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Question :

Prepare essay on the major features of the tax system of your chosen country. It should include (but is not restricted to) detail that covers all of the topics and issues that are discussed in Modules 1–5 of the Study Materials. Your report should be as up to date as possible and should be evaluative as well as descriptive. reference: footnote and bibliography according to Australian guide to Legal Citation.

Answer :

1. Introduction

Hong Kong ranks as the freest market in world, coordinated by limited governmental barriers as well as an open price mechanism. This position has been affirmed by not only Nobel Prize laureates , but also by the 2016 Index of Economic Freedom for the 22nd consecutive year . Hong Kong’s economy is an ideal example of the merits of an efficient market, wherein its taxation system serves as one of the paramount factors for its economic growth . The tax system is simple, transparent and straightforward among rest of the countries in the world. As the economy continues to prosper in Asia-Pacific regions, it is important to familiarise with its taxation system . Article 108 of the Basic Law of Hong Kong stipulates that the Hong Kong Special Administrative Region should practice an independent taxation system, free from any external policy influences, especially China. In pursuance, it has adopted a marginal tax policy, and has enacted its own types of taxes, tax rates, tax reductions, allowances and exemptions, which are primarily collected through the Inland Revenue Department (hereinafter, referred to as “IRD”). The public finance system is solely administered by Hong Kong, and no amount of revenue earned from taxable sources is delivered or surrendered to China. As compared to tax systems of other nations, Hong Kong only taxes income derived from the country itself. In addition, there is no sales tax, withholding tax, capital gains tax, tax on dividends and estate tax in Hong Kong. Despite its low tax status, Hong Kong has consistently had revenue surplus . In the fiscal year 2014-15, Hong Kong's tax revenue amounted to HK$301.9 billion, with a 24% surge from the previous year's revenue. This report provides an overview and evaluation of the features of the taxation system of Hong Kong, and its contribution towards its economic expansion. 

2. The Tax Regime

Hong Kong has a territorial taxation arrangement, whereby only income generated within the country itself will be taxable according to the applicable tax rates. It has one of the lowest tax rates amongst all developed and developing countries that provide great fiscal freedom to its taxpayers. For the ease of collection, taxes in Hong Kong are categorized as:

  1. Direct taxes of:
    1. Profits Tax – for business profits
    2. Salaries Tax - for individual’s employment income
    3. Property Tax – for rental income form real estate
  2. Indirect taxes of:
    1. Stamps Duty
    2.  Betting Duty
    3.  Estate Duty

Each tax under both sub-heads is chargeable by the IRD at different rates, depending upon the valuation of the gains incurred or service rendered. The Hong Kong government relies primarily on the aforementioned direct taxes for their revenue, which consists of 3 types of income, namely, trading profits, employment income, and rental income from a property. As of fiscal year 2016-17, the direct taxes are levied in the following manner :

As mentioned above, Hong Kong is considered to have a modest tax system because of the absence of sales tax, capital gains tax and estate tax etc. It does not levy any form of turnover taxes, such as Value-Added Tax (VAT) and Goods and Services Tax (GST). No taxes on returns on savings in form of dividends, capital gains and interest income are charged. On the other hand, some countries like Australia have a very complex taxation system that is made up of approximately 125 categories of taxes which includes income tax, capital gains tax, fringe benefits tax, service tax and many others.

Furthermore, excise duty in Hong Kong is charged only on four types of goods, which are, liquor, tobacco, petroleum-based fuels and methyl alcohol, and previously imposed duties on beer and wine were also abolished in 2008. With the exception of import of motor vehicles, all exports and imports are also tax-free. For the aforementioned reasons, Hong Kong has been reaffirmed as a highly favourable location for profit shifting and conducting re-invoicing activities.

3. Characteristics

3.1 Simple Tax Rate:
The taxation regime in Hong Kong has minimal tax layers, and is arguably the world’s most efficient tax system. Due to such simplicity, not only are there lesser instances of tax evasions; the tax compliance costs, the cost for policy formation and paperwork is relatively low in Hong Kong. For instance, the American federal income tax generates a whopping 66,000 pages of codes and regulations, whereas the entire tax code of Hong Kong does not exceed 200 pages. The marginal rate of taxes keeps encourages capital formation and economic distortions low, which leads to higher rate of economic growth and constant support of the Hong Kong population.

3.2 Territorial Taxation:
The basis for taxation is purely territorial, wherein the income or profits solely derived from the territory of Hong Kong is taxable. Any income earned in extraterritorial jurisdictions is not chargeable under any additional tax, even if the income was not taxed in the respective jurisdiction. For instance, if an employment is located outside Hong Kong, income from such employment is exempt from salaries tax. There is, however, a general exception to this rule – all income derived from services rendered in the country would be deemed to be taxable.

This renders a higher incentive for the taxpayers in Hong Kong to save, and provides a broader base of resources at their disposal, which increases the level of investment in the economy and leads to long-term economic development.

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