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Are you getting your slice of the “generous” tax measures as outlined in the 2018/2019 Hong Kong Budget?

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With a forecast budget surplus of HK$138 billion for 2017/2018 (cf. HK$92.8 billion for 2016/2017), Financial Secretary Paul Chan Mo-po introduced tax measures for both businesses and individuals which are relatively more generous comparing to those of last year but can you enjoy the “candies” of the Budget? We set out two hypothetical scenarios in this article to illustrate how much you can save. 

Key Tax Measures

  • reducing profits tax, salaries tax and tax under personal assessment by 75% for the Year of Assessment (“YoA”) 2017/2018 subject to a cap of HK$30,000 (cf. HK$20,000 for YoA 2016/2017).
  • waiving government rates for four quarters of 2018/2019 subject to a cap of HK$2,500 per quarter (cf. HK$1,000 per quarter for YoA 2017/2018).
  • expanding the tax bands for salaries tax as detailed below:-
Current tax bands and tax rates for YoA 2017/2018 Proposed tax bands and tax rates for YoA 2018/2019
Chargeable Income (HK$) Marginal Tax Rate Chargeable Income (HK$) Marginal Tax Rate
First $45,000 2% First $50,000 2%
Next $45,000 7% Next $50,000 6%
Next $45,000 12% Next $50,000 10%
      Next $50,000 14%
Remainder   17% Remainder   17%
           
Standard Rate: 15% Standard Rate: 15%

Increasing the tax allowances / allowable deductions as detailed below:-

Allowances/ allowable deductions Current amount for YoA 2017/2018(HK$) Proposed amount for YoA 2018/2019(HK$)
Child Allowance $100,000 $120,000
Additional Child Allowance (for child born during the year) $100,000 $120,000

Dependent Parent or Grandparent Allowance-        
Aged between 55 to 59-         
Aged 60 or above

    
$23,000 $25,000
$46,000 $50,000
Additional Dependent Parent or Grandparent Allowance-          
Aged between 55 to 59-          
Aged 60 or above		    
$23,000 $25,000
$46,000 $50,000
Cap for the Elderly Residential Care Expenses $92,000 $100,000
Personal Disability Allowance N/A $75,000
Cap for the premium of the Voluntary Health Insurance Scheme [1] N/A $8,000

Are the tax measures really generous?

Illustration example 1

A single person with total income of HK$800,000 would have a tax saving of HK$4,500.

  YoA 2017/2018 (HK$) YoA 2018/2019 (HK$)
Assessable income $800,000 $800,000
Less allowances:    
–          Basic ($132,000) ($132,000)
     
Net Chargeable Income $668,000 $668,000
     
  1. Tax liability under Marginal Tax Rates
 $100,060 $95,560
     
  1. Tax liability under Standard Rate
 $120,000 $120,000
     
Final tax liability (lower of (i) and (ii)) $100,060 $95,560
     
Less reduction on salaries tax $30,000 $30,000 [2]
     
Final tax payable $70,060 $65,560(saving $4,500)

Illustration example 2

A couple with only one of them working earning HK$1,000,000 in total, with one dependent child (both in other year) and one dependent parent above age 60 not residing with them would have a tax saving of HK$8,580.

  YoA 2017/2018 (HK$) YoA 2018/2019 (HK$)
Assessable income $1,000,000 $1,000,000
Less allowances:    
–          Married Person ($264,000) ($264,000)
–          Child ($100,000) ($120,000)
–          Dependent Parent ($46,000) ($50,000)
     
Net Chargeable Income $590,000 $566,000
     
  1. Tax liability under Marginal Tax Rates
 $86,800 $78,220
     
  1. Tax liability under Standard Rate
 $150,000 $150,000
     
Final tax liability (lower of (i) and (ii)) $86,800 $78,220
     
Less reduction on salaries tax $30,000 $30,000 [3]
     
Final tax payable $56,800 $48,220(saving $8,580)

Our Observations

1. The maximum tax saving arising by an individual taxpayer from the changes in the tax bands and the marginal tax rates would be HK$4,500 as illustrated below:-

Total chargeable income (HK$) Total Tax liability under current law (HK$) Total Tax liability under proposed law (HK$) Aggregate Tax Saving (HK$)
$50,000 $1,250 $1,000 $250
$100,000 $4,750 $4,000 $750
$150,000 $12,000 $9,000 $3,000
$200,000 $20,500 $16,000 $4,500

2. Higher income individuals (except those being taxed at the flat standard rate) will benefit more from the expansion of the tax bands and the increase in the various allowances / deductions.

