HONG KONG 2005

The Government controls its finances through a series of fund accounts. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. There are eight other funds established by resolutions of the Legislative Council for specific purposes such as to finance capital works expenditure or government loans and investments. They are the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology Fund, Land Fund, Loan Fund and Lotteries Fund.

The Capital Works Reserve Fund finances the public works programme, land acquisitions, capital subventions, major systems and equipment items, computerisation and the payment of redemption money in respect of land exchange entitlements. Its income is derived mainly from land premiums and appropriation from the General Revenue Account.

The Capital Investment Fund finances the Government's capital investments, such as equity injections to the Airport Authority, the Kowloon-Canton Railway Corporation and the MTR Corporation Limited, and capital investments in the Housing Authority and the Urban Renewal Authority. Its income is derived mainly from appropriation from the General Revenue Account and dividends.

The Civil Service Pension Reserve Fund acts as a reserve to meet payment of civil service pensions in the unlikely event that the Government cannot meet such liabilities from the General Revenue Account. Its income is derived from appropriation from the General Revenue Account and investment income.

The Disaster Relief Fund finances grants for humanitarian aid to help victims of disasters that occur outside Hong Kong. Its income is derived mainly from appropriation from the General Revenue Account.

The Innovation and Technology Fund finances projects that contribute to innovation and the upgrading of technology in the manufacturing and service industries, and those that contribute to the upgrading and development of the manufacturing and service industries in general. Its income is derived mainly from investment income.

The Land Fund was established on July 1, 1997 to enable the investments held by the former Trustees of the HKSAR Government Land Fund to be formally brought into the Government's account. Its income is derived from investment income.

The Loan Fund finances loan schemes such as housing loans and student loans. Its income is derived mainly from loan repayments and interest.

The Lotteries Fund finances welfare services through grants and loans. Its income is derived mainly from sharing the proceeds of the popular Mark Six Lottery.

The principles underlying the Government's management of public finance are set out in the Basic Law: to keep expenditure within the limits of revenues in drawing up the budget, to strive to achieve a fiscal balance, to avoid deficits and to keep the budget commensurate with the growth rate of its gross domestic product. The Budget presented by the Financial Secretary to the legislature each year is developed against the background of a medium-range forecast to ensure that full regard is given to the longer-term trends in the economy.

Public expenditure is taken to include government expenditure from the General Revenue Account and the other funds except advances and equity investments from the Capital Investment Fund, plus expenditure by the Housing Authority and government trading funds. Government grants and subventions to institutions in the private or quasi-private sectors are included, but not spending by organisations in which the Government has only an equity stake (such as the MTR Corporation Limited, the Kowloon-Canton Railway Corporation and the Airport Authority). Similarly, advances and equity investment by the Capital Investment Fund are excluded as they do not reflect the actual consumption of resources by the Government.

The Housing Authority, operating through the Housing Department, is financially autonomous. The Government provides the Housing Authority with capital and land on concessionary terms to finance the provision of public housing rental flats to those in need.

A trading fund is an accounting entity enabling a department to provide services on a commercial or quasi-commercial basis. Unlike a vote-funded department, a department operating on a trading fund is allowed to retain revenue generated to meet its expenditure and finance future expansion.

Taking into account the proceeds from the issuance of government bonds and notes, the Government's consolidated account recorded a surplus of $21.4 billion in 2004-05. The accumulated balance at the end of 2004-05 stood at $296 billion. This forms the Government's fiscal reserves and is available to meet any calls on its contingent liabilities. It also enables Government to cope with any short-term fluctuations in expenditure relative to revenue.

Total government revenue including the proceeds of government bonds and notes in 2004-05 amounted to $263.6 billion and spending $242.2 billion. For details of revenue by source and of expenditure by component for 2004-05 and 2005-06 (Revised Estimate) see Appendix 6, Table 6.

Public expenditure in 2004-05 totalled $257.1 billion. There was a drop of 5.1 per cent in nominal terms or 3.5 per cent in real terms over the previous year. Some $51.7 billion, or 20.1 per cent of the public expenditure in 2004-05, was of a non-recurrent nature. Table 7 gives an analysis of expenditure by policy area group and Table 8, the growth rate of public expenditure as compared with the rate of economic growth.

Hong Kong's tax system is simple and relatively inexpensive to administer. Tax rates are low, and the Government accords a high priority to curbing tax evasion and minimising opportunities for tax avoidance. The major sources of revenue are profits tax (25 per cent) and salaries tax (14 per cent). Other significant sources include revenue from properties and investments (6 per cent), utilities, fees and charges for services provided by the Government (6 per cent), land premiums (13 per cent), betting duty (5 per cent), rates (5 per cent), stamp duties (7 per cent) and duties on dutiable commodities (3 per cent). For major sources of revenue, see Appendix 6, Chart 2.

