IN THIS ISSUE…
Welcome to the latest issue of our Tax Newsletter. In this issue, we have
covered a number of developments and cases in the PRC and Hong Kong
which could impose legal and tax implications to your business.
In the PRC, an important yet not new topic is that the Ministry of
Finance (“MOF”) and the State Administration of Taxation (“SAT”)
have jointly issued a detailed version of VAT reform guidance, which
replaces several previous circulars on the same subject matter. In this
newsletter, we have included a summary of the key features as well as
the new VAT rates for the industries covered under the VAT reform.
As a related topic, the SAT also promulgated the rules to cover the tax
registration and invoice issues under the reform.
In addition, MOF, SAT as well as the General Administration of
Customs (“GAC”) are working together to strengthen the control
over import taxes imposed on cross-border e-commerce retail.
GAC.also introduced some new concepts on the import/export
declaration for trading of goods.
Finally, China and Indonesia have formally signed the Protocol to the
In Hong Kong, the special stamp duty (“SSD”) measures to combat
property speculation remains in place. It is noted that the amount of
SSD, Buyer’s Stamp Duty (“BSD”) and Doubled Ad Valorem Stamp Duty
(“Doubled AVD”) collected in early 2016 has decreased, suggesting that
the measures may be working.
In addition, under the “Assess First, Audit Later” system, eld audit and
investigation cases have been consistent in the last 3 years. In a recent
tax.evasion case, a taxpayer who made false statements in connection
with claims for deduction of self-education expenses and approved
charitable donations was convicted.
In Board of Review (“BOR”) D25/14, the facts bring us back to a time
when trade restrictions between Taiwan and China did not allow direct
trade. In this case, a Hong Kong company took the role of a middleman
between a Taiwanese company and a Chinese company. It was undisputed
that the Hong Kong company’s activities in Hong Kong did not include
the entering into and performance of contract. However, its role and
transshipment activities in Hong Kong were held to be the effective
causes of pro ts.
In BOR decision D26/14, a taxpayer had unintentionally submitted a tax
return with items of total income amount left blank. Although it was
decided to be no grounds of appeal, it was held that the Inland Revenue
Department (“IRD”) should provide a written warning to rst time
offenders requesting him/her to amend the return with a small penalty
instead of issuing additional tax assessment at the rst instance.
Finally, we have highlighted the new tax network with Latvia and the
commencement of operation of the Inland Revenue (Amendment)
(No..3) Ordinance 2015 (“Amendment Ordinance No. 3”),
effective from 1 April 2016. We have also summarized the recent
views of the Chief Secretary for Administration on the reasons why
the implementation of a universal pension scheme, in particular the
“regardless of rich or poor” approach, is not an ideal solution to enhance
retirement protection for the elderly in Hong Kong.
We welcome your feedback and any questions you may have about
this.issue of the Tax Newsletter.
4. VAT REFORM – TAXPAYERS
REGISTRATION AND INVOICING
4. CHINA’S NATIONWIDE VAT REFORM
7. CHINA INCREASES TAXES ON
9. CHINA CUSTOMS ENHANCES
MONITORING OF INTER-COMPANY
PRICES AND ROYALTY PAYMENTS
9. PROTOCOL TO THE TAX TREATY
BETWEEN CHINA AND INDONESIA
CAME INTO EFFECT
11. PROPERTY MARKET COOLING
MEASURES REMAIN FOR NOW
11. ASSESS FIRST, AUDIT LATER
12. LESSON NOT LEARNT
12. AN UPSIDE DOWN ANALYSIS OF
ANTECEDENT AND ANCILLARY
13. LEAVING YOUR TAX RETURN
13. LATVIA IS ON BOARD
13. INLAND REVENUE (AMENDMENT)
(NO. 3) ORDINANCE 2015
14. HONG KONG FACES PENSION
CHALLENGES WITH POTENTIAL
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1. VAT REFORM – TAXPAYERS REGISTRATION AND INVOICING
Following the announcement of the nationwide pilot value added tax (“VAT”) reform program effective
from 1 May 2016, the SAT issued the Announcement of the State Administration of Taxation on Matters
relating to Tax Levying and Administration concerning the Comprehensive Promotion of the Pilot Collection of
Value-added Tax in lieu of Business Tax (“Announcement 23”), which provides detailed guidance on the
procedures for taxpayer registration and tax invoicing under the VAT reform program.
