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TAX PLANNINGTAX PLANNING FChFP Conversion CourseFChFP Conversion Course

Jason LamJason Lam

CPACPA

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Tax planning Tax planning ≠≠ tax evasion tax evasion (illegal)(illegal)

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TAXATION SYSTEM IN HONG KONGTAXATION SYSTEM IN HONG KONG

the territorial principle the territorial principle

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TAXATION SYSTEM IN HONG KONGTAXATION SYSTEM IN HONG KONG

Profit tax rate:Profit tax rate:– Corporation – 17.5% (03/04; 04/05)Corporation – 17.5% (03/04; 04/05)– Unincorporated business – 15.5% (03/04)Unincorporated business – 15.5% (03/04) 16% (04/05)16% (04/05)

Salaries tax rate:Salaries tax rate:– Standard rate – 15.5% (03/04)Standard rate – 15.5% (03/04) 16% (04/05)16% (04/05)

Property tax rate:Property tax rate:– 15.5% (03/04)15.5% (03/04)– 16% (04/05)16% (04/05)

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TAX PLANNING STRATEGIESTAX PLANNING STRATEGIES

DeflectionDeflection

Income deferralIncome deferral

Deduction - Remuneration packagingDeduction - Remuneration packaging

– Holiday passageHoliday passage

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INDIVIDUAL TAX PLANNINGINDIVIDUAL TAX PLANNING

EMPLOYMENT INCOMEEMPLOYMENT INCOME

– 60 Day Rule of Visit60 Day Rule of VisitHK Employment

No service in HK Service in HK

No tax Visitor Non-visitor

＞ 60 days ≦60 days

Tax TaxNo tax

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Non HK Employment

No service in HK Service in HK

No tax Visitor Non-visitor

＞ 60 days ≦60 days

Tax TaxNo tax

Apportional Apportional

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INDIVIDUAL TAX PLANNINGINDIVIDUAL TAX PLANNING

EMPLOYMENT INCOMEEMPLOYMENT INCOME

– Remuneration PackageRemuneration Package

If a benefit cannot be converted into cash, no If a benefit cannot be converted into cash, no

salaries tax liability would arisesalaries tax liability would arise

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Example 1Example 1

Assuming Mr. X is now receiving a monthly salary of HK$60,000 per month with 12 months’ salary for a year. If he can structure his employment package in such a way that out of the employment package, HK$10,000 per month is regarded as a refund of rent paid, his tax position will be completely different.

Revised

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(2003/2004) With Without benefit-in benefit-in kind kind HK$ HK$ Total package (HK$60,000 x 12) 720,000 720,000 Less: Refund of rent (120,000) --- ———— ———— 600,000 720,000 Add: Housing benefit 60,000 --- ———— ———— Assessable income 660,000 720,000 Less: personal allowance (104,000) (104,000) ———— ———— Net assessable income 556,000 616,000 ======= =======

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Salaries tax at progressive rate

1st HK$32,500 @2% 650.00 650.00

2nd HK$32,500 @7.5% 2,437.50 2,437.50

3rd HK$32,500 @13% 4,225.00 4,225.00

Remaining @18.5% 84,822.00 95,922.50

———— ————

92,134.50 103,235.00

======= =======

Tax saving HK$11,100.50

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Example 2

Assuming Mr. X in example 1 above now decides to acquire a property for his own use. Mr. X is required to pay mortgage loan interest of HK$20,000 a month. He can choose either to buy the property under his own name or arrange a company to acquire the property and lease the property to his employer for a monthly rental of HK$20,000 as quarter provided to him. In this case, his tax position will also be different.

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(2003/2004) Acquire Acquire under under company own name HK$ HK$ Total package (HK$60,000 x 12) 720,000 720,000 Less: Housing allowance (240,000) --- Home loan interest deduction --- (100,000) ———— ———— 480,000 620,000 Add: Housing benefit 48,000 --- ———— ———— Assessable income 528,000 620,000 Less: personal allowance (104,000) (104,000) ———— ———— Net assessable income 424,000 516,000 ======= =======

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Salaries tax at progressive rate

1st HK$32,500 @2% 650.00 650.00

2nd HK$32,500 @7.5% 2437.50 2,437.50

3rd HK$32,500 @13% 4,225.00 4,225.00

Remaining @18.5% 60,402.50 77,422.50

———— ————

67,715 84,735

======= =======

Company position

Rental income 240,000 ---

Less: Mortgage interest (240,000) ---

———— ————

Assessable profit --- ---

======= =======

Total Tax 67,715 84,735

======= =======

Tax saving HK$17,020

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INDIVIDUAL TAX PLANNINGINDIVIDUAL TAX PLANNING

EMPLOYMENT INCOMEEMPLOYMENT INCOME

– Stock OptionsStock Options

– Holiday PassageHoliday Passage

– Rental Arrangement for Housing Rental Arrangement for Housing

AccommodationAccommodation

– Termination Payment (Compensation for Termination Payment (Compensation for

loss of office)loss of office)

