AC4251 Group Project Written Report

AC4251 Group Project Written Report
Name
SID
Lam Cheuk Yuk
54034280
Lam Sze Wing
54052051
Taxation and Tax Planning
Lui Yin Yi
54032181
Group Project - Written Report
Mok Tsz Kwan
54029846
Session: S02
Group Members:
AC4251
Content
1. Objective
2. Taxes in United Kingdom
2.1. Overview of UK tax system
2.2. Major difference between UK and HK tax system
.2.1. General difference
.2.2.
UK tax types which are new to HK
a. Value-Added Tax
b. Climate Change Levy
c. Landfill Tax
.
Introducing Electricity Tax in Hong Kong

.1 Major problems with current HK tax system
.2. Why not other methods
.3. Why Electricity Tax?
.3.1. Reason
.3.2. Content of Electricity Tax
.3.3.
Implementation timeline
.3.4.
Impacts
.3.5. Expected result
.3.6.
Challenges & obstacles during implementation
Conclusion
1. Objective
This study aims to analysis Hong Kong tax system by first evaluating other countries tax
types and bases. In this report, we are going to suggest a new tax type in Hong Kong. We will
discuss the need and consequences of adopting the suggested new tax base in Hong Kong,
and further evaluate its feasibility and effectiveness in the followings.
2. Taxes in United Kingdom
2.1 Overview of UK tax system
The UK has adopted an independent tax system with the UK tax authority named Her
Majesty's Revenue & Customs(HMRC) to make sure that all the taxpayers has comply with
his or her obligations. The central government (HMRC), devolved national government and
local government are the three level of tax payments in the UK. There are six major types of
tax in the UK including income tax, national insurance contributions, consumption tax (VAT),
excise duties on alcohol and tobacco, corporation tax and stamp duty. However, the largest
source of government revenues comes from income tax and followed by national insurance
contributions. The fiscal year in the UK runs from 1 April t 31 March. In the view of the
similar economic structure with Hong Kong, we would like to identify the differences
between them and point out the feasible tax type to implement in Hong Kong.
2.2 Major difference with HK tax system
2.2.1. General difference
UK
Hong Kong
Complex tax system, with considerable Relatively straight forward tax system.
Revenue discretion on interpretation at the Considerable Revenue discretion at the
margins.
margins.
Tax residence and domicile basically Tax residence and domicile are irrelevant.
determines what is taxed. Broadly, UK Only Hong Kong sourced income is taxable.
residents are taxed on their worldwide
income and gains; non-residents on their
UK income.
Fringe benefits of employment, dividends, No tax on dividends, interests and capital
interest and capital gains are taxable.
gains. Most fringe benefits are not taxed if
correctly
structured.
For
instance,
accommodation
benefits
are
taxed
concessionally.
Value-added tax
No Value-added tax
Tax withheld on employment income
No withholding
Schedular basis of taxation, but income Schedular basis of taxation, with salaries,
aggregated for purposes of tax payments.
profits and property income generally taxed
separately.
Two layers of tax: company and individual. One layer of tax only
Some relief by way of imputation system.
Top Marginal personal income tax rate of Top marginal tax rate of 17% and an overall
40%
tax limitation of 15% of salary income
Relatively minor tax allowances
Substantial tax allowances
Significant social security taxes
No social security taxes
Inheritance tax based on tax domicile and Estate duty based on location of assets only
location of assets
Tax year-end of 5 April
Tax year-end of 31 March
Self-assessment system
No self-assessment system
Tax filing date of 31 January (30 September Tax filing date varies between year of
if the Revenue computers tax liabilities)
arrival and subsequently, but generally 1
June
Wide tax treaty network
Bar the double tax arrangement with

