Hong Kong’s regulation of charities full of holes, city’s official auditor says

Some allowed to maintain tax-exempt status and free land even after conducting non-charitable activity, Audit Commission says

PUBLISHED : Wednesday, 26 April, 2017, 8:13pm
UPDATED : Wednesday, 26 April, 2017, 10:20pm

The Hong Kong government’s rules on charities are ridden with loopholes, the latest report by the city’s official auditor has found, with some groups allowed to maintain their tax-exempt status and free land even after conducting non-charitable activity, paying their directors and operating hotels and serviced apartments for commercial purposes.

“There is no overall statutory scheme for the registration and regulation of charities in Hong Kong,” the Audit Commission said. “There is a gap between public expectations of the [government’s] role in administering [charities] and what the Inland Revenue Department can do under the [existing laws].”

According to the report, the number of tax-exempt organisations grew 17.5 per cent to almost 9,000 between the 2012-13 financial year and September last year.

But the commission found tax authorities had been lacking in reviewing the charitable status of these groups, with 635 reviews yet to be finished as of September, among which 71 had been in process for over five years.

The Inland Revenue Department had also been slow to delist inactive charities, according to the report, with one organisation allowed to maintain its status even though it had never operated as a charity since it became one 12 years ago.

The commission also found four cases where the charities involved were allowed to keep tax-free status even after being found paying salaries to their directors, which breached regulations. The department did not require these directors to fully refund the organisations after the payments were discovered.

In one case, nine directors of a charity received HK$13 million between 2012 and 2014 and did not refund the organisation after the department found out.

The commission also found two cases where groups splashed out on non-charitable activities – in one case HK$236,000 renovating ancestral halls and the graves of a director – and were allowed to keep their tax-free status without a mandatory refund.

Help each other to help those in need, Hong Kong charities urged

The department said the law did not allow for it to require a full refund and that breaches of directors’ remuneration clauses would not alter a charity’s status.

The commission urged the government to strengthen its oversight of tax-exempt bodies and review the laws to further empower the Inland Revenue Department to regulate charities and carry out enforcement.

The commission also investigated 14 sites granted to charities between 2013 and 2015 which were used for commercial hotels and serviced apartments, and found that only eight leases stipulated the sites should be used for hostels or dormitories, while three did not specify any restrictions on land use, and four did not have restrictions on profit distribution.

The commission recommended the Lands Department review lease terms when granting charities space and set out related restrictions.

According to the report, charities across the city raised HK$282 million in the 2014-15 financial year while tax exemptions were valued at HK$11.8 billion. The commission urged the government to further regulate fundraising events, especially online campaigns and events in public spaces, which are currently not monitored by officials.

The government-appointed Law Reform Commission reviewed the charity regulation system and put forward 18 recommendations in 2013 including setting up specified financial reporting standards, making charities’ financial details publicly available and designating an official body responsible for enforcement action.