Answers of Taxation Assignment

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  • Topic: Tax, Employment contract, Employment
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THE CHINESE UNIVERSITY OF HONG KONG

School of Accountancy

ACCT 5160 – Taxation
(3rd Term, 2010-2011)
Assignment 3
Solution

Only the “Assessable income in Hong Kong” is required, others are for your reference.

Question 1

According to Inland Revenue Departmental Interpretation and Practice Note No. 10, the Commissioner accepts that an employment is located outside Hong Kong if all of the following three conditions are satisfied.

a.The contract of employment is negotiated and entered into, and is enforceable outside Hong Kong. b.The employer is resident outside Hong Kong.
c.The employee's remuneration is paid to him outside Hong Kong.

Mr. Pan is not a Hong Kong resident, and he was offered the job by an American company. It is very likely that his contract of employment was negotiated and entered into and enforceable outside Hong Kong. Mr. Pan's employer is an American company, and his employer's resident status is outside Hong Kong. Mr. Pan's salary is paid to his bank account in America by his employer. Thus, all the three conditions for an employment located outside Hong Kong are satisfied, Mr. Pan's employment is outside Hong Kong.

If Mr. Pan's employment is outside Hong Kong, his salaries tax liability is determined by the number of days he stays in Hong Kong in the year of assessment concerned. Thus, Mr. Pan is not able to ascertain his Hong Kong salaries tax liability until the basis period for the year of assessment has passed. The longer the time he stays in Hong Kong for a year of assessment, the more salaries tax he has to pay.

Dual employment
In order to avoid such uncertainty, Mr. Pan may negotiate with his employer to divide his duties into two parts, namely one for the Hong Kong office and the other for the head office. When Mr. Pan is present in Hong Kong, he works for the Hong Kong office, and while he is outside Hong Kong, he works for the head office. In this way, Mr. Pan can divide his salaries into two parts, and all the income derived from the employment with the head office is exempt from Hon Kong salaries tax under Section 8(1A) because he performs all services outside Hong Kong.

Remuneration package
In addition to the dual employment, Mr. Pan may design an efficient remuneration package to take advantage of the preferential treatment on certain income, such as refund of rent by the employer, and provision of benefits, which are not Mr. Pan's liability to pay.

a. Refund of rent
Mr. Pan can request his employer to refund the monthly rent of $20,000 to him instead of giving him the salary of $20,000. In Hong Kong, refund of rent is not treated as a cash allowance for the employee. It is taxed in the form of rental value which is calculated as 10% of the income of the employee. Thus, the effective taxable amount is greatly reduced. b. Provision of accommodation by the employer

Instead of renting the flat by himself, Me Pan may request his employer to rent the flat for him. The monthly rent paid by the employer to the landlord is not treated as assessable income of Mr. Pan, but the benefit is taxed in the form of rental value which is also calculated as 10% of the income of the employee. In other words, the tax effect is the same as that of a refund of rent. c. Education for employee's children

It is provided in Sections 9(1)(a)(iv) and 9(2A)(b) that education allowance provided for employee's children by an employer is fully taxable, and it will make no difference whether the school fee of Mr. Pan's children is paid by the employer or Mr. Pan himself for Hong Kong salaries tax purpose. d. Contractual payments made by the employer for an employee It is provided in Section 9(1)(a)(iv) that if an employee can arrange with his employer in such a way that the employer is a contractual party to pay for the employee's expenses, then such a payment made by the employer for the benefit of the employee is not taxable in Hong Kong. i....
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