mainland China, no general tax treaties
2.2.2. UK tax types which are new to HK

UKs tax system differentiates quite a lot with Hong Kong in terms of tax types and tax rate
etc. We have summarized the general differences between the two systems as shown above.
And, we have picked a few tax types in UK which are new to Hong Kong for analysis to see
if they are suitable and possible to be introduced to Hong Kong.
a. Value-Added Tax (VAT)
Overview
Value Added Tax which is an indirect tax adopted by the UK mainly taxed on sales of goods
and services provided by VAT-registered businesses as well as some goods and services that
are imported from countries outside the European Union (EU) and brought into UK or EU
(The amendment of VAT after Brexit has not yet announced). The tax revenue from VAT will
be passed on to the government instead of contributing to the business profit.
Taxpayer
All VAT-registered businesses are required to charge VAT on their goods and services and
they are permitted to reclaim VAT if they paid on business-related goods and services.
However, they need to report to HM Revenue and Customs the amount of VAT they have
charged and paid in every 3 months.
Out-of-scope goods and services
Goods and services which is out of scope are not included in VAT system. It cannot charge or
reclaim for VAT. For instance:
1. Purchase of goods and services outside of European Union
2. Statutory fees
3. Charity donations
VAT registration
4
For the business with a VAT taxable turnover more than 83,000 in a 12 month period or
receive goods valued more than 83,000 in the UK from the EU or expected to go over the
threshold in a single 30 day period, it has to register for VAT with HM Revenue and Customs
(HMRC). For the business with a VAT taxable turnover less than 83,000, the registration of
VAT is voluntarily. Register online or through an agent are both workable way to register
VAT. However, once the business registered in VAT, it has certain responsibilities:
1. Charge VAT with a right amount
2. Payment of VAT due to HMRC
3. Submission of VAT returns
4. Keep all the VAT records as well as a VAT account
Tax rate
VAT in the UK composed of three types of rate including standard rate, reduced rate and zero
rate as well as some exemptions. However, zero-rate does not means that the items under zero
rate are not taxable and it is different from exemptions. Items under zero rate are still taxable
at 0%. The company still have to record zero rate VAT in their accounts. Also, the business
who are selling exemption items are not required to register VAT and it cannot charge or
reclaim VAT. The determination of three types of VAT rate depends on different conditions
including the person and the place of supplying, the person of purchasing, the nature of the
goods and services, to name but a few.
Rate
Conditions
Examples
Standard
rate
20% Applied to most of goods

and services unless the
goods and services are
classified as reduced or
zero-rated.
- Alcoholic drinks
- Taxi fares
- Electrical goods
Reduced
rate
5%
Applied to certain goods

and services like elderly
or child care.
- Mobility aids for

the elderly installed
in their home
- Sanitary protection
products
- Children's car seats
Zero rate
0%
Applied to certain goods

and services such as
some food and drink for
human consumption.
- Building services
for disabled people
- Public transport
fares
Remarks
The items under

zero-rate is still
taxable at 0%.
- Donated goods sold

at charity shops
Exemption
Applied to some goods

and services such as
charity or education.
- Educational and
training
- Insurance, finance
and credit
- Fund raising events
by charities
Items which
exempted from
VAT are not
taxable and not
include in VAT
records. Also,
there is no VAT to
reclaim.
Advantages of VAT
1. Widen tax base
As VAT is taxable on most of the goods and services, the tax base of VAT is much more
widen because all the consumers with purchases of VAT taxable products has to pay. Even a
lower rate of VAT can generate a huge amount of tax revenue to the UK government. It
provides a stable income for the UK government with the benefits of huge tax base. From the
forecasting of sources of government revenue in 2016-17 by the UK Institute for Fiscal
Studies , the estimated revenue from VAT is 120.1 billion which is the third largest sources of
revenue for the UK government.
Disadvantages of VAT
1. Regressive taxation
VAT is a regressive tax which means that the people who are living under the poverty line
may spend a larger proportion of their income relatively when compare with the wealthiest.
The poor people have to spend a large amount of their total income to purchase necessary
items than the rich people. The gap between the rich and the poor in the UK has already
serious. The total assets of the wealthiest in the UK is 20 times more than the poorest.
Regressive tax rate may make the gap between the rich and the poor in the UK more worse.
2. Inflation
As the sellers will charge the VAT on customers by including the VAT into selling price, the
price of goods and services will raise and lead to a higher rate of inflation. The seller may
take the advantages of VAT to charge customer more than the VAT rate. As a result, the
increase in price level may reduce the purchasing power of money and the cost of living the
cost of living to the citizens. As the price level in the UK remains high with 0.9% increase in
CPI in the year to October 2016, it may result a heavy burden of living for the citizens
especially who are living under the poverty line.
3. Administrative costs
As VAT is taxable on almost goods and services, it makes up the complicated tax system.
VAT registered business has to trace the records for the prices of purchasing and selling
goods. It needs a large amount of labor power on tracing the records and it costs a lot of time.
As a result, it drove a large amount of administrative costs.
b. Climate Change Levy

Objective
The levy is aimed atinfluencing the public behaviour to protect and improve the environment
by providing valuable market led mechanisms to help limit greenhouse gas emissions,
encourage sustainable behaviour and improve environmental performance to address climate
change.
Scope of charges
Taxable Items:
1. Electricity
2. Gas
3. solid fuels - like coal, lignite, coke and petroleum coke
Tax Rate
The Climate change levy is either pay at :
1. Main Rates
2. Carbon Price Support Rates
Sectors
Industrial
Commercial
Agricultural
Public services
Tax Rate
Reduction/Exemption
Main Rate
N/A
Energy Intensive Business with CCA

agreement
business that uses small amounts of

energy
domestic energy user
charity engaged in non-commercial
activities
electricity generating stations and
operators of combined heat and power
(CHP) stations
90% reduction for electricity

