Questions on Taxation Essay

Tax I


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  1. Direct revenue enhancement

In the assessment twelvemonth, taxpayers would pay revenue enhancements straight to the authorities on the due day of the month and needed sum. It is direct revenue enhancement because of payments straight to the authorities.

For illustration, wages revenue enhancement is a direct revenue enhancement. Employee straight pays their revenue enhancement to the Inland Revenue Department and it is based on their wages. Except the revenue enhancement, belongings revenue enhancement and net income revenue enhancement are besides direct revenue enhancement.

Indirect revenue enhancement

First, taxpayers pay revenue enhancement to mediators. And so, mediators transfer the money to the authorities. It is indirect revenue enhancement because taxpayers pay revenue enhancement to the authorities through mediators.

For case, a first enrollment revenue enhancement for imported auto is indirect revenue enhancement. It is received from the first proprietor of a auto and subsequent proprietors do non pay the revenue enhancement. Car proprietors should manage it which is charged to taxpayer as portion of the monetary value of the auto.

  1. There are the aims of a good revenue enhancement system, as followers:
  • To administer goods and services equitably ;
  • To protect the autonomies and rights of persons ;
  • To maximise present and future end product of goods and services ;
  • To enforce a suited degree of revenue enhancement ;
  • To non increase inequality or offend equity ;
  • To be efficient of revenue enhancement disposal ;
  • To see as tools in helping economic growing and stableness ; and
  • To hold revenue enhancement statute law that is simple and cheap to administrate.

The undermentioned features of a revenue enhancement system, as followers:

  • Neutrality

It indicates revenue enhancement system minimizes the disincentive effects and reasonably distributes the revenue enhancement load. The revenue enhancement system should non supply any suggest and advice to apportion resource. Any action would impact its neutrality. Sometimes, the authorities may take action for promoting or detering an industry. For illustration, the Inland Revenue Ordinance requests the tax write-off of research and development disbursals in order to develop higher engineering industry.

  • Equity

Persons should pay his/her just portion of revenue enhancement. The revenue enhancement load on taxpayers is distributed reasonably. Every taxpayers in same state of affairss should be treated the same. Harmonizing to their income and net incomes, they should pay the same sum of revenue enhancement on the same income or net incomes.

  • Efficiency

The efficiency of a revenue enhancement system can cut down the conformity costs and disposal costs for roll uping gross. For illustration, probationary revenue enhancement system based on the income on current twelvemonth and taxpayers will pay in progress. In pay-as-you-earn, employers need to keep back a specific sum from their employees’ wages. To compare, probationary revenue enhancement is more efficient because it can salvage employers’ measure.

  • Simplicity

The revenue enhancement system should be crystalline, predictable and apprehensible so that it clear and easier apprehension. For illustration, in Hong Kong, a taxpayer can complete his/her ain revenue enhancement return because the procedure is really easy.

  • Economic and societal aims

It indicates the authorities employs it to achieve selected economic policy. For illustration, S16 G prescribed fixed assets is like computing machine equipment, including hardware and package.

  • Cultural

There is household construct including joint appraisal in wages revenue enhancement. It besides allows some allowance, such as dependent grandparent allowance, kid allowance, contribution allowance and brother and sister allowance.

  • Effectiveness

The effectivity of a revenue enhancement system includes gross productive and gross outputs. Revenue productive is that it produces the sum of revenue enhancement gross on timely mode. Besides, gross outputs are sustainable for a long clip and insulated every bit far as moderately possible from economic rhythms, such as recession.

  • Other

The features of a revenue enhancement system consist of flexibleness and competitory. Nowadays, cyberspace is popular so that Inland Revenue Departmentallows that taxpayers submit revenue enhancement return on cyberspace, which is Green Tax. The revenue enhancement system is flexible and capable on technological alterations and commercial development. International fight is to go to and follow international tendencies.

  1. Some people think Hong Kong has a narrow revenue enhancement base. In order to broaden the revenue enhancement base of Hong Kong, Goods and Services Tax is proposed for Hong Kong.

Harmonizing to portion B ) , there are the aims and the features of Goods and Services Tax, as followers:

  • Neutrality and Economic

Goods and Servicess Tax should be economically impersonal so that it should non do market deformation. That is to state, it does non take to resource allotment in a society.

  • Equity

It should reasonably revenue enhancement the persons, concern and Government in similar ways. When they face the same state of affairs, they are treated the same. Harmonizing to the merchandising monetary value of goods and services, they should pay the same sum of revenue enhancement on the same monetary value.

  • Efficiency and Effectiveness

The revenue enhancement can minimise the administrative costs for the Government and conformity costs for concern. Therefore, it can run into efficiency and effectivity features.

