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Hong Kong Revenue Defends Salaries Tax Collection System

In her reply to a question in the Legislative Council (LegCo), the Acting Secretary for Financial Services and the Treasury Julia Leung confirmed that, as salaries tax payment arrangements in Hong Kong are 'effective and easy to administer to all relevant parties,' the Government has no plan to explore other payment options.

Hong Kong does not have a 'Pay As You Earn' (PAYE) system, whereby income tax is withheld and paid at the time the remuneration is received. The Inland Revenue Department (IRD) makes tax assessments and issues tax demand notes to taxpayers after taxpayers have reported their income. As such, the amount of final tax payable is only determined after taxpayers have earned their income.

However, to ensure that tax is collected in the year the income is earned as far as possible, Hong Kong has implemented a payment system whereby provisional salaries tax (PST) is computed on the basis of the income in the previous year of assessment. Under normal circumstances, IRD requests taxpayers to pay salaries tax by two installments in the ninth and twelfth months of each financial year.

The tax amount in the first installment is the balance of the salaries tax payable for the preceding year (i.e. the salaries tax payable less the PST which had been paid for that year) plus 75 percent of PST for the current year. The tax amount in the second installment is 25 percent of PST for the current year.

The question in LegCo pointed out that there is a view that the proportion of PST payable in the first installment is so high that some taxpayers are under financial pressure as they are required to pay a tax of an amount equivalent to one month's salary, and suggested that it could be reduced without a significant impact on public finances, especially given the Government's large present fiscal reserve.

In her reply, Leung commented that, as taxpayers only need to file tax returns once every year and pay their salaries tax by two installments, and employers do not need to withhold and pay the salaries tax to IRD on behalf of their employees every time they pay their remuneration, the arrangement is convenient for taxpayers and employers;

In addition, she added, taxpayers are only required to pay 75 percent of their PST for a year after they have earned the income for at least nine months in the same year, and the remaining 25 percent is paid after they have earned the income for the whole year. Compared to PAYE, she noted, Hong Kong taxpayers have more time to prepare for their tax payment.

Finally, she confirmed that a holdover mechanism is provided under the PST system so as to relieve the financial pressure for taxpayers with genuine needs, and taxpayers have the flexibility to save for tax payment by purchasing tax reserve certificates at any time, earning interest when they are redeemed to pay tax.

The Inland Revenue Ordinance also provides for flexible arrangements to cater for changes in taxpayers' income. If a taxpayer anticipates that his/her income for the current year would reduce by more than 10 percent as compared to his/her income in the preceding year, he/she could apply to IRD for corresponding holdover, wholly or partially, of his/her PST 28 days before the due date for its payment.



For further information please contact Kenneth Young, international contact partner for our firm in Hong Kong on


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