Under Announcement 23, taxpayers who were previously registered with the local tax bureaus and paid
business taxes on their business income shall now be registered as VAT payers with the state tax bureaus
of their respective jurisdictions. Among all these new VAT payers, those whose annual taxable income
reaches the stipulated threshold (i.e. RMB 5 million according to the current rules issued by MOF and
SAT) are required to be registered as general VAT payers; others should be registered as small-scale
VAT payers. For those taxpayers whose annual taxable income is less than RMB 5 million, they may also
apply for the general VAT payer status provided that they maintain sound accounting system and provide
necessary tax related information as requested.
VAT payers shall issue special VAT invoices and/or regular commercial invoices according to the relevant
laws and regulations. A new VAT invoicing system has been adopted to enable the new VAT payers to
issue invoices effective from 1 May 2016. Classi cation codes are used in such new VAT invoicing system
to differentiate taxable goods and taxable services.
In addition, due to the increasing workload of the tax authorities as a result of the VAT reform program,
tax bureaus at provincial levels are allowed to postpone the deadlines of annual enterprise income tax
lings (i.e. 30 May according to the laws) at their own discretions, but such deadline shall be no later than
30 June 2016 in any event.
2. CHINA’S NATIONWIDE VAT REFORM
Following the Premier’s earlier announcement of the nationwide pilot VAT reform program, under which
service sectors historically subject to business tax (“BT”) would be subject to VAT effective from
1 May, 2016, MOF and SAT of China jointly issued the detailed implementation rules on the pilot
program, namely Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax
in.Lieu of Business Tax (“Circular 36”) on 23 March 2016.
Circular 36 provides a set of guidance rules on implementation of the pilot VAT reform program, at the
same time, it also supersedes the previous rules and regulations in respect of levying of VAT in service
sectors. With the promulgation of Circular 36, there are still two sets of VAT regulations, namely
(i) the current VAT regulations which govern the traditional VAT taxable transactions (including sales
and importation of goods and provision of processing, repair and replacement services); and (ii) Circular
36.which governs sectors/industries that are under the new VAT reform. It is expected that MOF and
SAT will formulate a uni ed set of VAT regulations applying for all business activities in future.
1) Scope of tax and applicable tax rates
Circular 36 sets out the taxable scope of activities under the VAT reform as below:
a) Provision of various types of services (“VAT Services”), which are further divided into several
sub-sectors as depicted in the Appendix, subject to VAT at 6% or 17%;
b) Transfer of intangibles, subject to VAT at 6%; and
c) Transfer of real properties, subject to VAT at 11%.
04 | Tax Newsletter
Entities and individuals who provide VAT services inside China are subject to VAT. For those foreign entities
who provide VAT services but do not maintain an establishment in China, the relevant Chinese service
recipients shall have the obligations to withhold the VAT for the foreign entities.
In the following situations, foreign service providers are not considered providing onshore taxable services
in China and thus are not subject to VAT:
a) VAT services provided to Chinese recipients are purely for overseas consumption;
b) Intangibles transferred to Chinese recipients are completely used outside of China;
c) Tangible goods leased to Chinese lessees are located outside of China.
VAT payers are still classi ed into (i) general VAT payers and (ii) small-scale VAT payers depending on
their.annual sales turnover and abilities of keeping sound accounting system.
3) VAT calculation and credit mechanism
China has a unique VAT invoicing system to monitor VAT credit and payment. For example, all VAT payers
are required to apply for and “purchase” blank VAT invoices from the competent tax authority and issue
invoices to customers for the sale of goods and services. The buyer, based on the of cial VAT invoices
obtained from the seller, will then be able to claim VAT credit (i.e. offsetting the output VAT on sales
from the input VAT evidenced by the VAT invoices collected from the seller). Speci cally, the legitimate
documents to enable a VAT payer to claim VAT credit (or VAT offsetting) in relation to the purchases
a) special VAT invoices issued by sellers of goods and services;
b) receipts issued by Customs Of ce for imported goods;
c) purchase invoices or sales invoices for agricultural products;
d) tax payment certi cates on VAT withheld from the payment made to foreign service providers.
Circular 36 also provides a list of non-creditable input VAT items for which the taxpayers have to book
assets or expenses.
