Watch out! Are you receiving certain fringe benefits, such as housing benefits, share option benefits and share award benefits from your employer? Did you and your employer both report the fringe benefits to the Hong Kong Inland Revenue Department (“HK-IRD”) correctly in order to avoid any over-charge of your own Hong Kong salaries tax liabilities?
Under the Hong Kong salaries tax system, both employers and employees/directors are obliged to report the employment remuneration/directors’ remuneration to the HK-IRD by filing annual Employer’s Returns and individual tax returns respectively. Any inconsistency in the remuneration/tax reporting to the HK-IRD might potentially result into enquiries from the HK-IRD and/or unfavourable tax treatments of the employees/directors. Therefore, it is important to ensure that the remuneration/tax reporting made by both you and your employer are in order.
Common discrepancies/errors in tax reporting
Common fringe benefits/remuneration that are often incorrectly reported to the HK-IRD by employers and/or employees/directors:
(i) Housing benefits
Housing benefits in the form of provision of a rent-free residence or a rent-subsidised residence (such as through rental reimbursement) are taxed at a deemed rental value (“RV”), which is calculated at 4%, 8% or 10% of the net income after deducting outgoings and expenses earned by employees/directors, depending on the types of residence being provided. On the other hand, housing benefits provided in the form of cash allowance are taxed at the actual amount received by the employees/directors. Generally, it is more tax beneficial for the housing benefits to be taxed at the deemed RV rather than the actual amount of the housing benefits received.
The HK-IRD has some requirements/criteria for the housing benefits to be taxed at a deemed RV, such as employers must have the specific intention to provide a place of residence to their employees & adequate control must be exercised by employers on the rental reimbursement to their employees. As such, in the absence of a housing benefit policy by employers and/or lack of communication between employers and employees, the nature of same housing benefits reported by employers and employees to the HK-IRD may be different (e.g. cash allowance being reported by employers while provision of a rent-free residence being reported by employees). Sometimes, disputes may arise between employers and employees.
(ii) Share-related benefits
There are specific tax rules for calculating the amount of taxable share option benefits and share award benefits in Hong Kong. For example, in order to calculate the share option gains, the market value of the shares concerned at the date of exercising the share options should be used, instead of the grating date of share options or the date of selling the shares. As such, there is a chance that the amount of share-related benefits calculated and reported to the HK-IRD by employers is incorrect.
As for the tax reporting by employees/directors in their individual tax returns, partial/full tax exemption on share-related benefits may be eligible if certain conditions can be met. A number of factors, such as whether the employment is Hong Kong sourced or not, the granting date/vesting date/exercising date of the share options/share awards concerned, the number of days in Hong Kong plus leave days attributable to services in Hong Kong during the vesting period, are all relevant factors when determining the taxability. Employees/directors are therefore suggested to ascertain whether they are eligible for any tax exemption claim on their share-related benefits before making a tax filing to the HK-IRD.
Apart from the above benefits, other benefits/remuneration, such as severance payment and compensation payment, are also often subject to the discussion whether they are chargeable to Hong Kong salaries tax or not. Hence, employers/employees may consider to seek advice from tax advisors whether certain fringe benefits/remuneration are required to be reported in the Employer’s Return and/or subject to Hong Kong salaries tax.