65% reduction for gas, liquefied
petroleum gas (LPG), coal and
other solid fuel.
N/A
Exempt from paying the levy
Carbon Price
Support Rate
N/A
Advantages
One of the biggest concern when implementing a tax is the impact towards the countrys
economic development. Take the steel industry for instance ,which is a intensive electricity
user, it is shown that there is no significant effect to the industry when examining its
emploment and output level. Therefore, it is believed that the climate change levy does not
impose any obvious adverse effects to UK economic outcome variables.
Disadvantages
The primary goal of imposing the climate change levy is to enhance the efficiency of energy
use in business. According to the study, a levy provides a increase in the price of energy for a
typical business at roughly 15%, it is expected the increase in the relative price of energy
shall lead to an improvment of energy efficiency and reduction in energy use. However, the
impact of imposing the levy towards the reduction of carbon emission is still ambiguous.
c. Landfill Tax
Objective
The implentation of landfill tax in United Kingdom is aimed to ensure that the landfill cost
reflect the environmental impact in order to enhance the awareness of both the comercial and
consumer sector to produce less waste, recover the value from more of the waste that is
produced as well as lessen the waste disposed to the landfill site.
Scope of Charges
Activities Subjected to Landfill Tax:
Unless it is exempt specifically, landfill tax applies on all material of disposal of :

-
as waste
by way of landfill
at a landfill site that covered by a permit under specific environmental legislation
prescribed landfill activities relating to use of material on site
Entities Subjected to Landfill Tax
Taxpayer
Conditions
The Landfill Site Operator
1. Liable to pay tax on disposal if he/she is the

permit holder of the landfill site
The Landfill Site Controller
1. Liable to pay tax on disposal if the permit

holder on the landfill site do not involve into
the operation of the site directly.
2. Liable for the tax liablility jointly or
severally if the permited holder fail to pay
the tax
Tax Rate
The tax is chargeable according to the weight of the disposal by 2 different rate,which are:
Rate ( per tonne)
Conditions
Lower Rate
2.65
Those less polluting wastes listed in the Landfill Tax

(Qualifying Material) Order 2011
Qualifying fines
Standard Rate
84.40
All other taxable waste
Exemption
There are several kinds of waste that can be exempted from the landfill tax :
-
Waste removed from inland waterways and harbours by dredging and disposed of to landfill
Mining and quarrying waste
Pet cemeteries
Filling of quarries
Advantages
The implementation of landfill tax has forced some industries, especially the foundries and
construction company to put more efforts on considering the amount of waste produced on-
site. The landfill tax also prompts approximately 31% of the companies to begin or improve
existed program in waste minimization, re-use and recycling
Disadvantages
The effectiveness of the landfill tax is limited to its alternative available to the waste
producers. The alternatives can be summarized as minimization, reuse, recycling, and some
of the alternative method like incineration. According to the statics, 90% of the domestic
waste and disposal is still disposed to landfill. Because of the lack of alternative of handling
the waste, the effectiveness on changing the waste producers behavior on disposing their
waste by imposing landfill tax is still questionable.
3.
Introducing Electricity tax in Hong Kong
3.1. Major problems with current HK tax system

Overview of Hong Kong Tax System and Tax Revenue
Hong Kong Governments revenue comprises various components. Amongst all, its chief
sourcees of revenues are from Salaries Tax, Property tax and Profits Tax (also known as
schedular tax)
Major Features of HK Tax System:
No sales tax or value added tax.
No tax on capital gains, dividends or interest.
No withholding taxes except for certain payments to non-residents.
Only income and profits sourced in Hong Kong are taxable. Residence status does not
affect taxability.
Corporate profits tax rate is 15% - 16.5% (from 2008/09 onward).
Individual tax rate on total income does not exceed 15%.
Progressive tax rate: Low income earners are even taxed at lower rates under the graduatedrate system or exempt if their total incomes below their total personal allowances.
10
Because of the low tax rates, the Revenue combats tax avoidance vigorously --complicated anti-avoidance legislations are enacted.
Hong Kong SAR Government Revenue 2015-20161
1 HKSAR Census and Statistics Department. (2016) Government Accounts, Finance and
Insurance: Table 193: Government Revenue (General Revenue Account and Funds).
Retrieved from http://www.censtatd.gov.hk/hkstat/sub/sp110.jsp?
tableID=193&ID=0&productType=8)
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Whats the problem with Hong Kong tax system?