  • Simplicity

Goods and Servicess Tax is simple and certain. It should be compatible with the bing low rate revenue enhancement system. Although it is levied at low rate, it can maintain competitory advantages and do gross in Hong Kong.

To reason, Goods and Services Tax can bring forth steady gross for the Government.


  1. Harmonizing to CIR V George Andrew Goepfert ( 2 HKTC 210 ) , the undermentioned three factors of DIPN 10 are used in make up one’s minding the beginning of income from an employment:
  • the topographic point where the contract of employment is negotiated, entered into, and is enforceable ;
  • the topographic point of abode of the employer ; and
  • the topographic point of payment of the wage.

If all the above three factors are in Hong Kong, it should be Hong Kong employment and the beginning of income from the employment is Hong Kong so that it is capable to wages revenue enhancement in Hong Kong. However, in the above three factors, the location of payment of the wage is less of import.

An office is a company’s board of manager or secretary. Income from an office is that the wage is paid to the managers or secretaries for their places.

The factor in make up one’s minding the beginning of income from an office is where the cardinal direction and control of the company ( McMillan v Gurest ( 24 TC 190 ) ) , for case, the location of board meetings. Even if the office ever travels for concern intent, it is capable to wages revenue enhancement in where the cardinal direction and control is. Unless all determination of the company is finalized by its parent company outside Hong Kong, it is non capable to wages revenue enhancement in Hong Kong.

  1. During the twelvemonth of appraisal 2011/12, Paul Newman is capable to wages revenue enhancement in Hong Kong harmonizing to 60 yearss regulation.

Paul Newman was non Hong Kong’s employment because:

  1. He who is a German citizen had an employment contract in Germany.
  2. His company, Silver Corporation, was in Germany and his higher-up was besides in Germany.
  3. His wage was paid into his bank history in Germany.

Furthermore, he did non negociate or subscribe a new employment contract once more. Therefore, his employment was in Germany even if he worked in Hong Kong. He should be exempted from wages revenue enhancement in Hong Kong.

However, he worked in Hong Kong transcending a sum of 60 yearss during the twelvemonth of appraisal although he was a non-Hong Kong employment. The income from non-Hong Kong employment is based on the figure of yearss spent in Hong Kong during the assessable twelvemonth. The expression is

For During the twelvemonth of appraisal 2012/13, the state of affairs is every bit same as the twelvemonth of appraisal 2011/12. Paul Newman is capable to wages revenue enhancement in Hong Kong harmonizing to 60 yearss regulation. In add-on, Paul was besides an office in Hong Kong so that it was capable to wages revenue enhancement in Hong Kong.

The ground is that he was a manager of Copper Ltd in Hong Kong and its cardinal direction and control was in Hong Kong. Therefore, the wage of HK $ 60,000 should be taxed under Hong Kong wages revenue enhancement.

Paul Newman’s wages revenue enhancement calculations are as follows:



Wages ( Working 1 )


Director fees


Traveling allowance


Relocation fee


Share option benefits ( Working 2 )



Attention deficit disorder: Rental value


Less: Rent suffered

( 24,000 )


Net assessable income ( A )


Less: Married person’s allowance

( 240,000 )

Child allowance

( 126,000 )

Net Chargeable income ( B )


Tax at standard rate ( A ) x15 %


Tax on ( B )

1st$ 40,000 @ 2 %


2neodymium$ 40,000 @ 7 %


3rd$ 40,000 @ 12 %


Rest @ 17 %


Tax at progressive rates


Tax collectible by each partner


Working 1:

Vacations in Hong Kong =

Vacations in China =

= $ 874,985

Working 2:

Share option benefits =

= $ 72,000


Century City Limited

Net income revenue enhancement calculation for the twelvemonth of appraisal 2013/14

Basic period: twelvemonth ended 31 December 2013



Net income per history


Attention deficit disorder: Disallowed disbursals / nonexempt income non recorded in histories



Compensation for distribution understanding


Gross from Trade Development Council




Less: Non-assessable or exempted income

Compensation originating out of joint venture


Compensation for landlord




Net incomes revenue enhancement payable at 16.5 %


  1. Note 1: Harmonizing to the above computation, compensation originating from joint venture understanding is non-taxable. The ground is that it is non gross originating from ordinary concern and is about company’s construction and capital. If the company enter into a joint venture and subscribe a formal understanding, it will alter its theoretical account of operation. Furthermore, it is non one of a figure of contracts and is non for fabricating. In fact, the mill does non come in a formal understanding and paid compensation for this event. The compensation for loss of the understanding is capital in nature so that $ 500,000 is non nonexempt.

Note 2: The involvement income of $ 200,000 is received from fiscal establishments. The Exemption from Net income Tax ( Interest Income ) Order, which states involvement income received by non-financial is exempted from net income revenue enhancement, can non use. Using “operation test” , the beginning of involvement income is from Hong Kong. Therefore, the involvement income is capable to gain revenue enhancement in Hong Kong.