4) Concurrent sales and mixed sales
Where a taxpayer is concurrently engaged in more than one of the items of (a) sales of different types
of goods, (b) provision of services, (c) transfer of intangibles, (d) transfer of immoveable assets, and
(e).tax.exemption/reduction activities, it is considered to be undertaking concurrent sales business.
Circular 36.requires such taxpayer to separately account for the sales revenue of each type of the
goods/services for tax purposes. Failure to comply with the requirement will cause the total sales
revenue to be subject to the highest rate of VAT and will lead to the denial of the application of the
If one business transaction involves both the sale of goods and provision of services, it will be treated as a
mixed sale transaction and the applicable VAT rate will be determined based on the core business of the
taxpayer (i.e. goods or service) and applied on the total income derived.
5) Deemed sales and transaction price adjustment
The provision of any free services, real properties and intangibles are subject to VAT based on the deemed
sales revenue, except that the activities are rendered for public welfare. In determining the deemed sales
revenue or where the transfer price is abnormally low or high without a justi able reason or in lack of a
reasonable commercial purpose, the competent tax authority may make a price assessment and impose
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6) Bene t to traditional VAT payers
Traditional VAT payers are those who have been registered as VAT payers during the dual system of
indirect taxes and are essentially engaged in manufacturing and trading activities. With the VAT reform
expanded to real properties, construction and entertainment sectors, Circular 36 has made it clear
that traditional VAT payers can claim input credit for the VAT paid for purchasing (a) real properties and
construction projects (subject to a two-year deduction schedule) and (b) motorcycles, cars and yachts
which are for the self-use of taxpayers and subject to consumption tax. Both of the above items are
explicitly prohibited in the existing VAT regulations applicable to the traditional VAT payers.
Traditional VAT payers must separately account for VAT for business income before and after the
reform and the input credit balance before 1 May 2016 (which are related to the traditional VAT taxable
transactions) can only be recovered by the VAT payable on the same type(s) of income. In other words,
VAT payable on the income from real properties, construction, nancial services and consumer services
sectors cannot be used to recover the VAT credit brought forward from the previous periods of the
traditional VAT payers.
7) Transitional rules
To ensure that taxpayers can enjoy the same tax bene ts and will not signi cantly increase their
tax.burden before and after the reform, Circular 36 sets out a detailed list of preferential treatments,
including VAT exemption, VAT reduction, and immediate VAT refund after levy, to match with the
tax.burden of taxpayers under the previous BT regime. Circular 36 also clari es that for taxpayers
who.have been enjoying BT incentives, equivalent VAT incentives will be offered to such taxpayers
during.the remaining incentive period.
Furthermore, Circular 36 provides another option to general VAT payers of certain sectors (mostly
real properties and construction) that they may pay VAT by applying the simpli ed taxation method, i.e.,
paying VAT by using the tax rate equivalent to the BT rate under the BT regime, for certain contracts
8) Preferential treatments for cross-border services
VAT exemption or refund treatment are still available to domestic service providers that export services
or intangibles to overseas service recipients. Circular 36 however introduces a new requirement that the
relevant services or intangibles must be used/consumed entirely outside of China for domestic taxpayers
to enjoy such preferential treatment.
06 | Tax Newsletter
Taxpayer Category Sub-category & Notes
All types of taxable business activities 3%1
Sales of Services
Transportation Service 11%
Post Service 11%
Construction Service 11%
Financial Service (including sale-and-leaseback
R&D service, information technology service,
culture design service, logistics service, leasing,
veri cation and consulting service, broadcasting
and television service, ancillary business
1) Operating and nancing lease of real
2) Operating and nancing lease of tangible
Including: culture and sports service,
education and medical service, tourism and
entertainment service, food, beverage and hotel
service, daily service to residents, others
excluding land use rights 6%
including land use rights and lease of real
No VAT credit is allowed.
Source of information: ttp://www.drcnet.com.cn/eDRCnet.common.web/DocSummary.aspx?DocID=4176651&lea d=3075&chnid=1002
3. CHINA INCREASES TAXES ON CROSS-BORDER E-COMMERCE RETAIL IMPORT
On 24 March 2016, MOF together with GAC and SAT issued a new circular, Cai Guan Shui 
No.18 (“New Circular”) about import taxes imposed on cross-border e-commerce retail.
This New Circular has come into effect from 8 April 2016.
The development of cross-border e-commerce has been phenomenal in China in the past few years.