Narrow tax base
A Hong Kong tax base study has been carried out previously in early 2000s and finds out that
Hong Kongs tax levels are significantly lower the the averages of the Asia-Pacific region and
is the lowest-tax jurisdiction among all the comparison groups, which are members of
Organisation for Economic Co-operation and Development (OECD). It reveals the following
major findings:
-
Hong Kong tax base has limited taxpayers. For example, in 2001-2002, only 1.2 milion out of
3.2 miliion employees are subject to salaries tax.
12
Its tax base is narroow in composition as it heavily relies on a certain range of taxes. For
example, income taxes contributed more than half of the total government revenue.
Taxed sectors in Hong Kong are small and slow to adjust to growing population
demographics.
Rely on unpredictable sources
Hong Kong heavily relies on Profits Tax and Property-related taxes. From Chart 1, Hong
Kong tax revenue is mainly collected by Profits Tax which is 35.9% among the other tax
types. And, the revenue of Property-related taxes in Hong Kong (17.7%) is triple of the
OECD average (5.5%). Heavy dependence on these highly volatile forms of tax revenue
makes Hong Kongs revenue unstable.
Low tax rate with generous allowances and deductions
Moreover, Hong Kong is well-known of its lower tax rate in Salaries Tax, Corporate Tax and
Profits Tax such as the tax rate of Profits tax is 16.5%. And, there are many generous
allowances and deductions to alleviate taxpayers taxable amount. For instance, according to
60-Days rule of visit and 183 days rule of exemption, the income generated by the
employment outside Hong Kong is either taxed time- proportionately or fully exempted in his
or her salaries tax. This is relatively a generous exemption for the expats. The taxable amount
of the top 10 miilion salaries taxpayers were 60% of their salaries and only 5 million
taxpayers contributed 95% of the total. The low tax rate with generous allowances and
deductions tax not only reduces the taxble amount of the tax payers, but also reduces the
revenue of the government.
Low tax revenue
Summing up the aforementioned tax problems in Hong Kong, the total tax revenue turns out
to be relatively low (as shown in the Revenue Table above) when compared with others
countries. Revenue from tax for Hong Kong only takes up not more than 80% of the total
governemtn revenue. With such a low tax income, Hong Kong may not be able to secure a
budget surplus and may not survive in time of any cyclical fluctuations and financial crisis,
such as the period of 2003-2008.
In view of this, Hong Kong should increase its tax revenue by changing its tax system to deal
with the external and internal factors. Therefore, we would propose a new tax type and
evaluate its feasibility, and further discuss its effectiveness in the following section.
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3.2. Why not other methods?

- Increasing tax rates of current taxes is not a good option to increase the tax revenue
Compromising Hong Kong residents living standard
Increasing tax rates of Salaries tax or other direct taxes would further increase the financial
burden on existing taxpayers but would not significantly broaden the tax base. Take the
housing problem in Hong Kong as a case inpoint, increasing property tax or stamp duties
only makes it for hard for Hong Kong people to own a flat, making them slaves to apartments
but not tackling the hosuing problem. Hence, this is not a good option to increase current tax
rate as it cant directly address the root problems of HK narrow tax base.
Hampering Hong Kongs competitiveness and international position
Increasing tax rates makes Hong Kong lose its edge of simple and competitive tax system
with low tax rate which is favorable to foreign investors. Sky-high tax rate would impose a
detrimental impact on Hong Kongs status as an international financial and commercial centre
as investors no long find it attractive to invest in Hong Kong and would choose to relocate
their corporations or base for investments. Besides, higher tax rate would also make a heavy
blow on local new business start-up, changing Hong Kongs economic structure.
- Why not VAT?
Worsening wealth gap in Hong Kong
Since most of the goods and services are taxed under the Value-added tax for the same rate, it
seems to be a fair tax in some sense as all taxpayers require to pay the same amount of tax. In
fact, the taxpayers with lower income need to pay a higher percentage of their income as tax
than those with higher income. The disposable income for the low income earner will be
adversely affected while there is no material impact on the high income earner. The income
gap in Hong Kong will then be widened.
Damaging the growth of the economic development

Implementing a Value-added tax (VAT) gives rise to the cost of operating the business in
Hong Kong for the retail industry. In 2016, Nearly a quarter of the total value of GDP is
contributed by Import, export and retail industry. Imposing a VAT will raise the price of Hong
Kong product in general and reduce its competitiveness. The implementation of VAT may
increase the cost of operating in Hong Kong, which will hamper the growth of these industry
as well as the economic development as a whole in Hong Kong.
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- Why not Landfill Tax?