Note 3i: A amount of $ 150,000was paid to the landlord as compensation for renting an office. The usage of office is for its ordinary concern, so it is a deductable payment to the landlord.

Note 3ii: Harmonizing to subdivision 16 ( 1 ) is fulfilled, the loan besides meet the status under subdivision 16 ( 2 ) ( vitamin D ) which the money had borrowed from fiscal establishment. Harmonizing to subdivision 16 ( 2 ) ( A ) , nevertheless, the involvement generated by sedimentation or loan is non nonexempt in Hong Kong and the loan involvement is non deductible. In this instance, the fixed sedimentation borrowed with a bank in British Virgin Islands and generates involvement in British Virgin Islands so that the loan involvement is non capable to gain revenue enhancement in Hong Kong.

Note 3iii: A amount of $ 500,000 was spent to put in a proving installation in the company’s mill. Although the equipment is for fabrication, the installment is considered in a capital nature. When the outgos improve the utile life of the plus, it is non-deductable because it regards as capital outgos.

  1. There are three standards of loan involvement deducted in finding Hong Kong net incomes revenue enhancement liability, as followers:
  1. To carry through the application of subdivision 16 ( 1 ) ;
  2. To fulfill any one of the conditions under subdivisions 16 ( 2 ) ; and
  3. The outgo is non restricted or disallowed by application of subdivisions 16 ( 2A ) , ( 2B ) or ( 2C ) .

Section 16 ( 1 ) provinces:

  • To be incurred during the footing period of a certain twelvemonth of appraisal ; and
  • To the extent they are incurred in the production of net incomes indictable to net incomes revenue enhancement for any period.

( Course material P36 )

The undermentioned conditions are under subdivisions 16 ( 2 ) :

  • The money has been borrowed by a fiscal establishment. ( s.16 ( 2 ) ( a ) )
  • The money has been borrowed by a public public-service corporation company, such as The Hong Kong Electric Company and The Hong Kong and China and Gas Company Limited, at a rate non transcending the rate specified by the Financial Secretary. ( s.16 ( 2 ) ( B ) )
  • The money has been borrowed from a individual other than fiscal establishments ( local or abroad ) and the receiver of the involvement income is indictable to revenue enhancement in Hong Kong. ( s.16 ( 2 ) ( c ) )
  • The money has been borrowed from fiscal establishments ( local or abroad ) . ( s.16 ( 2 ) ( vitamin D ) )
  • The money has been borrowed for the intent of geting works and machinery that qualifies for depreciation allowance ; or for the purchase of trading stock for bring forthing net incomes indictable to net incomes revenue enhancement ; and, in either state of affairs, the loaner has been non an associate of the borrower. ( s.16 ( 2 ) ( vitamin E ) )
  • The money has been borrowed by issue of unsecured bonds marketable in any stock exchange recognized by the CIR. ( s.16 ( 2 ) ( f ) )

( Course material P40 )

Besides, the 3rd standards of loan involvement are:

  • It is called the ‘secured loan test.’ This limitation is imposed on the borrowers who fulfill conditions under subdivisions 16 ( 2 ) ( degree Celsius ) , ( vitamin D ) and ( vitamin E ) . If the borrowers use bank sedimentations held by themselves or their associates as security for the loan, and the involvement income from the sedimentations are non capable to revenue enhancement in Hong Kong, so the involvement disbursals incurred by the borrower will be reduced by the involvement income that is non taxed in Hong Kong. ( s.16 ( 2A ) )
  • This and subdivision 16 ( 2C ) are known as the ‘interest flow-back test.’ This limitation is applied to a borrower who fulfils conditions under subdivision 16 ( 2 ) ( degree Celsius ) , ( vitamin D ) or ( vitamin E ) . If a borrower arranges with the loaner or through another individual to hold the involvement collectible ‘flowed back’ to the borrower or any affiliated individual, so that portion of the involvement payable is non allowed. ( s.16 ( 2B ) )
  • This subdivision is similar to subdivision 16 ( 2B ) , but the borrower fulfils the status under subdivision 16 ( 2 ) ( degree Fahrenheit ) — the loan money is derived by the issue of unsecured bond marketable in accepted stock exchanges. If the borrower or any affiliated individual buys back the unsecured bond entirely or partially through the stock exchanges, the involvement collectible by the borrower will travel back to the borrower or its affiliated individual. This portion of the involvement payable is hence non allowed. ( s.16 ( 2C ) )

( Course stuff P40-41 )


ACT B414 Taxation I, Unit 1-3: OUHK


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Dora Lee,AdvancedTax in Hong Kong: Pearson, Fifteen Edition

The GST Frame work

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Goods and Servicess Tax

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A Broader-Based Tax System for Hong Kong?

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