What tax policies are defined and implemented by Hong Kong tax law for benefits of employee of Hong Kong incorporation company that are convertible and/or non-convertible into cash?

In this blog we will be seeing the taxation policy of Hong Kong that is defined and implemented by Inland Revenue department on the benefits that can and/or cannot be converted into cash. We will also learn about those benefits that cannot be converted into cash through some case studies.

The return to the effect that gain for assessment on the understanding that no more liability on taxpayer will arise after the actual execution, release and assignment of option, an election form with computation of statement of gain should be attached, in the case a person wants to make such an election. Word ‘release’ in this statement exclusively means the departure of a person from Hong Kong. The election should only be made and accepted if before the termination of employment for Hong Kong salaries tax purpose and/or his/her departure from Hong Kong. In any other case it would not be accepted by Inland Revenue department, as in DIPN 38 (revised).

If election has not made before the permanent departure of taxpayer from Hong Kong, then it would only be accepted by Inland Revenue department if it made within three months from the permanent departure of taxpayer from Hong Kong. If due to any reason such situation arises then in order to calculate the gain the date of departure of taxpayer would be taken as date of national exercise, as taken from DIPN 38 (revised).

If an election is made then it cannot be withdrawn by any party before the actual release, assignment, and exercise, the election could only be withdrawn if:

• Total penalty of options with no compensation or substitution before real exercise.
• Within the period in which actual gain of national exercise is included and also known as objection period of the assessment.

The Inland Revenue department as a favor will consider any application for mandatory re-assessment or amendment if it is clearly known that gain that should be subjected to actual assignment, exercise or release is less than as compared to amount that was assessed for the sake of national exercise, DIPN 38 (revised).

Benefits for Share Award of Employee

The Inland Revenue department will choose the same practice as it used for share option benefits to facilitate the early finalization of salaries tax liability of the employer of a Hong Kong incorporation company before his permanent departure from Hong Kong and this is with regard to where back end methodology is suitable and applicable and the case where share awards were awarded but not vested to the employee.

Person would be eligible to be evaluated on either:

• If selection of taxpayer is made between three months from his/her permanent departure from the Hong Kong, then the considered value on his/her departure.
• The considered value on a day before he/she submits his/her final application for assessment purpose that is applicable to year assessment. That day can be any day in the days of week and the assessment year is the year in which he departs permanently from Hong Kong but in case if an election is made before his/her permanent departure from Hong Kong. The reference for these statements is taken from DIPN 38 (revised).

An election if once made then according to DIPN 38 (revised), it will only be accepted by authorities if it applies to all unvested shares that are chargeable to salaries tax. And if such election is made then it cannot be withdrawn. If Inland Revenue department accepted an election and assessment of gain is exercised:

• In subject to only reason that value upon vesting has increased would not be accepted by the Inland Revenue department to increase the assessment.
• As long as the assessment is not opposed between the statutory times allowed for objection then a subsequent request in which it would be mention to revise the assessment will not be entertained by Inland Revenue department.

Benefits-In-Kind for an Employee

Under Section 9 (2a) (A) the Benefits that are Convertible to Cash:

As taxable income of a taxpayer is also money so this money is transformed less the consideration amount paid by a person as taxpayer. These can be any applicable consideration.

In a case of Wilkins 1960 a suit was provided by an employer having company setup in Hong Kong to his/her employee at a cost of £15. Then while assessing the taxable income of employee it was held by authorities that the actual price of suite would not be taxable but only amount that would be taxable is that the employee would acquire after selling this suite. And this price was found to be just £5.

The benefit is considered for sure to be converted into cash as long as employee discharges the personal legal responsibility of that employee. This legal responsibility of employee that is discharged by employer includes tax liability of employee. As heard in the proceeding of cases of Diggins 1926 and Austin 1935.

Payment of Tax by Employer

If salaries tax of an employee is paid by an employer in the form of additional remunerations these additional incomes or benefits are also subjected to salaries tax. This situation is also called as ‘tax on tax’. Under section 12 (1) (a) of Hong Kong tax law if part of salary is paid to employee and other part is held by his employer to pay salaries tax of employee then such amount this amount that is withheld by employer is not subjected for the assessment.

Own Liability of Employer under Section 9 (1) (a) (iv)

If sum is paid by an employer in discharge of his/her own liability, then under section 9 (1) (a) (iv) of Hong Kong tax law no tax would be applicable on his/her. Suppose there is a contract between employer and electricity. Under the action of this contract employer was responsible to provide the electricity to the house of employee through that company. As this benefit was to be provided by employer having company setup in Hong Kong to his/her employees so he/she was liable to pay tax on that and the amount that was due to him for electricity was exempted from income tax.