Reducing Hong Kongs government revenue
Landfill Tax is levied on the landfill site operator, but Hong Kongs landfill sites are operated
by the Environmental Protection Department (EPD). Launching a landfill tax will only tax on
EPD, a governmental department, while spending resources on taxing EPD. It will not
increase Hong Kongs government revenue, and may further reduce government revenue.
Expensive Administrative cost
Since it is difficult to measure the amount of waste disposed of each releaser, the
administrative cost of this tax may be quite expensive which will then reduce its efficiency.
Also, implementing a new tax will need time to modify and may revise in every year of
assessment. The authorities will also be required to adapt the pace of the changes and the
changes in processing with the landfill tax. Therefore, training for those authorities will be
needed. The cost of conducting this tax will then rise.
- If a landfill tax is levied on households, why is it unsuitable in Hong Kong?
Focusing on fewer types of taxpayers
Since some industries will leave a lot of garbage during the production process, they would
be taxed proportionately with the weight of the disposed material. This major tax revenue
would discourage people to develop in those industries. It will then hinder Hong Kongs
industry diversity as well as Hong Kongs competitiveness.
Triggering an ethical problem
Of fundamental concern to the tax payers is their liability in paying the landfill tax, not
protecting the Earth. Although implementation of this tax will enlarge tax revenue, it may
trigger an ethical problem. Firms and households may think that they have fulfilled the social
responsibilities in terms of monetary. Protecting the environment will not become their
duties.
Possibility of tax evasion
Higher taxes may encourage firms and households to hide the waste or divert to other sites
which will trigger fly-tipping. According to the UK landfill tax, switching waste to
unauthorized place is one of the undoubtedly consequences. Also, it will put more burden on
the authorities in carrying out the tax.
15
3.3. Why Electricity Tax?

3.3.1. Reason
Evaluating Electricity Tax with Good-Tax Criteria
Criteria
Evaluation
Fairness
The electricity tax will be levied on User-pay principle. The more

eletricity one consumes, the more tax one has to pay. This is absolutely
fair as one has to pay the price for pollution or over-consumption made.
Besides, electricity tax, as an indirect tax, can reach every individual in
Hong Kong. It is very unlike direct tax, like salaries tax, which the
lower-income group are always exempted from. It makes sure everyone
is paying and contributing, regardless of the amount.
Convenience
Indirect tax, such as sales tax is always convenient in terms of collection

and amount. The small portion of tax has already been charged in the
bill. Consumers pay the tax when making purchases. Electricity tax is
just the same case as other indirect taxes. The indirect tax is just pricecoated, meaning it will be included in the electricity bill. Introduction
of electricity tax does not require extra effort to pay or to collect the tax.
This is beneficial and convenient to both taxpayers and the government.
Stability
Electricity tax is imposed on a daily necessity electricity, which

everyone in Hong Kong must consume daily. It is a stable source of tax
revenue. When compared with taxes, like Good and Sales Tax on
luxuries, electricity tax is more reliable and undoubtedly a good source
of finance to secure the government tax revenue as the demand for
electricity is quite inelastic. Even if theres a tax imposed on electricity,
people wont have significant changes in their daily consumption
pattern as they cant avoid consuming electricity in daily life.
Sustainability
Concerns are often raised regarding the sustainability of the tax base of
electricity tax, as its aim is to reduce electricity consumption through
increasing the cost of using it. Hence, a higher levy will to lower
consumption and the tax will gradually be subject to diminishing
marginal returns.
Efficiency
Unlike salaries tax (direct tax), electricity tax is imposed and calculated
in accordance to the electricity consumption in the territory. Theres no
such kind of exemptions, like the 60-days rule of salaries tax. Hence,
theres no way to evade tax.
Effectiveness :
Broadness of
basing
Tax base is very broad when it comes to electricity tax as taxpayers

include 7 million of domestic household and business entities or
corporations which locate their offices in the territory. Aside from the
number of taxpayer, electricity tax takes the amount of electricity
consumption into account, implying that theres a new kind of taxable
commodity for the government.
16
Effectiveness :
Sufficiency of
revenue yield
Hong Kong is a developed city well known for its high electricity
consumption. According to the Hong Kong Energy Statistics for 2015,
total local consumption of electricity (including commercial, domestic
and industrial usage) is around 15x1016 joules. Assuming 0.00001% tax
is charged based on every single unit (joule) of electricity, the estimated
annual revenue from electricity tax will be HK$15 million dollars,
which increase Hong Kong total revenue by approximately 33%. As a
result, sufficient revenue yield will be guaranteed.
Effectiveness :
Solving
environmental
problem in HK
Imposition of electricity tax increase peoples cost of consuming

