How does it work?
In 2001, the Brand Hong Kong government programme was launched in order to promote Hong Kong as "Asia's World City". The programme was a success, as Hong Kong would go on to become one of the largest financial hubs in the entire world. While this can be attributed to various factors, at the heart of its success is its notoriously low tax rate.
In terms of direct taxes, the Hong Kong government only imposes 3: Salaries Tax, Profit Tax and Property Tax, all of which are operated by the Inland revenue department.
In the case of salary taxes, the government states that "Salaries tax is imposed on all income arising in or derived from Hong Kong from an office, employment or any pension." Salary taxes in Hong Kong follow a progressive tax structure on net chargeable income (income after deductions and allowances), as shown below.
This means that taxation in Hong Kong is proportional to your income, which theoretically should lead to a reduction in wealth disparity. However, the problem persists due to dividends not being taken into account, which are profit payments to investors in a company. Furthermore, at 2% ranging up to 17%, the salary tax rates in Hong Kong are considered to be one of the lowest in the world. While it is beneficial to the majority of the public, it limits its effectiveness in reducing wealth disparity.
Salary taxes also follow a territorial concept of taxation, meaning that they are only imposed on income sourced from Hong Kong, the determinants of which are as listed below:
the place where the contract of employment was negotiated and entered into, and is enforceable;
the employer’s place of residence; and
the place of payment of the employee’s remuneration.
This means that if you are employed by a Hong Kong company to work in Hong Kong, you will be subject to salary tax. If you are assigned to work in Hong Kong for a few years by a non-Hong Kong employer but have to perform duties in other countries as well, only income generated in Hong Kong is subject to tax. Furthermore, this is only the case if your visit to Hong Kong exceeds 60 days.
As for profit tax, profit taxes are levied on the net profits of businesses. In 2018, the government implemented a new 2 tier system to further promote business startups in the city. For the first HK$2million of profit earned, tax is set at 8.25 percent. Profits above the number are subject to a 16.5 percent tax. For unincorporated businesses (sole traders who are not registered with the government), profits are subject to 7.5 percent up to HK$2million and 15 percent for profits above that.
With such low profit taxes, Hong Kong is able to attract more international businesses to the city, boosting its financial reputation.
Finally, property tax is paid annually by the owner of an immovable company (home flat, apartment, land and/or building) at a standard rate of 15%. Both individuals or corporate owners are subject to property tax, with the exception of corporate owners, who are able to apply for exemption or deduction.
What is exempted?
One reason for Hong Kong's low tax revenue collection rate is its narrow tax base. This means that they have a limited source of tax revenue and that few products are taxed in Hong Kong.
In 2009, lawmakers debated over the implementation of a value-added tax in Hong Kong, called the "Goods and Services Tax". Proponents argued that it would broaden the tax base of Hong Kong and increase the sources of income for the government and spread risks, thereby improving the sustainability of government revenue streams. This was, however, met with widespread criticism from both the LegCo and the general public, resulting in the idea being scrapped.
By not having a goods and services tax, Hong Kong remains a popular destination for shopping and consumer spending. Goods are generally cheaper, leading to higher purchasing power for consumers, both local and foreign. This has also led to an increase in tourism to Hong Kong.
Below are some of the most notable of Hong Kong's omissions from taxation.
No sales tax or VAT
No capital gains tax (tax on the profit that you gain when you sell something that has increased in value)
No tax on dividends (tax on profit payments to investors in a company)
No estate tax (inheritance tax)
How can the government afford such low taxes?
While a narrow tax base and low tax rates are beneficial to citizens and incentivises tourism as well as immigration, it comes at the detriment of government revenue. Fortunately for Hong Kong, the government has other sources of revenue.
Much of its revenue comes from Property and Land Premium. The government owns the majority of property in Hong Kong, leading to yearly rent revenue from leases as well as a large sum of money collected from sales. Hong Kong also has a large amount of fiscal revenue, which is subject to yearly interest and growth in value. All of the above helps to alleviate the strain of the low taxes.
What else is special about Hong Kong's taxation?
In 2020, an investigation led by the World Bank and auditor PwC concluded that Hong Kong had the second most business-friendly tax system in the world, only one place behind Bahrain. This points to how the Tax system in Hong Kong not only imposes low tax rates but is also transparent and straightforward. One reason for this is Hong Kong's use and integration of technology into the taxation process, which has allowed citizens to file taxes online.
What does the future hold for Hong Kong's low tax structure?
Hong Kong's low tax rate structure has long been a polarizing subject amongst critics. Many believe that the high property taxes will inevitably prove detrimental to the government, as it makes the city less attractive to investors. This problem has been further exacerbated as property prices rise due to the pandemic. Given the unpredictability of the world's economy, it is hard to predict how Hong Kong’s taxes will change in the future, but one thing is for certain: we as GenZs are sure to experience it first hand.
Sources:
Writer: Eric Wang
Editor: Angela Chan
Artist: Joyce Liang
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