According to the Information Website of the China State Council Development Research Center2,
the value of cross-border e-commerce transactions reached RMB 4,200 billion (or USD 650 billion) in
Appendix – VAT Reform Taxable Scope and VAT Rates
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2014 and this gure is continuously growing. As part of this vibrant cross-border e-commerce economy,
millions of Chinese individuals are buying numerous items directly from overseas retailers through
e-commerce service providers in China (hereinafter referred as “Cross-border E-commerce Retail
There are different CERI operation models depending on the locations of e-commerce service
providers, the way the commodities are reported for the customs clearance, and whether bonded
warehouses are used, etc. From the customs duty and tax points of view, all of the imported items
generally would fall within one of the following two scenarios.
■ If the item is identi ed as imported for general trade, it should be subject to customs duty, import
VAT and consumption tax (if applicable) (“Standard Import Tax Treatment”);
■ If the item is identi ed as a personal postal item, it may be entitled to a favourable composite rate
(“Postal Composite Rate” or “PCR”) instead of the standard import tax treatment. Such import
may also be entitled to an exemption if the composite tax amount is less than RMB 50.
Prior to the issuance of the New Circular, CERI was subject to the following PCRs speci cally for
import of the personal postal items as stated below, the applicable rates were generally lower than the
tax rates applicable to general trade items.
No. Item PCR (before
1 Books, magazines, educational movies, furniture, computers,
2 Textile & garments, video cameras and other electronic home
appliances, bicycles, watches and clocks
3 Golf and golf appliances, luxury watches 30%
4 Cigarettes, cosmetics and alcohol 50%
5 Others 10%
Exemption for low-value items: An exemption will be available if the composite tax calculated
based on the applicable PCR is less than RMB 50.
According to the New Circular, CERI will be classi ed as general trade, and be subject to customs duty,
import VAT and consumption tax (if applicable) based on the retail price but also with a quota-based
exemption and reduction.
(for each individual Chinese buyer)
Import VAT Consumption
Transaction value not in excess of RMB
2,000 per transaction and within the
annual quota of RMB 20,000
0% 70% of the
70% of the
Transaction value in excess of RMB
2,000 per transaction, or above the
annual quota of RMB 20,000
08 | Tax Newsletter
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Alongside with the New Circular, a notice was issued by the State Council Custom Duty Commission
for adjustment of the PCR. As indicated in the table below, the PCRs in respect of the following import
items will be increased to either 15%, 30% and 60% respectively starting from 8 April 2016.
No. Item PCR (after
1 Books, magazines, educational movies, computers, digital cameras and
other digital products, food and beverage, gold and silver, furniture, toys,
gaming products, holiday or other entertaining products.
2 Sports products (excluding the golf and golf appliances), shing product,
textile & garments, video cameras and other electronic home appliances,
3 Cigarettes, alcohol, precious jewellery and jade, golf and golf appliances,
luxury watches, cosmetics.
4 Others 30%
4. CHINA CUSTOMS ENHANCES MONITORING OF INTER-COMPANY PRICES AND
China’s GAC has released an.amendment to the Import and Export Declaration Documents Standards
(“Amendment”) on 24 March 2016. Among all changes, the Amendment now requires Chinese
entities engaging in import and export activities.to con rm the following matters in the customs
a) whether there is an underlying inter-company or other special.relationship between the
contracting parties (i.e. “Special Relationship Con rmation”)..
b) whether the import/export price is in uenced by the special relationship, if any (i.e. “Arm’s
Length Con rmation”); and
c) whether any royalty.in relation to the goods imported or exported is paid by the buyer to the
seller (i.e. “Royalty Payment Con rmation”)..
To comply with the above requirements, Chinese entities engaging in import and export activities
should ll in the corresponding columns in the declaration documents with a straight forward response
of “Yes” or “No”. Although a disclosure of the details of the relevant import and export transaction is
not required, it is clear that GAC is.stepping up.its monitoring on cross-border transactions, especially
those related to inter-company imports, and royalty payments associated with imported goods...
For Chinese entities that frequently.import goods from their overseas af liates, especially those who
make royalty payments to overseas af liates, it is advisable to make sure that the inter-company.import
prices and royalty payments are.carefully and properly planned based not only on the transfer pricing
rules but also the relevant customs regulations...
