Talk to your employer and cut your tax bill
Although tax on salaries in Hong Kong is very low, there are a number of steps which an employee, with the help of a sympathetic employer, can take which will make a significant difference to their tax bill. And, the difference is a substantial reduction in tax.
Let us start with the 'non-Hong Kong employment' clause. Those who travel outside Hong Kong extensively can avoid paying tax on a percentage of their salary equal to the percentage of days spent outside Hong Kong. For example, an employee who earns US$100,000 a year but spends 40 per cent of her time outside Hong Kong would only be taxed in Hong Kong on 60 per cent of her salary.
To be considered a non-Hong Kong employee, the contract of employment must be with a non-Hong Kong company and must be both signed and negotiated outside Hong Kong. So this tax break is only available to those who work for multinational companies and who can be contracted to another group company outside Hong Kong or to a branch of a foreign company registered under part XI of the Companies Ordinance. Such entities are not Hong Kong companies but foreign companies registered in Hong Kong. This might be only a technical difference but it is an important one if you are looking to reduce your tax liability.
Drawing up a contract stating the employee will work in Hong Kong for the Hong Kong branch or subsidiary is not difficult. It is easy enough to arrange for the contract to be signed outside Hong Kong. The employee could go to Macau for the day, play some golf and sign the contract while he is there. But it must also be demonstrated that the contract was negotiated outside Hong Kong. It may well be necessary to prove this by producing details of conversations with persons outside Hong Kong on a stated date or dates and to match those with plane or ferry tickets, passport stamps, hotel receipts and other evidence that can prove the employee was outside Hong Kong at the time.
It is not generally possible to change your status from Hong Kong employee to non-Hong Kong employee while in the same job so if you could have been a non-Hong Kong employee but did not claim to be so, probably nothing can be done about that. But if an employee moves jobs within the same company or moves companies, this would represent an opportunity to change the status and cut taxes.
There is room to save tax in accommodation as well. Hong Kong gives generous tax treatment to the provision of accommodation by an employer. Under most foreign tax regimes, an employee who is paid that same US$100,000 salary but also gets a housing allowance of US$60,000 would pay tax on the total benefit of that package, i.e., US$160,000. Not so in Hong Kong.
Accommodation paid by the company on behalf of an employee is taxed on the actual cash value or 10 per cent of salary, whichever is lower. So in this example, the employee would only be taxed on an additional US$10,000 (10 per cent of her salary). It is wise for the employer to directly pay the landlord. Ideally the lease would also be between the employer and the landlord, although this is not generally considered essential.
Another area to look at - and this need not involve the employer - is interest on a loan used to purchase a property. While the interest is deductible, capital repayments are not.
Amounts paid to the Mandatory Provident Fund or other approved retirement schemes can be deducted up to a certain specified maximum, which is not large.
Donations to Hong Kong charities (but not foreign charities) are deductible up to a maximum of 25 per cent of salary. You must not receive any benefit in return so the purchase of a ticket to a charity dinner would not be deductible generally because you get the benefit of a good feed and enough booze to float a small warship - you hope. But a donation made at the dinner would be deductible. I see that Goldman Sachs has asked all employees who are receiving bonuses to give money to charity. What a fine institution.
Expenses incurred in the care of an elderly relative are also deductible, so look after your granny. Costs incurred taking a prescribed course of education are deductible, too. The government describes this as 'expenses of self-education'.
As always, it is important to get the detail right to successfully claim these deductions so care should be taken in drafting the contracts and taxpayers should be able to provide full documentary evidence to support a claim for any deduction.
I have come across some clients who think it somewhat immoral to try and reduce their already low tax bills. I would argue that they might still wish to claim deductions, work out how much tax they are saving and then donate the saved amount to a charity of their choice or simply volunteer another cheque to the Inland Revenue Department and give them a nice present. Choice is a wonderful thing.
