Issue 3 - 10 December 2002

    tax notes

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    Salaries tax - time claims

    Tax relief for days spent outside Hong Kong

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    Hong Kong Salaries Tax legislation provides for tax relief for employees who have a non Hong Kong source employment and who travel outside Hong Kong.

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    Charge to tax

    Hong Kong Salaries Tax is charged on an individual in respect of income arising in or derived from Hong Kong from an office or employment and also from services rendered in Hong Kong.

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    As with all Hong Kong taxes, Salaries Tax is territorial in nature and only income which is considered to have a Hong Kong source is subject to tax in Hong Kong.

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    Income subject to Salaries Tax falls under two headings.

    • Income from a Hong Kong source employment

    • Income from a non Hong Kong source employment

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    Where an individual has a Hong Kong source employment he is subject to Salaries Tax under Section 8(1) of the Inland Revenue Ordinance (IRO) on all of his assessable income even if he spends significant periods of time outside Hong Kong.

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    However where an individual has a non Hong Kong source employment he is subject to Salaries Tax only in respect of his income from services rendered in Hong Kong. In practice this means that the individual will be eligible for a partial exemption from Salaries Tax on a physical presence basis which is commonly known as a time claim.

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    Where an individual has a non Hong Kong source employment and travels outside Hong Kong he will be able to apportion his income on the basis of days spent in Hong Kong and days spent outside Hong Kong. Only the income relating to the services in respect to days spent in Hong Kong will be subject to Salaries Tax.

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    The difference between the two charges to tax has no practical implications for taxpayers who provide all of their services in Hong Kong, as all of their income from employment will be subject to Salaries Tax irrespective of whether they have a Hong Kong or non Hong Kong source employment. However employees who have a non Hong Kong source employment and travel outside Hong Kong should consider whether they are eligible for a time claim.

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    Employment

    The question of what is and what is not a Hong Kong employment was clarified by the decision in the case of CIR v Geopfert which the Inland Revenue Department ("IRD") has adopted in issuing Departmental Interpretation and Practice Notes No. 10 on the subject (DIPN10). DIPN10 indicates that in the majority of cases the source of a taxpayer's employment will be determined by the following three tests, all of which are concerned with the contract of employment.

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    (a) The place where the contract of employment was negotiated and concluded and is enforceable

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    (b) The place of residence of the employer. It is important to properly identify the employer for this purpose. The IRD considers an employee of an overseas company seconded to work for the Hong Kong subsidiary for an extended period should be considered for Salaries Tax purposes to be an employee of the Hong Kong company not of the overseas parent. On the other hand, an employee of an overseas company seconded to the Hong Kong branch will still be an employee of the overseas company.

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    (c) The place of payment of the taxpayer's salary. The IRD acknowledges that this third test is of limited importance and the majority of cases will be decided by reference to the first two tests.

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    Thus, if a taxpayer has negotiated and concluded his contract of employment outside Hong Kong, with an employer who is resident outside Hong Kong, then the taxpayer will normally be able to claim that he has a non Hong Kong source employment and is therefore eligible for a time claim. The judge in the Geopfert case stressed that the above tests could be applied in the majority of cases to determine the source of employment but cautioned that there may be instances where the Commissioner of Inland Revenue "may need to look further than the external or superficial features of the employment ... He may need to examine other factors that point to the real locus of the source of income, the employment." Thus the Commissioner may on occasion need to go beyond the three tests to obtain clarification of the position, for example, where it is not clear who is the employer or how a contract was negotiated.

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    Apportionment of income

    Where the IRD agrees that the taxpayer has a non Hong Kong source employment and is eligible for a time claim, then the employee's income which is subject to Salaries Tax is usually calculated by apportionment of his assessable income between days spent inside Hong Kong and days spent outside Hong Kong. For this purpose, the IRD normally considers a day to have been spent outside Hong Kong if the individual was outside Hong Kong at midnight. Thus, if an individual leaves Hong Kong on Monday evening and returns on Thursday morning, this will be considered to be three days outside Hong Kong although he has only been away for two working days.

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    There are however some exceptions to the general rule of apportionment of income where payments are made for services rendered entirely inside or outside Hong Kong.

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    For example, cost of living allowances paid only during trips outside Hong Kong, may be treated as having a non Hong Kong source, whilst payment of Salaries Tax liabilities by an employer will be considered to be totally Hong Kong source, as the Salaries Tax liabilities relate only to services in Hong Kong.

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    Summary

    The position regarding time claims has remained remarkably stable in recent years. The straightforward nature of the Geopfert tests as adopted by the IRD in DIPN10, provides certainty for taxpayers in the majority of cases, but it is important that a taxpayer who wishes to lodge a time claim has proper documentation and evidence to support the position outlined in the three tests. This is an area of tax planning for employees which should be examined by all employees who travel outside Hong Kong during the course of their employment.

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    Employees who do not already lodge a time claim, but who believe they may be eligible based on the three tests in the Geopfert, should consider their position to see whether they can lodge a time claim for 2002/03 and possibly seek to reopen prior years of assessment.

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    Employees who are considering taking up a new employment in Hong Kong, which involves travel outside Hong Kong, should consider their eligibility for a time claim and also the composition of their remuneration package to include tax efficient benefits-in-kind. A summary of the tax treatment of the major benefits-in-kind is set out in our Tax Notes Issue 1.

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    If you wish to discuss the above please notify your usual Grant Thornton contact or contact:

    Paul Chow

    T +852 2218 3188

    E paul.chow@gthk.com.hk

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    David Southwood

    T +852 2218 3103

    E david.southwood@gthk.com.hk

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    Brenda Cheung

    T +852 2218 3136

    E brenda.cheung@gthk.com.hk

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    Gary James

    T +852 2218 3137

    E gary.james@gthk.com.hk

    Tax notes are issued in summary form exclusively for the information of clients and staff of Grant Thornton and should not be used or relied upon as a substitute for detailed advice.  Accordingly Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on the information contained herein without further consultation with ourselves.

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