electricity. People have to pay an extra price for every joule of
electricity. Despite the small percentage of tax charged, its still simply a
law-of-demand problem, people will reduce consuming that goods along
with its surging price. This can effectively stop people from consuming
electricity unwisely and ease the environmental problems.
Simplicity
Unlike the progressive tax rate, electricity tax does not require difficult
and complicated calculation of tax payable as it adopts the proportional
tax rate. The amount of tax to be paid is directly, positively and
proportionally linked to the amount of ones electricity consumption.
The calculation of such kind of tax will only generate low cost.
International
competitivenes
s
It has been an international trend towards a lower electricity

consumption as a means to low carbon economy. China, Hong Kong
and many other countries have also set a carbon intensity reduction
target. Launching electricity tax is one of the ways to achieve the target.
Lowering electricity consumption has been a global trend. Its especially
common in the Europe. For instance, Finland, Denmark and Norway
have been launching electricity tax for years. In terms of public
awareness towards environmental issues, this tax can maintain its
international competitiveness in the long run.
Yet, electricity tax may increase a firms operating cost, making less
investors to start their business here, which in fact will eventually
undermine Hong Kongs international competitiveness in business/
financial sectors.
3.3.2. Content of Electricity Tax

Objective
The objective is to broaden the current tax base in Hong Kong through adding in electricity
tax as a green tax in order to reform the developing green tax system in Hong Kong. It is
also used to increase the government tax revenue while tackling the over-consumption of
electricity in Hong Kong and environmental problem caused by carbon emission in the
territory.
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Scope of Charge & Tax Rate

Taxable items Scope
Rate
Electricity
- Class 1
HK$0.07/MJ
- Class 2
End-consumers of electricity (no matter what sources

of the electricity) in manufacturing and commercial
sectors.
End-consumers of electricity (no matter what sources
of the electricity) for domestic usage.
HK$0.1/MJ
*Remarks:
1 Megajoule (MJ) = 1,000,000 Joules = 0.278 Kilowatt-Hour (KwH)
The charges on every MJ of electricity consumed in the manufacturing and commercial
sectors are lower than that of domestic usage in order to provide incentives for business or
manufacturing industry to grow continuously, maintaining Hong Kongs economic growth
while encouraging low electricity-consumption.
Exemption
1. Charitable and educational organizations

Charitable organizations that are non-profit-making and educational organizations, like
private and government-funded schools are exempted from the electricity due to their nonprofit-making purpose and the current education system in Hong Kong. The exemption acts
as an incentive for these organizations to further carry on their development.
2. Government Departments
Government Departments are exempted from electricity tax to avoid duplication of
calculation and collection of tax as the tax expenses of the government are at the same time
its tax revenue. In addition, nearly most government department provide public services to
Hong Kong residents at a price lower than the market rate.
3. Public hospitals
Public hospital which provides emergency or other health-care services to Hong Kong
residents should be exempted from tax due to their charitable nature. They do not
necessarily have to provide any free services to the public as long as it maintained an
emergency room open to the public regardless of their ability to pay. Moreover, the
charitable nature of hospitals stems from the inherent charitable purpose to enhance
promotion of health to a community-level.
4. Research and Development, R&D-related business
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Businesses focusing on Research and Development should be exempted from the electricity
tax in order to encourage their advanced development, fostering the Hong Kong technology
or creativity industries growth. The tax exemption acts an incentive for these industries.
Collection method
Electricity tax is shown as a separated item on the monthly electricity bill and will be
collected together with the electricity tariff to the electric company. The two electric
companies will further transfer the tax part of revenue to the Hong Kong government.
3.3.3. Implementation timeline
Setting up an advisory
committee & Draft
Two-round Consultation
Consolidation & analysis of

data and feedback
Revision of drafted proposal
Announcement
Implementation
(First-phase)
Review and collection of

