Personal Income Tax in Hong Kong - Coursework Example

Personal Income Tax in Hong Kong I. Introduction “Tax is the lifeblood of the country.” Stipulated by Baron Bedesky (2008, pp. 4-5), taxes are the tools used by the government in order to provide public services to its constituents, who were the primary sources of taxes themselves. In the process of taxation, hence, popular participation is essential. However, there is relativity in the levels of participation of the taxpayers, those people paying for taxes, which varies from one state to another. Hence, this paper aims to provide an extensive treatment of the matter concerned with focus on one state, Hong Kong. The focus, furthermore, is on the nature of the country’s personal taxes and how its admission affects the taxpayers’ participation. In addition, Hong Kong’s personal tax system is being compared with that of Australia in establishing links on what contributed to the former’s taxpayer behavior—which is believed to have been low—and the latter’s, which is the reverse of the first mentioned. II. Personal Tax: Hong Kong vis-à-vis Australia In the onset of the increase in global labor mobility, personal taxation systems rates have fallen by a significant average. Particularly, in the Asia Pacific states, the lowest tax rate is found in Hong Kong, with 16% (Godfrey, 2008). Personal tax in Hong Kong is usually referred to as the salary tax, which comes only on annual employment income. In addition, non-employment income coming out in the form of dividends, shares, or capitals are held not taxable. Such conception is further grounded on the notion that salaries are only those which could one possibly get through being employed, and it is that portion of their salaries that is paid as taxes (The Low Tax Network, n.d.). In an article by Rory Boland (n.d.), Hong Kong’s taxation system could be defined in five major definitions: (1) no sales tax; (2) no capital gains tax; (3) no VAT; (4) maximum salary tax of 20 %; and (5) profit tax maximum of 16%. Personal taxation in Hong Kong is, in fact, considered as having a narrowly-defined base which justifies the state’s tax system as a relatively generous one (Littlewood, 2007). On one hand, the Australian personal taxation is falling behind Hong Kong’s. In fact, because of its “incompetent” tax reduction efforts to compete with other states, Australia is now planning for a system reform (Australian Chamber of Commerce and Industry (ACCI), 2005). According to Mr. Stanhope (n.d. cited in Business Coalition for tax Reform, 2004), “Australia’s personal taxes are among the highest in the world…” Thus, a mark clearly separates the two states into two distinct classifications: first, that Hong Kong, given its simplified and generous way of personal taxation system, is at one end more advantageous especially to some concerned labor sectors which are in search of more potential avenues for low tax rates; and the other is that Australia is at far distance compared to Hong Kong’s “competitiveness” in terms of tax rates. The two countries differ in their levels of taxpayer participation, though; the former with a lower level as contrast to the latter. III. Allowances: Hong Kong vis-à-vis Australia As part of the OECD-10 countries, Australia’s personal taxation system has been open to specs of comparison. A point of comparison is Hong Kong, as being part of the contending countries with Australia with regard to issues on the taxation system. In more specified angles, their areas of comparison cover various sub-areas such as allowances, filing procedures, penalty and assessment, the process of paying taxes itself, and the behavior of their taxpayers. The Australian Government Treasury Office (n.d.) stressed the highly competitive edge of Hong Kong in terms of its personal allowances provision. As reflected in its annual report, Hong Kong offers HK$100,000 for a single person’s basic allowance; HK$200,000 for a married person’s allowance; and HK$30,000 for the child/ dependant parent allowance. The Government of Hong Kong (n.d.) further identified other beneficiaries for its allowances including single parents and disabled dependents. In Hong Kong, it is normally in the Tax Return-Individuals (B.I.R. 60) form that one would claim his / her allowances, yet it should be within the premises of the year of assessment. More recently, there have been changes in the allowances allotted by the Hong Kong government to the “beneficiaries.” A maintain or increase phenomenon of its standardized allowances was manifested in its annual report—the increase was particularly on the sides of the basic allowance, the married person’s allowance, and on the single parent allowance (The Government of Hong Kong, n.d.). In addition, the Inland Revenue Department of Hong Kong (2009-2010, pp. 19-20) reflected in its report the coverage of each particular allowances. In the children allowance, for example, the allowance covers the first child born to even the ninth child. The terms of qualifications in getting the allowances for each entitled beneficiaries are also as simplistic as Hong Kong’s taxation system structure is. On one hand, the Australian Federal Government (2008 cited in Diviny & Landis, 2009) added “10% capital allowance deduction for new tangible assets.” Furthermore, as it was clearly asserted by