5. PROTOCOL TO THE TAX TREATY BETWEEN CHINA AND INDONESIA CAME
The Protocol to the Tax Treaty between China and Indonesia (“Protocol”) was signed in Beijing on
26.March 2015 and has come into effect on 16 March 2016. The Protocol will apply to income derived
after 1 January 2017.
Among others, according to Article 8 of the Protocol concerning income from shipping and air transport,
a resident of a Contracting State (say Indonesia) engages in the aircraft operation in international traf c
in the other Contracting State (say China) shall be exempted from VAT or similar taxes in that other
Contracting State (i.e. China).
1. PROPERTY MARKET COOLING MEASURES REMAIN FOR NOW
Since 2010, the HKSAR Government (“HKSAR”) has adopted several measures under the stamp
duty regime to combat the speculative activities of the property market in Hong Kong and to support
ownership of residential property by Hong Kong permanent residents. Speci cally, the SSD was
introduced in November 2010, BSD in October 2012 and Doubled AVD in February 2013.
A breakdown of the stamp duty collected by month was reported in a press release dated 16 March
2016, summarized as follows:-
1. It should be noted that the SSD rates were increased from October 2012 onwards and the
holding period within which residential property transactions are chargeable to SSD was
extended. In October 2012, the Stamp Of ce collected a total of HK$ 49.3 million from 292
residential property transactions. This was the highest amount of SSD collected in a month to
date. Thereafter, the number of transactions and SSD collected slowly decreased and in February
2016, only a total of HK$ 8.4 million was collected from 22 residential property transactions.
2. The Stamp Of ce began collecting BSD since March 2014 and a total of HK$ 3,310.5 million was
collected from 1827 non-Hong Kong permanent resident buyers of residential property that
month. This was the highest amount of BSD collected in a month to date. In February 2016, only
a total of HK$ 316.3 million was collected from 62 transactions.
3. The Scale 1 rates of AVD was effective since February 2013 when the Stamp Of ce began
collecting AVD in respect of residential and non-residential property transactions. The total
amount of AVD collected in September 2014 was HK$ 2,145.7 million from 2213 transactions.
Although the number of transactions subject to AVD from August 2014 to December 2015 was
quite high, there was a drop of AVD collected in February 2016 of a total of HK$ 704.7 million
from 1577 transactions.
The introduction of the SSD, BSD and Doubled AVD are important measures for the stable development
of the Hong Kong property market. Although the amount of duty collected has decreased, it remains
to be seen whether these measures are really the sole cause of the reduced number of transactions.
Before considering further changes to the stamp duty regime, the HKSAR will need to spend some
time to assess the market conditions and local economy hence no changes to the stamp duty regime is
anticipated to occur in the near future.
2. ASSESS FIRST, AUDIT LATER (OR NEVER)
Under the current “Assess First, Audit Later” system, the IRD issues Pro ts Tax Assessments/Statement
of Loss in the rst instance based on reported gures if some pre-set conditions are satis ed. It was
reported in the press conference held on 3 May 2016 by the Commissioner of Inland Revenue that the
IRD had collected HK$291.3 billion of revenue in the year 2015-16, which was HK$10.6 billion below
that of the previous year.
After the assessments have been issued to the taxpayer, the Field Audit and Investigation Unit will
conduct eld audits and investigations on selected businesses and individuals in order to combat tax
evasion and avoidance. Speci cally, eld audits are conducted on both corporations and unincorporated
businesses and entails site visits to business premises and examination of accounting records of
taxpayers in order to ascertain whether correct returns of pro ts have been made. On the other hand,
investigation of cers conduct in-depth investigations where tax evasion is suspected, and take penal
action (including prosecution proceedings as appropriate).
Interestingly, the results of the eld audit and investigation cases have been quite consistent from the
nancial year 2013-14 to 2015-16. During this period, the number of cases completed was 1,802, 1,803
and 1,804 respectively and the average back tax and penalties per case was 1.4 per HK$ million for all
three years. One of these cases are discussed below. Although a eld audit or investigation can be a
time consuming exercise and could possibly take years to complete, it will be an interesting exercise to
consider how the IRD has managed to keep the gures so steady for the past few years.
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3. LESSON NOT LEARNT
You may recall that we have discussed a tax evasion case in our Nov/Dec 2015 issue in which the
defendants have falsely claimed tax deduction for self-education expenses. One of the defendants has
appealed against his two months’ imprisonment sentence to the High Court. The High Court dismissed
the appeal on 21 April and the taxpayer was jailed immediately.
