Tax Series Part 8 - Departure from Hong Kong
In the final part of our 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 or from Hong Kong, need to know.
What’s the tax process for someone changing jobs in Hong Kong?
As mentioned in the first article, Hong Kong tax runs on a fiscal year from April 1 to the following March 31.
Say for example, you have been working with the same employer for 3 years and you end with them on September 30 2017 and move to another company on October 1, 2017. Your old employer would have been preparing the Form IR 56B Employer's Return of Remuneration and Pensions ("ERRP") for the Hong Kong Inland Revenue Department (“IRD”) reporting your income up to each March 31. In this example, this would have been up to March 31 2017 and you would have filed your 2016/17 tax return based on this information in this form.
As this is a simple change of employment within Hong Kong which has occurred in fiscal year 2017/18, your old employer will then file a Form IR56F, Notification by an Employer of an Employee who is about to Cease to be Employed informing them of the cessation and will provide details of income from April 1 2017 until September 30 2017 and provide you a copy of the same.
Your new employer should File an informational Form IR56E to the IRD* detailing your commencement (Notification by an Employer of an Employee who Commences to be Employed) and at the end of the fiscal period ending March 31 2018, your new employer will file a Form IR 56B Employer's Return of Remuneration and Pensions ("ERRP") to the IRD reporting your income from commencement on October 1 2017 up to March 31 2018. You should receive a copy at the same time.
The 2017/18 tax return will then be easy to complete based on 1) the Form IR56F from old employer and 2) the Form IR56B - ERPP from new employer.
* If there is a significant change in salary, the IRD may, in rare situations, adjust the provisional tax, but the general practice will be to wait until the end of the fiscal year in question and reckon new numbers at that time. More often, you may write in to apply for holdover of provisional tax charged on the notice of assessment within a prescribed time limit if you believe your net chargeable income will be less than 90% of the net chargeable income of the preceding year.
What’s the tax process for someone leaving from Hong Kong?
Once you know you are leaving Hong Kong, you should inform the IRD of your departure either by email, telephone, fax or regular mail. The IRD requirement is that this notification is done not later than 1 month before the departure date so that the may issue the tax return for completion. As your employer is required also to furnish the Form IR56G, Notification by an Employer of an Employee who is about to Depart from Hong Kong which will detail the income from April 1 of the fiscal year, until the departure date, this should match your time line for informing the IRD as they have the same time requirement for the employer. If possible, you should provide the intended future address.
There may be situations where you suddenly decide to leave in which case a physical visit will help to clear the matter as soon as possible. This is particularly necessary as the employer is required to withhold all payment of money or money’s worth to the employee for a period of one month from the date on which the IR56G was given, or until receipt of the Letter of Release issued by the IRD, whichever is earlier.
You will want to therefore clear your tax and obtain this tax clearance from the IRD so that the employer can release money due to you as soon as possible.
"Notification to the IRD of your intention to leave Hong Kong should be given at least 1 month before the departure date"
Timing on Notice of Assessment
The IRD will endeavor to issue the final notice of assessment as soon as possible so that any pre-paid provisional tax (detailed in Part 1 of the series) offsets the final tax and if there is an excess, they will issue the refund; while if there is a shortfall, this notice of assessment will require payment of the shortfall. The reason they want future address is if the employer has to file a replacement or amended Form IR56G for additional income, then the IRD will know where to direct additional notices of assessment, if any.
Termination payments are a complicated issue and there is significant litigation outlining key issues, but for purpose of understanding simple concept, if they are paid in lieu of notice or form a part of severance, then they should generally not be taxable because they take the nature of payment received on a premature termination or in consideration of a variation of the terms of employment (such as post restrictive covenants) since such payments arise from “breach of contract” and not from “employment services.” To be clear, if the IRD is satisfied that the payments are not related to any past, present or future services, then the payments should likely not be subjected to tax. If the payments had been contracted for, i.e., included in the original employment contract, then it it is likely that the IRD may consider that such payments form part of the employment and should therefore be subject to tax.
Long service payments
Long service payments are not taxable and are calculated by a formula based on reckonable years of service. The IRD will particularly scrutinize excess severance payments since they prescribe the same formula for severance payment as the formula for long-service payment. In the case of severance, an employee will be eligible if they have completed not less than 24 months under a continuous contract and are dismissed due to redundancy or being laid-off. Usually an employee may either receive severance or long service, but not both.
How about Mandatory Provident Fund / Recognized Occupational Retirement Schemes?
There is strict guidance provided by the IRD on taxability of employer’s contributions (mandatory and voluntary) depending on timing of withdrawal and usually a proportionate benefit formula is applied to determine the amount that is reportable in excess of the proportionate benefit. This leaflet provides detailed guidance:
For the scope of this article, those people who should be permanently departing from Hong Kong may be able to withdraw these funds tax free upon filing certain forms. Should they return to Hong Kong to work again, upon subsequent departure(s) they should only be entitled to withdraw upon the other triggering events, such as retirement at age 65, death (in which case family members can apply), incapacity or terminal illness.
Read other articles from our series for US expats tax here, exclusively on Star Anise:
Tax Series Part 1 Hong Kong International Assignment (How the Hong Kong tax system works)
Tax Series Part 2, Hong Kong International Assignment (Territorial Concept)
Tax Series Part 3 Hong Kong International Assignment (Retirement: 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)