,924. The number of cancelled registrations during the year also fell by 8,827 (Schedule 8). The total number of active registrations recorded a significant growth of 35,442 for the year (Figure 15). Whilst the number of certificates issued increased by 8.6%, the total amount of business registration fees collected in the year dropped to $127 million (Figure 16), in consequence of the waiver.

Figure 15 Active Business Registration
Number of Active Business Registration 31.3.2002 31.3.2003
Corporations 380,532 397,920
Unincorporated Businesses Corporations 245,464 263,518
Total 625,996 661,438


Figure 16 Certificates issued and Fees collected
Certificates issued and Fees collected 2001-02 2002-03 Increase/
Number of certificates issued (Main and Branch) 685,140 743,880 8.6%
Fees (inclusive of penalties) (Dollars million) 1,240.2 127.7 -89.7%

Under the Business Registration Ordinance, a small business with sales or receipts below a specified limit ($10,000 for a business mainly deriving profits from the sale of services or $30,000 for other businesses) could apply for exemption from payment of the fee and levy. The number of total exemptions granted during the year was 8,381, representing a decrease of 21% from the previous year.

Where an application for exemption is not allowed, the business operator may appeal to the Administrative Appeals Board. 2 appeals were received by the Board in 2002-03, of which 1 was dismissed and the other was subsequently withdrawn by the appellant (Figure 17).

Figure 17 Appeals to the Administrative Appeal Board
Appeals Number
Awaiting hearing as at 1 April 2002 0
Add : Lodged during the year 2
Less : Appeal dismissed 1
Less : Appeal withdrawn 1
Awaiting hearing as at 31 March 2003 0

Stamp Duty

Stamp Duty is charged on instruments effecting property and stock transactions and leasing of property (Figure 18).

Figure 18 Composition of Stamp Duty collections, 2002-03
Immovable Properties
Leases etc.

Both the property and stock markets remained sluggish during 2002-03. The Stamp Duty collection from property and share transactions decreased by 5.9% and 22.6% respectively as compared with the previous year. Overall, there was a 13.7% drop in total Stamp Duty collection (Figure 19 and Schedule 9). The number of documents stamped, however, increased slightly by 5.4% (Schedule 10).

Figure 19 Stamp Duty collections
Compositions 2001-02 (Dollars million) 2002-03 (Dollars million) Percentage decreased
Immovable Properties 4,410 4,151 -5.9%
Shares 3,989 3,088 -22.6%
Leases etc. 238 219 -8.0%
Total 8,637 7,458 -13.7%

Estate Duty

Estate Duty is charged on that part of a deceased person's estate situated in Hong Kong. The threshold for levying duty is $7.5 million and the duty rates range from 5% to 15%, depending on the value of the estate.

Figures 20 and 21 show the composition of estates and cases processed for the past two years.

Figure 20 Composition of Estates
Composition of Estates 2001-02 2002-03
Immovable Properties 22.6% 15.9%
Quoted Shares 26.2% 19.9%
Unquoted Shares 18.4% 29.1%
Bank Deposits 18.5% 18.6%
Others 14.3% 16.5%

Figure 21 Estate Duty cases
Estate Duty cases 2001-02 2002-03
New cases 14,574 15,227
Cases finalized - Dutiable 302 298
Cases finalized - Exempt 14,399 15,047
Total cases finalized 14,701 15,345


Estate Duty of $1.402 billion was collected during the year (Schedule 11), a decrease of $525 million (27%) compared with that of the previous year.

As Estate Duty is payable on delivery of an estate duty affidavit or account (or within 6 months from the date of the deceased's death, whichever is the earlier), $1.147 billion was received during the year in advance of the issue of formal assessments (Schedule 12).

Betting Duty

Betting Duty is charged on bets made on totalisators at race meetings conducted by the Hong Kong Jockey Club and on the proceeds of lotteries conducted by the Hong Kong Lotteries Board.

In 2002-03, the rates of duty remained unchanged (Figure 22).

Figure 22 Rates of Betting Duty in 2002-03
Type of bets Details of bets Rates
Standard Bets win, place, double, quinella and quinella place 12%
Exotic Bets six up, treble, tierce, trio, double trio and triple trio 19%
Lotteries   25%

During the year, racing bets were on the decline despite an increase in racing attendances (Schedule 13), resulting in a drop of 7.6% in the duty collected from horse racing. Although lotteries duty collection increased by 14.5%, the total Betting Duty collected in 2002-03 was 5.6% less than that of the previous year (Figure 23).

Figure 23 Betting Duty collections
Betting Duty collections 2001-02
(Dollars million)
(Dollars million)
Horse Racing 10,527.8 9,725.7 -7.6%
Lotteries 1,043.5 1,195.0 +14.5%
Total 11,571.3 10,920.7 -5.6%

Hotel Accommodation Tax

Hotel Accommodation Tax is imposed on hotel and guest house accommodation at the rate of 3% of the accommodation charges paid by guests and is collected quarterly in arrears.

In 2002-03, there was an increase in the number of hotels and boarding houses operating in Hong Kong, resulting in an increase of 3.6% in the number of taxable rooms (Figure 24). The room occupancy rate also increased by 4.4% (Figure 25), but the tax collected was 0.9% less than that collected in the previous year (Figure 26). This was mainly due to the reduction in room charges (Schedule 14).

Figure 24 Hotels, boarding houses, taxable rooms and exempted rooms
Number 2001-02 2002-03 Increase / Decrease
Hotels and Boarding Houses 158 161 +1.9%
Taxable Rooms 37,733 39,101 +3.6%
Exempted Rooms 5,519 5,315 -3.7%

Figure 25 Room occupancy rates
Type 2001-02 2002-03 Increase
Room Days 10,681,725 11,057,669 +3.5%
Occupancy Rate 79.5% 83.9% +4.4%

Figure 26 Hotel Accommodation Tax collections
Fiscal Year
Collections (Dollars million)

Tax Reserve Certificates

There are two sets of circumstances under which Tax Reserve Certificates are purchased.

The first applies to taxpayers who wish to save for the payment of their future tax liabilities. Two service schemes are offered to these taxpayers: the ‘Electronic Tax Reserve Certificates Scheme’ for all taxpayers and the ‘Save-As-You-Earn’ (SAYE) Scheme for civil servants and civil service pensioners. Under the Electronic Tax Reserve Certificates Scheme, certificates can be purchased using various electronic means, i.e. by bank autopay, telephone, the Internet, public information kiosk and bank ATM. Under the SAYE Scheme, certificates are purchased by civil servants and civil service pensioners through monthly deductions from their salaries / pensions. Interest is payable on the certificates when they are redeemed for settlement of tax liabilities, based on the interest rate prevailing at the time of purchase, for a maximum period of 36 months from the date of purchase.

In 2002-03, while there was an increase of 25% in the number of certificates sold under the Electronic Tax Reserve Certificates Scheme, there was a slight drop of 3% in the sale of certificates under the SAYE Scheme (Schedule 15). The total amount involved decreased by 12% (Figure 27).

The second situation applies to taxpayers who object to tax assessments and are required to purchase Tax Reserve Certificates in respect of the tax in dispute. Such certificates are used to settle any tax found payable upon the finalization of the objection or appeal. Interest is only payable on the amount, if any, subsequently required to be repaid to the taxpayer, and is computed at floating rates ruling over the tenure of the certificate.

Figure 27 Certificates sold
Number Value (Dollars million) Number Value (Dollars million)
Certificates relating to Objections and Appeals 794 2,531.7 868 2,093.1
Certificates other than Objections and Appeals 91,289 410.3 96,691 361.9

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