feedback
Preparation for second phase
& improvement
Implementation
(Second-phase)
To introduce a new tax into Hong Kong, the first step is to set up an advisory
committee consisting of tax and legal professionals or experts to examine its
feasibility and effectiveness etc. and to draft a proposal of introduction of tax for
consultation.
To further set the details of the electricity and to make Hong Kong residents accept
such a implementation of a new tax, two-round consultation will be launched to see
peoples reaction and their acceptability towards electricity tax.
Upon the completion of consultations and collection of data. We would review all
the feedback and process the data to see of theres any rooms for improvements on
the tax proposal.
We would revise the tax proposal draft based on the data and feedback received
from the consultation and revise the tax proposal draft. For instance, adjusting the
tax rate to an acceptable and affordable level for the target taxpayers.
After the finalization of the tax proposal, we would cooperate with other
government departments (e.g. legislation of the tax) to implement and announced
the tax (e.g. stating its effective date.)
The target groups for the first launch of electricity tax will be commercial and
manufacturing sectors in Hong Kong. The tax rate will be 0.07% on every million
joule of electricity consumed. They would be charged with a lower tax rate than the
domestic households due to incentives for the development of businesses in Hong
Kong.
Collection of comments and feedback from those who are affected in the first launch
of electricity tax should be carried out to see if theres anything to improve in terms
of implementation, effectiveness, efficiency and coordination among departments.
To review all the feedbacks after the first launch and to discover potential challenges
on the second launch. Make appropriate improvements for better coordination
between different stakeholders, like different government departments for smoother
implementation.
The second launch of electricity tax will be imposed on all 7-million domestic
household in Hong Kong. The tax rate will be 0.1% on every million joule of
electricity consumed. Full implementation of electricity tax will be completed in
Hong Kong.
3.3.4. Impacts
19
Broadening Tax Base

As aforementioned, the electricity tax will be levied on User-pays Principle, the more
consumes, the more tax one need to pay. Since the electricity tax is a new type tax to Hong
Kong, the tax base will be broadened. Regarding the extend of the increase in tax base, it
depends on the coverage of the tax. In the past, the government havent charge much tax fee
on both commercial and household. Since we are proposed to introduce the electricity tax to
the commercial and household sectors, it is expected the tax base will be broadened.
Enhancing the stability of the source of income
According to the table in Hong Kong Energy End-use Data 2015, the total electricity
consumption has increased from 2003 to 2013 in residential sector by 26 % and commercial
sector by 19%. The steady electricity consumption reveals the implementation of this source
of income will not violate, and will help enhancing the stability of the tax revenue.
Raising peoples awareness on protecting environment
From the chart below, the rate of electricity consumption per Hong Kong residents has
increased per annum from 1980 to 2011. The usage of electricity has sharply increased from
approximately 1500 kilowatt to 6000 kilowatts within four decades. Comparing with China,
the total usage of electricity per person were much higher than it. It indicates the seriousness
of the electricity usage in Hong Kong.
To raise the publics attention, it is crucial for the government to implement green tax policy
at once. Electricity tax is a type of green tax, which objective is to change the publics
attitude towards the electric consumption to enhance environmental protection in long term.
Owing to the policy, people are more likely to reduce their electricity usage when not
necessary such as turn off the light when they are not using. Overuse of electricity in Hong
Kong will be alleviated.
It is beneficial towards the development of environment protection business as well as
attracting talent to work in Hong Kong.
Reducing the generous allowances and deductions
On the other side, the introduction of the tax may increase the cost of operating business as
electricity is necessary in the operation and thus discourages people work in those industries.
It may affect negatively to Hong Kongs international competiveness.
In view of that, adopting an electricity tax with reasonable allowances and deductions is
vitally important. As the above mentioned, we have listed out the stakeholders who can
20
exempt from the tax such as charitable and educational organizations, government
departments, public hospitals and R&D related business. To maintain industrial diversity, the
exemption on these industries is reasonable. Since electricity is one of the necessities in the
operation, the production cost will then increase and lead to going concern. Therefore, an
adequate number of allowances will help prevent going concern and not hamper the
development of these industries.
3.3.5. Expected result
Short term
Year
Local consumption by domestic sector (Terajoule)
Growth rate
2010
39344
2011
39872
1.34%
2012
41189
3.30%
2013
39941
-3.03%
2014
43415
8.70%
2015
42368
-2.41%
Average growth rate in past five years = 1.58%

Year
Local consumption by commercial & manufacturing Growth rate

sector (Terajoule)
2010
111360
2011
111561
0.18%
2012
113722
1.94%
2013
113260
-0.41%
2014
114552
1.14%
2015
115715
1.02%
Average growth rate in past five years = 0.77%

