(Source : Government Information Centre)
LCQ17: Tax deduction for mandatory MPF contributions
Following is a question by the Hon Sin Chung-kai and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (November 3):
Under the Inland Revenue Ordinance (Cap. 112), an employee may apply for a deduction in respect of his contributions to a Mandatory Provident Fund Scheme (MPFS) or any Recognized Occupational Retirement Schemes (RORS) in connection with the assessment of his salaries tax payable, and the amount deductible is capped at an amount equivalent to mandatory contributions. However, the Inland Revenue Department (IRD) requires employers to provide in the tax returns their employees' total income rather than the amount after deducting employees' contributions to retirement schemes. Some members of the public claim that they had to pay more tax as their total income, instead of the income net of contributions, had been used for tax assessment. In this connection, will the Government inform this Council:
(a) of the respective current numbers of employees who have joined the MPFS and RORS and are required to make contributions to the Schemes;
(b) of the number of objections, received by IRD each year since the implementation of MPFS in December 2000, in which taxpayers objected to their tax assessment on grounds that their employee's MPF contributions have not been deducted and, among these objections, the number of cases allowed;
(c) whether it has assessed the number of cases each year since the implementation of MPFS in which taxpayers did not raise objection to their tax assessment even though their employee's MPF contributions have not been deducted, and the total amount of money involved; whether it will review these cases and refund the excess tax collected to the taxpayers concerned; and
(d) of the measures to be adopted to avoid the recurrence of excess tax collection?
(a) The Mandatory Provident Fund Scheme (MPFS) commenced operation on 1 December 2000. As at 30 September 2004, a total of 1 799 500 employees in Hong Kong have joined the MPFS. In addition, the number of employees who have joined a recognised occupational retirement scheme (RORS) exceeds 612 000 (Note).
(b)&(c) Under section 26G of the Inland Revenue Ordinance, mandatory contributions to MPFS are deductible in computing the assessable income. The maximum deduction is $12,000 for each year of assessment (i.e. the mandatory contribution cap). Contributions made to RORS on or after 1 December 2000, equivalent to the amount of mandatory MPF contributions calculated on basis of the same salary level, are also deductible, subject to the deduction ceiling of $12,000 for each year of assessment.
To apply for the deduction, employees should declare in Part 4.3 of their individual tax returns the actual amount of mandatory contributions to recognised retirement schemes. Upon verification, the Inland Revenue Department (IRD) will have the actual contributions deducted from the assessable income in their tax assessments.
The following table shows the number of claims for deduction of employees' contributions handled by the IRD since the implementation of MPFS in December 2000:
|Year of Assessment||2000-01||2001-02||2002-03|
|Number of claims||718 966||822 098||825 112|
|Number of cases in which
deductions were allowed
|Percentage of cases in which
deductions were not allowed
It can be seen from the above figures that most of the claims for deductions of employees' contributions have been accepted. Taxpayers who are aggrieved by their tax assessments may raise objections to the Commissioner of Inland Revenue under the Inland Revenue Ordinance. In general, deductions are not allowed if taxpayers have failed to substantiate the actual amount of contributions made. The IRD does not have a breakdown regarding objection cases involving deductions on employees' contributions.
(d) Under the Inland Revenue Ordinance, employees are liable to tax on their total income. Claims for deduction of MPFS or RORS contributions from the assessable income need to be verified by assessors. As such, employers are required to provide in the returns of their employees' remuneration and pension the employees' total income rather than the net amount after deducting employees' contributions. We need to clarify that this requirement has not resulted in more tax being paid by taxpayers than is required, and that there is no such case of excessive tax collection by the Government.
If aggrieved by the tax assessment, a taxpayer may lodge an objection against the assessment to the Commissioner and may further file appeal against the Commissioner's determination to an independent Board of Review or to the courts.
Note: Under the Inland Revenue Ordinance, contributions towards two other kinds of recognised occupational retirement schemes are also deductible from the assessable income. The schemes include: (a) those under which an exemption certificate is issued under Section 7(1) of the Occupational Retirement Schemes Ordinance (Cap. 426), and (b) those operated by the government of a country or territory outside Hong Kong or any agency or undertaking of or by such a government which is not operated for the purpose of gain. As regards (a), there are around 2 000 schemes as at September 2004 but as most of the companies covered by such schemes are not required to provide to the Mandatory Provident Fund Schemes Authority breakdowns of the number of local and overseas employees, no such details are available. For (b), we do not have information about all those schemes and the Inland Revenue Department estimates that there are not many such schemes. The figure of 612 000 does not include the employees covered by these two kinds of schemes.
Ends/Wednesday, November 3, 2004