Tax Series Part 1 - Moving to Hong Kong? Know your Hong Kong taxes
In this series from tax expert and international assignment professional, Sanjna Melwani, we get to learn about the tax system in Hong Kong, and what you, as an international executive migrating to Hong Kong, need to know. This Part 1 covers arrival matters and tax process specifically related to Hong Kong. Part 2 goes on to discuss the territorial concept.
Sanjna Melwani, our tax expert and international assignment expert, outlines the scope of charge to tax in Hong Kong.
Q. Sanjna, let’s start off with the basics, what is Hong Kong’s fiscal year?
Hong Kong’s tax year is over a fiscal period running from April 1 to the following March 31, known as a year of assessment.
Q. What’s the tax process for someone moving to a new job in Hong Kong?
Upon commencement of employment in Hong Kong, your employer will file a Form IR56E to the Hong Kong Inland Revenue Department (“IRD”) detailing your commencement. Based on this, the IRD could issue a provisional tax assessment based on your starting salary.
However, they usually would wait until the end of the fiscal year and issue a tax return in early May for the year of assessment, say from April 1 2015 to the following March 31 2016 (known as the 2015/16 tax year).
Meanwhile, at the end of the fiscal period ending March 31 2016, your employer will file a form IR 56B Employer's Return of Remuneration and Pensions ("ERRP") to the IRD reporting your income from commencement up to this date. You should receive a copy at the same time.
The tax return will then be easy to complete based on the ERPP. It is due for submission within one month of date of issuance (delinquency on this could result in estimated assessment being issued). However, as a new employee, this might come out later as the IRD can be slow with new arrivals in Hong Kong. You should inform the IRD if you have reached four months from the end of the year of assessment and still not received a tax return.
Q. I’m thinking of moving to Hong Kong. What are the tax rates in this city?
Tax is charged at the lower of:
a) standard rate on net income (currently 15%); or
b) progressive rates on net chargeable income after deductions and allowances.
There are also tax breaks available such as current 75% tax reduction capped at HKD20,000. Personal assessment (and joint assessment) is also available if it is more favourable to combine income from other sources such as rental income.
Q. Do I have to take into account Provisional Tax for the following fiscal year?
Basically, yes. Once the tax return is submitted, the IRD will issue a notice of assessment which will ask for payment of tax for the fiscal year in question, plus a provisional tax for the following fiscal year which is based on the current year of assessment’s income (the amount may be grossed up if current year income is for less than a full fiscal year) with the following year of assessment’s rates and allowances.
A simple way to look at this in practice (since the provisional tax will go forward to offset the actual tax in the future year of assessment) is as follows:
- Let’s assume you started work on April 1 2015 and your 2015/16 tax liability is calculated at HKD50,000 based on the allowances/tax breaks and tax rates for 2015/16.
- For simplicity, let’s assume that the exact same allowances/tax breaks and tax rates are available in 2016/17. Hence, the IRD would arrive at a provisional tax of HKD50,000 based on the same level of income.
- The notice of assessment for 2015/16 would then be issued for HKD100,000 covering 2015/16 final tax (HKD50,000) plus 2016/17 provisional tax (HKD50,000).
- Later on, when you reach the time of filing of your 2016/17 return, let’s say your tax is actually determined to be HKD60,000 based on income in that year of assessment. As such, since you would have already paid HKD50,000, a balance of tax is payable of HKD10,000. Once again, for simplicity, assuming that the exact same allowances/tax breaks and tax rates are available in 2017/18, the IRD would then arrive at a provisional tax of HKD60,000.
The amount payable in the 2016/17 year notice of assessment would then be HKD70,000 covering 2016/17 final tax (HKD10,000) plus 2017/18 provisional tax (HKD60,000). This provisional tax HKD60,000 will then be carried forward to offset the tax liability for 2017/18 and so on…
Holdovers of provisional tax are available in certain situations and the most common is if you believe your net chargeable income in the 'provisional year' will be less than 90% than in the current year.
An objection process is also available, if required.
Q. What are the timings on a Notice of Assessment?
The notice of assessment will usually be issued in October or November by the IRD once the tax return for the fiscal year is submitted. It will request for payment of tax in 2 instalments, usually in January and April of the following year. The first installment will be 100% of the current year tax (or balance of tax) plus 75% of the provisional tax. The second instalment will be 25% of the provisional tax. This is actually timed in such a way that you may receive a bonus to pay for the big amount and also, if you look at it, the 'provisional income' stream matches the timing of the provisional taxes.
Penalties will be imposed for delinquency.
A summary is as follows using the examples given above:
|First year of assessment||Taxpayer arrives in Hong Kong||Employer Files IR 56E||Employer Files IR 56B ERPP||
IRD Issues Tax Return
|Employee Submits Tax Return||IRD Issues a Notice of Assessment||First Payment of Tax||Second Payment of Tax|
April 1 2015 to March 31 2016
|April 1 2015||April 1 2015||March 31 2016||May 2016||June 2016||
(HKD50,000 for 2015/16
plus HKD50,000 for provisional tax 2016/17)
(HKD50,000 + HKD50,000@75%)
April 1 2016 to March 31 2017
March 31 2017
(HKD10,000* for 2016/17 being balance
plus HKD60,000 for provisional tax 2017/18)
(HKD10,000 + HKD60,000@75%)
|* Tax of HKD60,000 for 2016/17 less amount already paid of HKD50,000 for provisional tax 2016/17|
If you have an employee tax query, you can contact Sanjna on email@example.com.
In the upcoming series from Sanjna:
Tax Series Part 2, Hong Kong International Assignment (Territorial Concept)
Tax Series Part 3, Hong Kong International Assignment (Mandatory Provident Fund vs ORSO)
Tax Series Part 4, Hong Kong International Assignment (Housing Benefit)
Tax Series Part 5, Hong Kong International Assignment (American 1040 Filing)
Tax Series Part 6, Hong Kong International Assignment (American FATCA and Form 8938 Reporting)
Tax Series Part 7, Hong Kong International Assignment (US Estate Tax Implications – Americans and non-American Investors)
Tax Series Part 8, Hong Kong International Assignment (Departure from Hong Kong)