taxtalk - June 2001
New changes to share option practice notes
Tax reporting obligation reminders
Government makes example of tax evaders
New changes to share option practice notes
The Inland Revenue Department issued a new practice note in February 2001 outlining the assessing practice in relation to the benefits obtained from share option schemes by employees and office holders.
In summary, any gain realised by the exercise or assignment of a share option obtained by a person as an employee or office holder of a company is employment income subject to Salaries Tax.
This new practice note seeks to explain in detail how such gains should be calculated.
In particular, the practice note makes it clear that:
Generally, if the person is granted a right to purchase shares during a year of assessment in which he has a Hong Kong employment, the gain is regarded as having a Hong Kong source and is therefore taxable. Exemption is available if the person renders all services outside Hong Kong in the year of grant or, if the right is granted on a conditional basis, during the vesting period. The exemption is valid even if the right is subsequently exercised in a year whilst the person is working in Hong Kong.
Where the person has a non-Hong Kong employment at the time of grant and the right is granted unconditionally prior to the person rendering any services in Hong Kong, the gain will have a non-Hong Kong source. There would not be any tax liability even if the right may be exercised after the person commences to render services in Hong Kong.
A complex situation arises where a person with a non-Hong Kong employment is granted the right subject to a vesting period during which services are rendered both in and outside Hong Kong. A portion of the gain attributable to services rendered in Hong Kong is taxable. The apportionment will generally be made with reference to the number of days spent rendering services in Hong Kong.
Tax reporting obligation reminders
The Inland Revenue Department (IRD) is increasingly focusing its attention on the late filing of Employer's Returns. This increased focus follows a number of high profile tax cases and a report from the Audit Commission in October 2000 that there were a large number of tax write-off cases related to expatriates leaving Hong Kong.
The IRD has the power to impose penalties on employers for not meeting reporting deadlines and obligations. It is therefore important that both employers and employees are aware of their obligations.
Annual Return
Employer's Returns are normally issued in April each year to enable an employer to report all remuneration/pension paid to employees during the past year, ending 31 March, including overseas payments made to employees and share option gains. The returns must be filed no later than one month after the date of issue.
Other Employer Reporting Obligations
An employer is also required to notify the IRD of the commencement, cessation or departure from Hong Kong of employees.
Employees Leaving Hong Kong
Employees departing Hong Kong permanently need to file a final tax return and settle the amount of tax due on or before specified due dates.
As noted above, employers are obliged to withhold salary payments. Such amounts withheld can only be released after the IRD notifies the employer it can do so, which is generally after all taxes have been settled.
Government makes example of tax evaders
There is a global trend to combat tax avoidance and evasion. There are a number of reasons for this phenomenon, including:
This trend has been witnessed in Hong Kong recently and is underscored by several highly publicised tax cases, where the courts have held that the taxpayer had committed a criminal offence in relation to their wilful intent to evade tax without reasonable excuse.
On 19 April it was held that Pak Wan Kam had assisted a company, she controlled to evade tax by overstating wages and entertainment expenses. As well as recovering the tax underpaid, Ms Pak was sentenced to three months imprisonment.
On 18 April it was held that Kan Tak-chu had understated the assessable profits of a business in the name of Yau Shing Kan Kee in his tax returns. The defendant was fined $812,000, representing 90% of the tax evaded.
On 26 February it was held that Chang Kin-man, Ivan, a director and shareholder of Kam Tong Kee Engineering Plastics Company had omitted sales proceeds from the profits tax return. He was sentenced to nine months imprisonment and ordered to pay a fine of over $2 million, which was equivalent to twice the tax evaded.
On 7 February it was held that Lam Kwong-wai, Anigo, the former personnel manager of Sogo omitted to file his own Employer's Return on behalf of Sogo. He was sentenced to 240 hours of community service and fined $500,000, which was about 190% of the tax evaded.
These cases deliver a very clear message, i.e., the Inland Revenue Department is prepared to adopt a very firm attitude in taking any suspected tax evasion cases to the court for judgement.
The deadline for filing tax returns in Hong Kong is one month after the tax return issue date. For taxpayers covered by the block extension granted to tax representatives, this deadline is extended in line with the table below. In particular, it should be noted that the Hong Kong Inland Revenue Department has recently revised the deadline for tax filings to 31 August 2001, in respect of companies having accounting periods ended December 2000. Notwithstanding these extended due dates, taxpayers are encouraged to file the tax returns as early as applicable to avoid a last minute rush.
1)Corporations & Partnerships
Profits tax returns
Accounting year end Extended due dates
01/04/00 - 30/11/00 May 2, 2001
01/12/00 - 31/12/00 August 31, 2001
01/01/01 - 31/03/01 November 15, 2001
Employers' returns May 2, 2001
2) Individuals & Sole Proprietorships
Composite tax returns
- without sole proprietorship business June 30, 2001
- with sole proprietorship business October 3, 2001
If you have any comments or require further information please contact:
Paul Chow
T (852) 2218 3188
E paul.chow@gthk.com.hk
Chris Hall
T (852) 2218 3144
E chris.hall@gthk.com.hk
Lusan Hung
T (852) 2218 3103
E lusan.hung@gthk.com.hk
Tom Corkhill
T (852) 2218 3167
E tom.corkhill@gthk.com.hk
www.gthk.com.hk
13/F Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong
T (852) 2218 3000
F (852) 2218 3500
E tax_enquiries@gthk.com.hk
The Hong Kong member firm of Grant Thornton International
The aim of Tax Talk is to alert taxpayers to recent developments. The information is general in nature and it is not to be taken as a substitute for specific advice. Accordingly, Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on information contained herein without further consultation with ourselves.