Duncan Bentley (2002), the Australian personal taxation system, as contrast to Hong Kong’s, was a complex process of taxation. In this case, there were various facets that were considered to have contributed to such process complexity. These factors include “a wide range of deduction, rebates, allowances, and welfare benefits within the tax system” in which prospect taxpayers, especially the low-income ones are in a must subjected to completing their tax returns. Thus, provided the “indirect” statement of the allowance percentages of the Australian tax system, it could still be inferred that its allotment of the allowances to the taxpayers is in a way a manner of extending its service provision. IV. The Filing Procedure The simple process of taxation in Hong Kong further justifies its simplicity through its like process of filing taxes. As it was reflected in the report provided by the Government of Hong Kong (n.d.), an accurately completed form of the Tax-Return—Individuals (B.I.R. 60) form is necessary within the given time frame of the specified filing date(s). In cases of delayed filing or late filing of tax returns, one “may be required to pay a penalty, or even prosecuted.” Further, if one fails to file the tax return on the given filing time requirement, there is a great tendency for him / her to be charged and to pay greater amount than the principal tax amount designated to him / her. The filing procedure in Hong Kong also deals considerably in the taxpayers’ compliance behavior. The filing of tax returns is indeed considered as the responsibility of the taxpayers, and that such responsibility is a shoulder to the latter’s part. As it was further discussed, if one is compliant enough to file the tax return on no delayed time, the assessing of necessary documents for completion would be dealt with ease, and the claims for tax allowance reductions and other important matters will be attended to (Inland Revenue Department of Hong Kong, 2009). In addition, the Hong Kong government Inland Revenue Department (2009) also stressed out that a person’s failure to report the complete income to be levied with tax, or “the omission of income without reasonable excuse,” is to be dealt with equivalent punishment of heavy penalty by the government. Moreover, the Hong Kong government had made it much easier for the taxpayers to file for tax returns with its effort in implementing the paper filing (which is the manual way) and the electronic filing over the internet through different guidelines of completion. On the other hand, personal tax filing in Australia has been like all other common OECD countries. The process, according to Duncan Bentley (2002) concerns all the individuals held liable for the application of tax returns. The filing starts with basic identification of whether to what type of tax assessment one should apply for—may it be a company or an individual. As Bentley further asserted, before the financial year ends, the Commission on Taxation then identifies who are obliged to lodge their tax returns. In fact, Bentley (2002) also asserted that “any resident or non-resident individual with a taxable income above the relevant minimum tax-free threshold, or who has tax withheld from a payment, or who carries on a business, or who wants to claim a tax loss or some other tax benefit or refund, must file a return. Furthermore, the Australian government had strategically provided “tax agents” whose primary role is to guide the taxpayers for them to responsibly file for their specific tax returns. An essential feature of the filing of taxes in Australia was also its high concern for privacy and information security of the taxpayers. As reflected in a report made by the Australian Government Taxation Office (2009), the government had formulated and implemented laws for the protection of the right to privacy entailed to its taxpayers. In different ways of filing, may it be through phone or written application, a tax file number is provided for security. V. Hong Kong Taxation: Payment Procedure In a country positing simple taxation system, procedures related to such follow to be of simple touch as well. The Inland Revenue Department of Hong Kong (2009, pp. 25-26) stressed the steps on how the tax payment process in Hong Kong takes place. Three major means were provided: (1) payment by electronic means, those done through the use of electronic gadgets such as phones, bank automated teller machines, or even the internet; (2) payment by post, that which comes in a form of cheque; and (3) payment in person, that which is manually done by the taxpayer through cheque or cash, appropriate to the amount stated in the voucher. In addition, if problems—such as taxes in default—are encountered, light sanctions are directed to the taxpayers. As further identified by the IRD, a 5% surcharge will be added to the unpaid amount. VI. On the Lens of Efficiency: Issues on Taxpayer Compliance Behavior and Taxpayer Participation The efficiency of the taxation system is an important facet to consider by every state. The taxation system extensively affects a country’s economic efficiency and the living standards of its constituents. Furthermore, the increase in efficiency and further development of the economic base is to be attained through the government’s efforts to augment its revenue for