SCMP Saturday, November 18, 2000
Tackling expat tax dodgers
It is colloquially known as "doing a Chek Lap Kok runner". The practice among expatriates of leaving Hong Kong to avoid paying income tax bills - some departing so hurriedly that they call bosses from Chek Lap Kok airport to resign - has come under the scrutiny of officials and prompted proposals for a crackdown which is being opposed by foreign employers' groups as discriminatory.
So-called "high-risk" workers - a term used to refer to expatriate employees - may be forced to buy tax certificates when they receive their pay cheques and foreign workers may even have taxes docked by employers from monthly wages, rather than simply receive an annual lump sum demand, as is the case at present.
The system came under the microscope of the Audit Commission which released a scathing report on Wednesday, blasting employers who failed promptly to tell tax collectors when their employees leave. It criticised the Inland Revenue Department for allegedly not taking the problem seriously enough and estimated tax authorities had to write off $213 million in lost revenue over the past three years from expatriates fleeing Hong Kong without settling their bills.
While the issue has captured headlines over the past two days, a detailed examination of government documents shows it is a relatively small problem.
Just 739 employees left without paying taxes in the last financial year, depriving the Inland Revenue Department of $58.5 million. Those dodging taxes by leaving Hong Kong amount to just 0.2 per cent of the expatriate population (excluding Filipinos, most of whom are domestic workers whose low wages are not taxed). The amount written off was just 0.2 per cent of the $24.8 billion collected in salaries tax last year.
Nevertheless, the Audit Commission's report on the issue stated that it considers the tax lost from employees recruited from outside Hong Kong to be "substantial".
An Australian working at a stock brokerage yesterday recalled his departure in the mid-1990s. "I decided on a whim - and I later regretted it - that I would rather be in Sydney," said the businessman, who spoke on the condition of anonymity.
"So on a Friday afternoon I rang the office from the old Kai Tak airport and told them I would not be coming back."
The executive never heard anything from the Inland Revenue Department.
"I never felt good about this and it is part of the reason I came back," he said, explaining that when he returned five years later to take up a new job, one of the first things he did was go to Revenue Tower in Wan Chai to fix up his tax debt of about $100,000.
An Irish engineer told how he just packed his bags in 1997 and left after four years of working in Hong Kong, without once having been asked to pay income tax.
He assumed his former employer never told the Inland Revenue Department of his existence and said it never occurred to him to tell the tax man. "I just didn't bother about paying any tax." When his time to depart the SAR came he did not tell his employer, with whom he had had a dispute.
The reason for the unannounced departures is to avoid receiving a final demand for tax, issued once employers notify the Inland Revenue Department of the termination of an employee.
The Inland Revenue Department has identified 739 individuals who left Hong Kong in the last financial year without paying $58.5 million in salaries tax, which was 37 per cent of the salaries tax written off in 1999-2000. The Audit Commission estimates the write-off was higher, valuing it at $77 million.
Among 20 cases it examined from last financial year - in which the amount of unpaid tax ranged from $37,080 to $1.2 million and averaged $264,766 - none of the employers had properly notified Inland Revenue. It said "many employers" failed to lodge notices informing the department that a worker had ceased employment or was about to leave Hong Kong.
Worse still, according to the auditors, the department failed to take action against the employers and took a long time in seeking an order from a judge preventing the taxpayers from departing - more than two years on average and five years in the longest case.
The department was so slow to act that three individuals who failed to pay tax had returned to Hong Kong and left again without any problems.
Employers are required by law to give tax collectors at least one month's notice when any worker - except those who frequently travel overseas on work - is expected to leave Hong Kong for at least a month. Employers are prohibited from paying any money to staff in the last month of their employment, unless they get permission from the Inland Revenue Commissioner to do so.
In its recommendations, the Audit Commission said the Inland Revenue Department should consider legislation forcing "employees in high-risk groups" - such as those recruited from outside Hong Kong - to purchase tax reserve certificates, which earn interest, to ensure they meet their obligations.
It also urged the department to review its procedures to substantially shorten the time for securing orders from District Court judges to allow the Immigration Department to prevent those who had not paid tax from leaving.
Democrat legislator Sin Chung-kai said a pay-as-you-earn system - which already exists in Britain and Australia, where it is known as PAYE - should be considered for introduction in Hong Kong. This would involve employers withdrawing a sum from expatriate salaries every month, representing their tax contribution.
Employees would submit tax returns at the end of the financial year showing how much they earned and how much they had paid plus deductions they wished to request, said Mr Sin, the Democrats' spokesman on economic affairs. He denied the scheme discriminated against foreigners, saying it was common in other countries.
"It's not discriminatory, you just pay tax a little bit earlier."