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SOLE PROPRIETORSHIP / SOLE PROPRIETORSHIP /

PARTNERSHIP INCOMEPARTNERSHIP INCOME

– Section 9A of the Inland Revenue Section 9A of the Inland Revenue

OrdinanceOrdinance

PROPERTY INVESTMENT INCOMEPROPERTY INVESTMENT INCOME

USE OF PERSONAL ASSESSMENTUSE OF PERSONAL ASSESSMENT

INDIVIDUAL TAX PLANNINGINDIVIDUAL TAX PLANNING

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Example 3

Assuming Mr. Y received salary income of HK$600,000 during the year. He also owned a property for letting purpose and derived rental income of HK$200,000 during the year. For such property, he has incurred mortgage loan interest of HK$150,000 during the same year.His tax position will be as follows:

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(2003/2004) Separate Personal assessment assessment HK$ HK$ Salary income 600,000 600,000 ———— ———— Rental income --- 200,000 Less: Statutory deduction --- (40,000) ———— ———— --- 160,000 Less: Mortgage loan interest --- (150,000) ———— ———— --- 10,000 ———— ———— Assessable income 600,000 610,000 Less: Personal allowance (104,000) (104,000) ———— ———— Net assessable income 496,000 506,000 ======= =======

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Salaries tax at progressive rate

1st HK$32,500 @2% 650 650

2nd HK$32,500 @7.5% 2,437.50 2,437.50

3rd HK$32,500 @13% 4,225 4,225

Remaining @18.5% 73,722.50 75,572.50

———— ———— 81,035 82,885

======= ======= Property tax

Rental income 200,000 ---

Less: Statutory deduction (40,000) ---

———— ———— Net assessable income 160,000 ---

======= ======= Property tax assessment (15.5%) 24,800 ---

======= =======

Total tax 105,835 82,885

======= ======= Tax saving HK$22,950

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PROFITS TAX PLANNINGPROFITS TAX PLANNING

Only profits arising in and deriving Only profits arising in and deriving

from Hong Kong is taxable from Hong Kong is taxable

No tax on capital gains No tax on capital gains

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PROFITS TAX PLANNING PROFITS TAX PLANNING STRATEGIES (1)STRATEGIES (1)

Segregation of onshore and offshore Segregation of onshore and offshore

businesses and profitsbusinesses and profits

Apportionment of profitsApportionment of profits

Deduction of expensesDeduction of expenses

Timing and classification of capital Timing and classification of capital

expenditureexpenditure

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PROFITS TAX PLANNING PROFITS TAX PLANNING STRATEGIES (2)STRATEGIES (2)

Apportionment of onshore and offshore Apportionment of onshore and offshore

expensesexpenses

Using companies with tax lossesUsing companies with tax losses

Taxability of interest incomeTaxability of interest income

Delay recognition of profitsDelay recognition of profits

Choice of financial year endChoice of financial year end

Securing capital gain claimSecuring capital gain claim

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ANTI-AVOIDANCE PROVISIONSANTI-AVOIDANCE PROVISIONS

╳ do not have real commercial substance and

justification

╳ sole or dominant purpose of obtaining a tax

benefit

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Sections 61 and 61ASections 61 and 61A

Sec 61: concerns artificial and fictitious Sec 61: concerns artificial and fictitious transactionstransactions

Sec 61A: concerns transactions which are Sec 61A: concerns transactions which are actually entered or effected but with the actually entered or effected but with the sole or dominant purpose of obtaining a sole or dominant purpose of obtaining a tax benefittax benefit

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Individual Tax Rules in ChinaIndividual Tax Rules in ChinaResidency in China Taxable income

＜ 1 year China- source income

＞ 1 year and ≦ 5 years China- source and foreign- source income (1)

＞ 5 years Worldwide income from 6th year

≦ 90 days(2) in a calendar

year, income from overseas

employers

Tax exempt

1.Upon application to and approval from the tax authorities, the

taxation of foreign-source income can be limited to that received from Chinese enterprises, Chinese establishments, Chinese economic organisations, and Chinese individuals.

2.The 90-day test is extended to 183 days if the individual is a tax resident of a country that has executed a taxation treaty with China.

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