more service and state welfare provision. In such case, the lower the revenues provided by the tax system, the higher the propensity for the government to fail in meeting the greater demands of its constituents. With such assumptions, a revealing issue is hence directed to the attentive concern of those narrow tax base systems—in which Hong Kong has been long since part of (Hong Kong Government, 2001, p. 18). Taking a lens of comparison between Hong Kong and Australia, levels of taxpayer behavior are being attributed to the nature of the two states’ taxation system. A study by Professor Duncan Bentley (2002) suggested that amid the complexity of the Australian taxation system, there still pervades the favorable level of taxpayer compliance or voluntariness compared to Hong Kong’s. For one reason, the Australian government responsibly takes the burden of providing the “uneducated” taxpayers with tax agents, who were in service of helping the taxpayers with no charge or payment. This system of having tax agent somehow lessens the burden of the taxpayers to undergo complicated steps of tax filing within the already complex tax system of Australia. The tax agent system of Australia heightened the appreciation of the taxpayers amid having complex filing procedure as prime mover of non-compliance (McKerchar, n.d.). On the other hand, Hong Kong is a different situation when it comes to taxpayer compliance, though. The issue however, could not be directed to either the simplicity or complexity of the filing process, as pointed out by McKerchar (n.d.). Instead, the issue of non-compliance and the behavior of the taxpayer towards the system of taxation in Hong Kong could be directed to its being “narrow-based.” As it was stipulated by the Inland Revenue Department of Hong Kong (2009), the narrow-based taxation system in Hong Kong hampered its efficiency in economic and social development. Because of its narrowness, public service provision is not that stable and productive. Efficiency, which was believed to have been the major consideration taken into account by the taxpayers, and the thrust the government could provide through “broadened tax system,” was not successfully dispersed; hence, a need for reformation. Furthermore, taxpayer participation in Hong Kong is not all-inclusive given the fact that the levied individuals come from chosen few, specifically those only having salaries to be levied as in the provisions of the government of Hong Kong. The issue of taxpayer participation in Hong Kong could therefore be considered as more on the ‘aftermath” of the narrow-based taxation system of the country. Although there could be an augmenting rate of labor and capital investments in the country, the stability of such system is arbitrary, whether such could really sustain for a long period of time. In addition, an article by Daniel Ho (2009, pp. 190-191) reveals another issue on the no-compliance of the taxpayers in Hong Kong, which points the “generous” sanctioning of the government to those who violate the regulations of the system; which is contrasting to that of Australia as stipulated by its Inspector-General for Taxation, David Vos (2007). VII. Conclusion and Recommendation(s) This account has therefore reached its points of concurrence. As it was presented, personal taxation system in Hong Kong has been, at a long period of consistency, a simple system. Such system further justified the simple procedures it requires in order for taxpayers to complete the whole process, from the filing to the paying stage. Such simplicity garnered Hong Kong appreciation from the business sector. However, significant “decline” in its taxpayers’ participation has been persistent for the very reason that the state’s system of personal taxation is narrow-based. Compared to Australia, with its taxation system a complex process, there is a relatively higher level of taxpayer compliance since the process, though complex, was aided by appropriate measures addressing such; and though levied taxes are quite higher than that of Hong Kong, gained revenues from such meet the taxpayers’ demands for qualitative social services. Another reason for the high level of non-compliance among the taxpayers in Hong Kong is that its “generous” sanctioning tolerated the “re-practicing” of tax violations over and over again. Thus, factors that could be attributed to the low level of compliance and participation in Hong Kong are due to the “defectiveness” of the taxation system itself and the defunct of the government, as well. Its current taxation has therefore failed to strengthen taxpayer participation due to such reasons. Thus, Hong Kong should go for the broadening of its tax system, heightening its tax rates for better provision of social services so as to encourage taxpayer participation. Moreover, punishments for tax violations should be dealt with utmost tolerance by the government that serious attention should be given to such. Bibliography Advisory Committee on New Broad-based Taxes, 2001. A broader-based tax system for Hong Kong?: Consultation document. [Online] Available at: http://www.info.gov.hk/archive/consult/2001/condoc-e.pdf [Accessed 12 February 2010]. Australian Chamber of Commerce and Industry, 2005. Australia needs personal income tax reform. 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