Within a week’s time, another taxpayer, who is a bank manager, was convicted at Kwun Tong Magistrates’
Courts for making false statements in connection with claims for deduction of self-education expenses and
approved charitable donations for the years of assessment 2005-06 to 2011-12. The total amount of the
false deduction claims was $377,800 and the total tax evaded was $66,426. After being remanded for 21
days pending background report, the taxpayer was sentenced to six months’ imprisonment, suspended for
two years, and ned $60,000 ($5,000 for each charge).
These cases remind taxpayers that the IRD does conduct random checks on deduction claims and
taxpayers are obliged to retain supporting documents for seven years to prepare for such checks.
4. AN UPSIDE DOWN ANALYSIS OF ANTECEDENT AND ANCILLARY ACTIVITIES
Purchase and sale activities are important factors to determine the locality of trading pro ts. It is
understood, from various court judgments, that whether any activities give rise to pro ts sourced from
Hong Kong is a question of fact. In deciding this question, antecedent or incidental matters must be
distinguished from effective causes.
BOR D25/14 – The Hong Kong company (HK Middleman) in this case had a business address in Hong
Kong and declared its major business as “investment holding and trading of hardware products”. It
took the role of a middleman between a Taiwanese company (T Company) and a Chinese company (C
Company), at a time when trade restrictions between these two jurisdictions did not allow direct trading.
To surpass trade restrictions at that time, T Company ensured that certain trading activities took place
in Hong Kong. For instance, the transportation of goods must go through Hong Kong. Practically, HK
Middleman sold raw materials supplied by T Company to C Company. C Company processed the raw
materials and sold the nished goods to HK Middleman who in turn sold them to T Company. For the
paperwork, T Company sent purchase orders to HK Middleman who then forwarded them on to C
Company. Invoices to and from T Company and C Company were addressed under the name of HK
Apart from the above transshipment, HK Middleman’s activities in Hong Kong were limited to those
usually regarded as ancillary in nature, e.g. maintaining company registration and operation of bank
accounts. However, the BOR in this case thought these activities are substantial and necessary to connect
the trading activities between China and Taiwan.
HK Middleman admitted that it derived pro ts from “purchase and sale of processed products”. In other
words, HK Middleman’s pro ts were derived from the trade that it operated. It was undisputed that HK
Middleman’s activities in Hong Kong did not include the entering into and performance of contracts.
However, the BOR held that the more important part of the equation was HK Middleman’s position and
existence between T Company and C Company. The “activity” of playing such a speci c and necessary role
that overcame the trading barrier, was carried out in Hong Kong. Against the backdrop of such the trade
barrier, the entering into and performance of contract became peripheral and less key. In contrast, HK
Middleman’s role and transshipment activities in Hong Kong were the effective causes of pro ts.
The BOR might be seen as being quite extreme in this case. Still, taxpayers should not be overly concerned
as the decision was made to this speci c set of facts and circumstances which no longer exist
12 | Tax Newsletter
5. LEAVING YOUR TAX RETURN BLANK?
In BOR decision D26/14, the taxpayer had unintentionally submitted a tax return with items of total
income amount left blank. The Commissioner issued additional tax assessment as a result of the
taxpayer’s failure to report the claim. The taxpayer did not object to the assessment but disputed the
amount. The BOR in D26/14 considered whether or not unintentional error with no intention to cover
up salary income would be a reasonable ground of appeal or defence. The appeal was allowed in part.
Section 82B of the Inland Revenue Ordinance confers on a taxpayer the right to appeal to the BOR
against assessment to additional tax. D26/14 made clear that if a taxpayer decides to appeal, the BOR
(a) consider the matters de novo (meaning starting from the beginning; anew); and
(b) exercise its full functions to con rm, reduce, increase or annul the assessment appealed against,
or may remit the case with the BOR’s opinion to the Commissioner for re-assessment (Shui
On Credit Company Limited v Commissioner of Inland Revenue (2009) 12 HKCFAR 392,
Commissioner of Inland Revenue v Nina T H Wang (1993) 1 HKLR 7 followed).
In considering the decision de novo, the BOR considered all relevant factual and legal grounds and
concluded that the taxpayer’s negligence would not amount to a reasonable ground of appeal or defence.