The Inland Revenue Department collects about 53 per cent of total revenue, including profits tax, salaries tax, property tax, stamp duty, betting duty, estate duty and hotel accommodation tax. Profits, salaries and property taxes (including tax under personal assessment), which together accounted for about 41 per cent of total revenue in 2004-05, are levied under the Inland Revenue Ordinance. Persons liable to these taxes may be assessed on three separate and distinct sources of income: business profits, salaries and income from property.

Profits tax is charged only on net profits arising in or derived from Hong Kong, from a trade, profession or business carried on in Hong Kong. In 2004-05, profits of unincorporated businesses were taxed at 16 per cent and profits of corporations at 17.5 per cent.

Profits tax is paid initially on the basis of profits made in the year preceding the year of assessment and is subsequently adjusted according to profits actually made in the assessment year. Generally, all expenses incurred in the production of assessable profits are deductible. There is no withholding tax on dividends paid by corporations. Interest income, other than that received by financial institutions, and dividends received from corporations are exempt from profits tax. In 2004-05, the Government received about $58.6 billion in profits tax, or about 25 per cent of total revenue.

Salaries tax is charged on emoluments arising in, or derived from, Hong Kong. The basis of assessment and method of payment (including provisional payments) are similar to the system for profits tax. Tax payable in 2004-05 was calculated on a sliding scale that progressed from 2 per cent, 8 per cent and 14 per cent on the first, second and third segments of net income (that is, income less deduction and allowances) of $30,000 each, respectively, and then to 20 per cent on the remaining net income. No one, however, needed to pay more than the standard rate of 16 per cent of his or her total income. The earnings of husbands and wives are reported and assessed separately. However, where either spouse has allowances that exceed his or her income, or when separate assessments would result in an increase in salaries tax payable by the couple, they may elect to be assessed jointly. Salaries tax contributed some $34 billion, or about 14 per cent of total revenue, in 2004-05. Owing to generous personal allowances under the Hong Kong tax law, only 36 per cent of the workforce had to pay salaries tax for the year of assessment 2003-04.

Owners of land or buildings in Hong Kong were charged property tax in 2004-05 at the standard rate of 16 per cent of the actual rent received, less an allowance of 20 per cent for repairs and maintenance. There is a system of provisional payment of tax similar to that for profits tax and salaries tax. Property owned by a corporation carrying on a business in Hong Kong is exempt from property tax (but profits derived from ownership are chargeable to profits tax). Receipts from property tax accounted for about 0.5 per cent of total revenue, or about $1.1 billion in 2004-05.

The Stamp Duty Ordinance imposes fixed and ad valorem duties on different classes of documents relating to assignments of immovable property, leases and share transfers. The revenue from stamp duties accounted for about 7 per cent of total revenue, or about $15.9 billion, in 2004-05.

A duty is imposed on bets on horse racing administered by the Hong Kong Jockey Club, on proceeds of Mark Six lotteries and on gross profits of the Hong Kong Jockey Club's football betting operation — the only legal forms of betting in Hong Kong. The rate of duty on betting proceeds from horse racing was 12 per cent on standard bets and 20 per cent on exotic bets in 2004-05. The duty on football betting, which was introduced on August 1, 2003, is charged at a rate of 50 per cent of gross profits. The yield from betting duty in 2004-05 totalled some $12.1 billion, and accounted for about 5 per cent of total revenue.

In 2004-05, estate duty was imposed on estates valued at over $7.5 million, at levels ranging from 5 per cent to a maximum of 15 per cent. With the abolition of estate duty, the estates of people who died on or after 15 July 2005 are no longer subject to estate duty. A hotel accommodation tax of 3 per cent was imposed on expenditure on accommodation by guests in hotels and guesthouses.

Under the Dutiable Commodities Ordinance, duties are levied on only four types of commodities — hydrocarbon oil, liquor, methyl alcohol and tobacco, both locally manufactured and imported. The Customs and Excise Department is responsible for collecting these duties. In 2004-05, the department collected duties worth $6.6 billion or about 3 per cent of total revenue.

The Rating and Valuation Department is responsible for the billing and collection of rates, which are levied on landed properties at a specified percentage of their rateable value. In 2005-06, the rates percentage charge is 5 per cent.

The rateable value of a property is an estimate of its annual rent on the open market as at a designated date. In order to better reflect prevailing market rents, revaluation of rateable values is conducted on an annual basis. The current Valuation List took effect on April 1, 2005, with rateable values reflecting rental values on October 1, 2004.

The Valuation List as at March 31, 2005 contained about 2.2 million assessments. In 2004-05, the revenue from rates was $12.6 billion, accounting for about 5 per cent of total revenue.