The above two tables summarize the growth rate of local electricity consumption by different
sectors in Hong Kong. Assume that their average growth rates for the next 5 years will be the
same as shown above, the expected tax revenue from electricity tax after 5-year
21
implementation time will be approximately HK$13,000 million dollars. It brings about a 4%growth in government tax revenue 5 years after the implementation of electricity tax.
Long term
In the long run, electricity tax cause a change in public electricity consumption pattern and
will lower carbon intensity in Hong Kong significantly. Electricity consumption growth rate
may slow down or even become negative. The electricity tax revenue for the government will
still grow at a lower pace. It will then operate as a diminishing returns basis.
3.3.6. Challenges & obstacles during implementation
Fairness
Electricity Tax applied "user pays" principle: the more you consume, the more you pay. It
may brings out a problem that the lower income group need to pay more than the higher
income group proportionally to their income. As the gap between the poor and the richer in
Hong Kong remains wide, the people who are living under the poverty line may fight against
the implementation of electricity tax. It may raise the level of resistance when the
government implement the tax.
Allocation of tax revenue
Basically, the main objective of implementing electricity tax is to broaden the tax base and
provide stable revenue. However, from the experience of other country, the revenue from
green tax may goes to the environmental protection projects. For instance, Some Brazilian
cities established ecological tax and invest 5% of the 25% of tax revenue passed to cities by
the state in environmental protection projects. As a result, electricity tax may not be the best
solution to alleviate the problem of narrow tax base and provision of stable tax revenue.
Transparency of information
In order to maintain the transparency and the fairness in the amount of electricity tax
payment, the disclosure of customer's usage data is needed. However, it comes to a debate
between the fairness of tax charges and the confidentiality of customer data. It will be a
challenge that obstruct electricity tax implement in a effective and fair way.
3. Conclusion
The fundamental problem for the Hong Kongs tax system is its narrow tax base, which is
one of the hurdle of jeopardizing Hong Kong future development and may even lead Hong
22
Kong to recession during the economic downturn since the government may not able to get
enough tax revenue. The electricity tax can widen the tax base significantly as all the
domestic electricity users are eligible to pay the electricity tax. In addition, it could provide a
relatively sustainable tax revenue to the government as electricity is one of the necessities for
all sectors. To conclude, we recommend the Inland Revenue Department to consider of
implementing the electricity tax to the industrial, commercial and household sector in order to
solve the underlying problem in the tax system.
References:
1. L. (2010). ENHANCING GREEN TAX MEASURES IN HONG KONG: A MEANS OF
ADDRESSING THE CITYS ENVIRONMENTAL PROBLEMS. Retrieved from
http://commons.ln.edu.hk/cgi/viewcontent.cgi?article=1003&context=acct_etd
2. HKSAR Inland Revenue Department. (n.d.). IS TAX REFORM REQUIRED IN HONG
KONG? Reforming Hong Kongs Tax System. Retrieved from
http://www.taxreform.gov.hk/eng/pdf/Chapter_01.pdf
3. HKSAR Inland Revenue Department. (n.d.). BROADENING THE TAX BASE : WHAT
ARE OUR OPTIONS? Reforming Hong Kongs Tax System. Retrieved from
http://www.taxreform.gov.hk/eng/pdf/Chapter_02.pdf
4. HKSAR Inland Revenue Department. (2001, August). A Broader-Based Tax System for
Hong Kong? Retrieved from http://www.info.gov.hk/archive/consult/2001/condoc-e.pdf
23
5. HKSAR Electrical and Mechanical Services Department. (2015, September). Hong Kong
Energy End-use Data 2015 Hong Kong. Retrieved from
http://www.emsd.gov.hk/filemanager/en/content_762/HKEEUD2015.pdf
6.
(2015, July 8). Retrieved from https://www.gov.uk/government/publications/vehicleexcise-duty/vehicle-excise-duty
7. (2016, October). Retrieved from https://www.gov.uk/tax-on-shopping/vat-duties
8. A., S., A., S., P., A., & G. (2013, November). Energy Use Policies and Carbon Pricing in
the UK. Retrieved from https://www.ifs.org.uk/comms/r84.pdf.
9. HKSAR Electrical and Mechanical Services Department. (2015, September). Hong Kong
Energy End-use Data 2015 Hong Kong. Retrieved from
http://www.emsd.gov.hk/filemanager/en/content_762/HKEEUD2015.pdf
10. HKSAR Census and Statistics Department. (2016) Government Accounts, Finance and
Insurance: Table 193: Government Revenue (General Revenue Account and Funds).
Retrieved from http://www.censtatd.gov.hk/hkstat/sub/sp110.jsp?
tableID=193&ID=0&productType=8)
11. HKSAR Census and Statistics Department. (2015) Hong Kong Energy Statistics - 2015
Aunnual Report. Retrieved from
http://www.statistics.gov.hk/pub/B11000022015AN15B0100.pdf
24

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Taxation and Tax Planning

Group Project - Written Report

Mok Tsz Kwan