The taxation highlight of the first quarter of the year in Hong Kong is the Budget Speech by the Financial Secretary. This year there was considerable speculation as to the contents of the Budget as the Financial Secretary had conducted reviews on a number of areas including Estate Duty and the duty on alcoholic beverages prior to the Budget. He had also set up an internal government committee to advise on the introduction of Goods and Services Tax (GST) in Hong Kong.

However, the Budget Speech turned out to be a relatively quiet event with the notable exception of the abolition of Estate Duty. The Financial Secretary indicated that "on balance" he was in favour of the abolition of Estate Duty as part of measures to further strengthen Hong Kong's financial services industry and enhance Hong Kong's position as an international financial centre.

On the question of GST, the Financial Secretary was far less forthcoming. He did not give any firm commitment as to whether GST would be introduced, stating that he would provide further information in a consultation document to be published later this year. The question of GST remains an area of uncertainty and it is to be hoped that the consultation period will be relatively short so that a firm decision on GST can be made within the next twelve months. A summary of the Budget is contained in our Budget Notes 2005/06.

One of Hong Kong's advantages is its simple and certain tax system and in this issue of Tax Talk there is an article on legislation introduced to clarify an area of uncertainty regarding the withholding tax on royalties paid to non Hong Kong residents. The legislation effectively reverses a decision in the Court of Appeal, but it provides certainty and, in that respect, it is to be welcomed.

An area which provides considerable uncertainty in practice is whether gains on the disposal of Hong Kong property are tax free capital gains or are trading profits subject to Profits Tax. Each year there are a significant number of cases heard at the Board of Review on this subject. In this issue we have summarised the practical tests which are applied by the Board of Review to determine the Hong Kong tax treatment of the disposal proceeds.

The second quarter of 2005 will see the commencement of the tax filing season for 2004/05. Details of the tax filing deadlines are set out in our Tax Notes No. 13 on filing deadlines. Please contact us if you have not received your copy of the Tax Notes.