But the exemption of such type would not be available in the situation if in a contract between supplier and employer the liability is guaranteed by any other person, in section 9 (1) (a) (iv). For example, if in a contract between employer and electric company it is guaranteed by employer that employee will duly pay the bills for electricity then the sums that are paid to company from employees on this ground will then consist of benefits of employee that are taxable.

The case study of David Glynn

In the case of DAVID GLYNN 1988, Privy Council the identified the sums which should be taxable that are paid by employee for the benefits of a particular employee by taking into consideration the contract of services.

But there were also some benefits that were considered nontaxable by that Privy Council.

• Those benefits that are not based on any contract between employer and employee and lacks the elements of continuity and expectations from both sides. For example, payments that were given on compassionate ground.
• Those benefits that does not include expenditure of money and not convertible to cash money.
• Those expenditures that are not partially or wholly towards a particular employee. For example given by the Privy Council according to which if an employer operate a nursery school for children then cost of running or operating that nursery school would not be considering as taxable income of that employer.

Departmental Interpretation and Practice Notes (DIPN) 16

The taxability of different benefits is dealt by departmental interpretation and practice notes (DIPN) 16.

Benefits for Education    

According the consideration by the Inland Revenue department the educational benefits also includes incidental educational expenses that include cost of school outgoings and boarding fees other than expenses of tuition that are paid by employer.

It was accepted by the Inland Revenue department that, the educational expenses that are provided by employer doing business in Hong Kong under a genuine optional trust are not allowed to be assessed, as in the case Barclays (1960).

Boat or Car Benefit

In a condition at which an employer allows his/her employee to use a car. This benefit in the form of allowance to him/her to drive the car cannot be converted by him/her into cash so this would not be any taxable benefit. But in the other case if car is sold or given to employee by employer at an undervalue than the taxable value of such benefit would only be the market value of car or the difference between cost of employee and the market value of car. The stump paid would be taxable if the personal liability of employee is reimbursed or discharged in connection with the car. These reimbursements can be in the form of repairs, petrol and parking expenditures etc.

Loan at Low Interest Rates

The benefits that are provided to employee from employer in the form of low interest or interest free loans are not chargeable benefits. As these benefits cannot be converted into cash by employee. If we see an example in which an employer lends some money from a bank at market rate and then after that lends it to his/her employee at privileged rate. Such a benefit cannot be converted by employee into cash hence not taxable benefit. Under the section 9 (2A) of Hong Kong tax the loan benefits would be taxable if employee guarantees to return them back.

Corporate Cards Benefits

In DIPN 16, it states by the CIR that the benefits obtained as a result of card used by an employer doing business in Hong Kong for private purposes is chargeable to salaries tax, following Richardson 1985. The dependency of assessment of benefits obtained from usage of corporate cards depends on that whether the liabilities are those of employee or employer. So in order to damn ensure the no taxation of benefits, it should be clear from the side of employee to supplier of goods and services before his entrance into the contract that this contract made by him is on the behalf of his employer. The employer would be in different position if corporate card is used by him/her in order to discharge the business expenses of the employer. And in that case no comparison of taxable aids arises.

Club Benefits for Employee

In respect of cost of acquiring corporate level membership card of club no chargeable benefits arise. The payment would be taxable if individual liability of employee is discharged by the employer. This individual liability of employee may include his/her club subscription etc.

Rules of Net Computable Income   

The following items are allowed by an employee to deduct by his/her computable income:

• Expenses for the purpose of self-education, by the section 12 (1) (e). 
• Expenses and outgoings, in section 12 (1) (a). 
• Losses experienced by him/her, as in sections 12 (1) (c) and 12 (1) (d).
• Depreciation allowance that is specific to machinery and plants, section 12 (1) (b).

Rules of Net Chargeable Income 

The net chargeable income of an individual providing Hong Kong incorporation services is his/her net computable income that is less:

• Personal allowance of an employee as given in Section 12B (1) (b). 
• Deductions that are concessionary, in Section 12 (1) (e) and include:
• Contribution of an employee to well-known retirement schemes (as from the year assessment 2000 to 01).
• Donations that are approved for charity.
• Interests from home loans.
• Elderly inhabited care expenses (ERCE).