The Rating and Valuation Department is also responsible for the billing and collection of government rent, which is payable from July 1, 1997, for land leases granted on or after May 27, 1985, and on the extension of non-renewable land leases. The latter group comprises all land leases in the New Territories and New Kowloon, north of Boundary Street, which were renewed on June 28, 1997. Government rent is levied at 3 per cent of the rateable value of the lot and is adjusted in step with any subsequent changes in the rateable value. There were about 1.64 million assessments in the Government Rent Roll as at March 31, 2005. The total government rent collected in 2004-05 was $3.9 billion.

The Government derives significant amounts of revenue from other sources. Fees and charges for services provided by government departments generated about $10.8 billion, or 4 per cent of total revenue, in 2004-05. It is government policy that fees, in general, should be set at levels sufficient to recover the full cost of providing the services. Certain essential services are, however, subsidised by the Government or provided free of charge. Government-operated public utilities generated about $3.4 billion, which accounted for about 1 per cent of total revenue; the most important of these, in revenue terms, is water charges.

The Government also collected $14.7 billion from investments and interest income on the fiscal reserves in 2004-05, amounting to about 6.2 per cent of the total revenue.

Lastly, some $32 billion, or about 13.4 per cent of the total revenue in 2004-05, was generated from land transactions. All revenue from land transactions is credited to the Capital Works Reserve Fund to help finance the Public Works Programme.

The Government recognises that the tax base of Hong Kong is very narrow and there is a need to broaden it to enhance the health of our public finances.

Out of a working population of some 3.23 million for the year of assessment 2003-04, only 1.16 million had to pay salaries tax. Of these, the top 100 000 taxpayers contributed some 61 per cent of the salaries tax. As for profits tax, the top 600 corporations, which represent only about 1 per cent of the total number of profit-making corporations, contributed 60 per cent. Compared with other overseas developed economies, Hong Kong is more reliant on profits tax and real property-related taxes or non-tax revenue. Since revenue from these sources is sensitive to economic fluctuations, the Government has decided that it should broaden the tax base to ensure a steady source of income to meet public expenditure needs.

A Goods and Services Tax (GST) is considered a viable option to broaden the tax base. An internal study committee, set up by the Government, has carried out a study on how GST would be implemented in Hong Kong. Overseas experience has found that the effects of GST on the economy are generally limited and short-term. Over the long term, GST can enhance the competitiveness of the economy and stabilise government finances. The Government aims to engage the whole community in rational and constructive discussion before a decision is taken on whether we should have GST.

Hong Kong, China is a signatory to the World Trade Organisation Agreement on Government Procurement (WTO GPA). Government procurement is undertaken in accordance with the principles of openness, transparency, fairness, public accountability, value for money and non-discrimination. Public tender procedures are widely used for general and common items. Restricted or single tender procedures are used where open competitive tendering would not be an effective means, such as in cases involving compatibility with existing equipment, or patented/proprietary items, or unforeseen urgency. For complex and critical purchases, suppliers may be required to undergo a prequalification exercise before tendering to ensure that they are capable in terms of financial and technical capability and reliability in performance.

Purchases of goods and related services with values above predetermined thresholds are undertaken centrally by the Government Logistics Department (GLD). These goods and related services are normally obtained by competitive tendering, without preference to any particular source of supply, to ensure that users' needs are met at the best possible price, having regard to life-time cost and reliability of supply. GLD helps users to get the best-value purchases by formulating a specific strategy for each type of purchase based on market conditions, focusing on value-for-money and cost-effectiveness.

To facilitate sourcing and market research, GLD also maintains and regularly updates the Supplier Lists which comprise local and overseas suppliers for different categories of commodities and services.

Notices for public and prequalification tenders are published in the Government of the HKSAR Gazette and local newspapers. GLD informs firms on the Supplier Lists when it is arranging purchases and, in the case of procurements covered by WTO GPA, it also informs consulates and overseas trade commissions. To allow easy access by suppliers outside Hong Kong, GLD also puts its tender notices and related information on the Internet. The Electronic Tendering System, which was introduced in April 2000 and enables subscribers to download tender documents and to submit tender offers by electronic means, has been running smoothly with the number of subscribers rising steadily.

In 2005, GLD awarded contracts with a total value of $3.62 billion, and bought items from 32 different territories. Major purchases included pharmaceutical products, computer equipment and software, transport services, specialised vehicles and spares, food and beverages and telecommunication equipment and spares.

Supplies of essential and emergency items are purchased in bulk and held in the Government Logistics Centre of GLD in Chai Wan. User departments can place orders for these items when required. To avoid stocking and double handling, other commonly used items have been gradually transferred from being handled centrally by GLD to being handled by term contractors who deliver directly to government departments on an as-and-when-required basis. The changeover was completed by the end of 2005. As a result of this change, the total value of stock items acquired and issued through GLD to customers was reduced from $65 million and $82 million in 2004 to $17 million and $12 million in 2005 respectively.