Most foreign workers paying tax received relatively high salaries and should not have a bolt-hole available to dodge their liability, he added. "It's not singling them out. Local citizens who refuse to pay tax will be pursued by the Inland Revenue Department."
The proposal met with opposition from chambers of commerce representing foreign companies.
British Chamber of Commerce executive director Christopher Hammerbeck said expatriates had no excuse not to pay their taxes because the SAR regime was "pretty liberal". A maximum 15 per cent tax on salaries is applied in Hong Kong.
He rejected proposals that employers dock tax contributions from salaries on a regular basis, saying this would require more staff and increase costs.
"It's people shooting from the hip rather than addressing the problem. It shouldn't be the employer that does it. If it's to be done, it should be done on a direct basis by the Government," said Mr Hammerbeck. "Anyway, it's only a very small proportion that don't pay tax."
American Chamber of Commerce president Frank Martin said tax authorities should approach the controversial issue cautiously.
"I personally think it is inappropriate for the department to discriminate against expatriates," he said, referring to proposals requiring employees to buy tax certificates or requiring companies to set up PAYE systems for foreign employees.
"They have to be very careful about putting onerous requirements on employers."
Mr Martin said employers should advise tax officials when employees were finishing work. "My concern is that not all employers are aware of this requirement."
Asked whether any new measures for expatriate tax arrangements could harm Hong Kong's image or deter newcomers, he said: "I don't think it would have a major impact on confidence, it would be more of an irritant than anything."
Taxation officials seem to accept that new tax arrangements for expatriates would differentiate between two groups in Hong Kong society, despite the department's claims of having a "simple and non-discriminatory tax system". They say different treatment for various groups already exists in the tax code, such as provisions applying to overseas performers whose managers are asked to withhold sufficient money to cover taxes.
"There is a particular need for this and nobody says it is discriminatory," said one senior Inland Revenue Department official, speaking on the condition of anonymity.
Vandana Rajwani, a barrister who is a member of Hong Kong Against Racial Discrimination, said she did not believe the proposed changes would amount to racism. "Fifteen to 20 years ago I would have said it was discriminatory when most of the expatriates working in Hong Kong were from countries like Britain or Australia. But now I would be cautious to say that because there are so many overseas Chinese working here now."
Ms Rajwani warned against vilifying people leaving without paying tax, saying many did not know they had a debt to pay. "A lot of them, when they realise that they do have this [debt], they come back and work to pay it off."
A lot of large companies and wealthy individuals were dodging tax as well by using "expensive accountants and offshore tax havens", she added.
Kaushal Tikku, tax partner at PricewaterhouseCoopers, said it would not be difficult to put a PAYE tax system in place for expatriates, as the bulk of them worked for companies with the resources to handle the procedure. "Let's face it. Expatriates don't work for mum and pops' stores. We are talking about big companies."
Mr Tikku said discrimination was not an issue. One idea was to require taxpayers who did not have permanent residency to have their pay deducted while those who had the status - acquired after living in Hong Kong for seven years - would be exempt, as they had shown their commitment to the city.
Legislation for the Mandatory Provident Fund differentiated between those with the right of abode and those without it, he said. Singapore discriminates between permanent residents and others in some tax provisions.
A PAYE system would also be helpful because the present system meant recent arrivals did not receive a tax bill and have to pay it until 18 months after they landed in Hong Kong, said Mr Tikku.
The Inland Revenue Department is forming a committee to examine the proposals and will consult employer groups, who are likely to provide opposition on the grounds of discrimination and the extra cost of withholding tax from employees' wages.
There might also be a political element to the department's willingness to investigate the Audit Commission's proposals for employers to withhold a portion of employees' salaries for tax or forcing them to purchase tax certificates.
The anonymous senior tax official admitted he was surprised at the media attention the report on the expatriate tax dodgers had attracted. "Personally, I think it is only a small percentage of the total tax take."
The full audit report also took the department to task over an issue it is keen to downplay - its decision in 1996 not to examine closely employers' returns for details of salaries paid but, instead, take at face value the amount they were reporting under an "honour system".
The salaries tax unit no longer compares the amounts paid to staff in the employers' returns with the amounts reported on financial statements lodged for profits tax.
Auditors were critical of the new practice and proposed the department implement "cost-effective" procedures to ensure employers were not falsifying their salary payments and providing more information in order to lower the amount of salaries tax they paid.
But tax officials, in their response to auditors, were reluctant to make changes because of the increased costs to employers of tax compliance and the labour costs to the department of regularly examining all employers' returns.
Perhaps Inland Revenue's willingness to bow to the auditors' recommendations for new tax arrangements applying to expatriates was a trade-off to give them a "win" on that issue, while resisting its demands for a change in handling employers' returns.
The senior tax official denied there was any link.
"We tried to dissociate the two issues."
Glenn Schloss (
) is a staff writer for the Post's editorial pages.