Nevertheless, the BOR conceded that the original additional tax rate of 7.94% was too excessive as
compared to previous similar cases. The BOR therefore held that a lower additional tax rate of 6.4%
should be applied.
Towards the end of the decision, the BOR suggested to the IRD that they should consider giving a
written warning to rst time offender requesting him/her to amend the return with a small penalty
instead of issuing additional tax assessment at the rst instance.
6. LATVIA IS ON BOARD
The HKSAR has entered into a Double Tax Agreement (“DTA”) with Latvia on 13 April 2016, which
expands Hong Kong’s DTA network to 35 jurisdictions. The DTA will cover pro ts tax, salaries tax and
property tax in Hong Kong and enterprise income tax and personal income tax in Latvia.
It may be of interest that, under the DTA, Latvia’s withholding tax rate on royalties will be reduced
to zero per cent if certain criteria are met. In addition, Latvia’s withholding tax rate on dividends and
interest will also be reduced to zero per cent if paid to a Latvia company which is a bene cial owner.
Hopefully, as wished by the Secretary for Financial Services and the Treasury, Professor K C Chan, the
DTA will bolster the economic and trade connections between Hong Kong and Latvia, and offer added
incentives for companies in Latvia to do business or invest in Hong Kong.
7. INLAND REVENUE (AMENDMENT) (NO. 3) ORDINANCE 2015
The Amendment Ordinance No. 3 was enacted on 4 November 2015, aiming to enhance the tax appeal
mechanism and to improve the ef ciency and effectiveness of the BOR, an independent statutory body
constituted under the IRO to hear and determine appeal lodged by taxpayers.
This Amendment Ordinance No. 3 has now come into operation, effective from 1 April 2016 (please refer
to our May/June 2015 and November/December 2015 issues for the key features).
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8. HONG KONG FACES PENSION CHALLENGES WITH POTENTIAL TAX HIKE
The HKSAR has launched a six-month public consultation on retirement protection in December last
year. One of two approaches proposed by the consultation paper on universal pension scheme is the
“regardless of rich or poor” approach, where every elderly person over the age of 65 would receive
HK$3,230 each month.
The Chief Secretary for Administration, Mrs Carrie Lam Cheng Yuet-ngor, made a speech at the 5th Asia-
Paci c Pensions Forum on 12 April 2016, discussing why such universal pension scheme, in particular the
“regardless of rich or poor” approach, is not an ideal solution to enhance retirement protection for the
elderly in Hong Kong. The reasons were explained in four-fold below:
1) Affordability. Mrs Lam stated that there are existing universal bene ts provided by the HKSAR
to the elderly, such as the non-means-tested Old Age Allowance, the $2 transport concession
scheme and the $2,000 medical voucher per year for the elderly to receive care from the private
sector. However, a monthly grant of HK$3,230 under the universal scheme would require an
immediate expense of HK$22.6 billion and incur an additional aggregate cost of HK$2,395 billion
over the next 50 years.
2) Sustainability. Given the ageing of Hong Kong’s population, a 2004 study commissioned by the
Financial Secretary on Hong Kong’s long-term scal planning concluded that even without any
service enhancement, a structural de cit will occur in 2029-30, and by 2041-42 the scal reserve
will be completely depleted. Increases in taxes may therefore become inevitable by then. With
this in mind, the introduction of a universal scheme with a total cost of HK$2,395 billion over the
next 50 years would only aggravate the dire scal situation.
3) Equity. The Hong Kong Chief Executive is of the view that public resources should be spent on
assisting people in need while the HKSAR should help those able-bodied people to be self-reliant.
In line with this view and with an aim to narrow the wealth gap, will the implementation of a
universal scheme providing each elderly person a standard monthly grant regardless of means
provide a more just and fair system than a system targeting public resources towards those in
4) Comprehensive protection. Approximately 57% of the HKSAR’s recurrent expenditure is spent
on education, welfare and health at the moment. Assuming suf cient revenue to support such
universal scheme is raised, one cannot overlook the potential consequences of inadequate funding
for enhancing medical and welfare services to meet the needs of the elderly.
All of the above suggest that the implementation of a universal pension scheme may involve a steep tax
hike, which will inevitably attract a lot of noises from various sectors. Worse still, a further implication is
that Hong Kong would possibly lose its appeal and attraction as a place for investment. Hence a more ideal
solution to enhance retirement protection for the elderly in Hong Kong remains to be seen.
14 | Tax Newsletter
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