3. As the flat standard rate remains unchanged, high income earners who are taxed at the flat standard rate would merely benefit from the reduction on salaries tax of HK$30,000.

4. As a comparison, currently the personal tax rates in Singapore range from 0% to 22% and income above SG$320,000 (approximately HK$1.89 million) would be subject to the top marginal tax rate of 22%. As the personal tax rates of Hong Kong taxpayers would be capped at the flat standard rate of 15% (without taking into account of the allowances / deductions available in both tax jurisdictions), personal tax rates in Hong Kong for high income earners are more preferential than that in Singapore.


For a detailed discussion or any enquiry, please contact one of our members of the Tax Advisory team.

OLN has tax advisors who have dual qualification in both accounting and law. We are happy to assist on any tax-related matter.

[1] Pending for the implementation of the Voluntary Health Insurance Scheme.

[2] Assuming that the same reduction on salaries tax would also be available for in the YoA 2018/2019.

[3] Assuming that the same reduction on salaries tax would also be available for in the YoA 2018/2019.

The Companies (Amendment) Ordinance 2018

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The Companies (Amendment) Ordinance 2018 requires non-listed Hong Kong companies to keep a “significant controllers register” (SCR), and comes into effect on 1st March 2018.

A “significant controller” is a person or entity who:

  1. holds over 25% of a company’s issued shares or over 25% of its voting rights;
  2. holds the right to appoint or remove the majority of the board of directors of the company; or
  3. exercises significant influence or control of the company in any other way.

Company’s obligation to serve notices and to notify Companies Registry

Every Hong Kong company has the obligation to identify all “significant controllers”, and to keep the SCR up-to-date by entering the particulars of all “significant controllers” and their nature of control in the SCR.

If a Hong Kong company knows, or has reasonable cause to believe, that a person or entity is a “significant controller” or that person or entity knows the identity of another “significant controller”, the company has an obligation to serve a notice on such person/entity within 7 days.

The person/entity on receiving the notice then has to respond to the notice advising if it is a “significant controller”, and if so confirm its particulars as stated in the notice and providing any missing particulars. The person/entity also has to advise if it knows the identity of another “significant controller”, all known particulars of that other “significant controller”.

For a Hong Kong company held by another company, or held by several companies in the same “chain of ownership”, “significant controllers” would include the immediate holding company of the Hong Kong company and the person/entity at the end of the “chain of ownership”.

The company should also serve a notice on a “significant controller” if the company knows, or has reasonable cause to believe, that the particulars of that “significant controller” have changed, or if it has ceased to be a “significant controller”.

The company also has an obligation to notify Companies Registry where the SCR is kept.

Regulatory oversight

Failure to comply with the above obligations is an offence which attracts a level 4 fine (HK$25,000) and where applicable, a further HK$700 for each day the offence continues.

Law enforcement officers from various authorities, including Companies Registry, Customs and Excise Department, Hong Kong Monetary Authority and the Hong Kong Police Force, can require the company to make its SCR available to them for inspection, and to make copies of the SCR.

Additionally, any “significant controller” whose name is on the SCR also has the right to inspect the SCR.

If you need further information, please do not hesitate to contact Stephan Chan at Jade Tang.

From the Digital Business Practice Group

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There have recently been a number of important announcements from Regulators, both in Hong Kong and in the United States, about ICOs and cryptocurrency exchanges.

First there was an announcement by the Chairman of the United States SEC stating that he considered that the majority of “ICOs” related to “securities”, which therefore fell under the SEC preview.

That was followed on 9th February, by the Hong Kong SFC alerting investors to the potential risks of dealing with cryptocurrency exchanges and in investing in ICOs.

The SFC has now sent letters to several cryptocurrency exchanges in Hong Kong warning them that they face sanction if they continue to trade cryptocurrencies without a licence.

There have also been complaints in Hong Kong asserting that certain cryptocurrency exchanges have misappropriated assets, manipulated markets, and have been involved in unlicensed and fraudulent activities, all of which have caused significant losses to investors/buyers.

OLN’s Digital Business Practice Group advises not only on the commercial and regulatory side of ICOs and cryptocurrencies, but also on the ability for investors and buyers of coins and tokens to claim against issuers and cryptocurrency exchanges, if they consider there has been fraud, misrepresentation, misappropriation of assets and or market manipulation.

If you need further advice on any of these issues, please contact either our Stephen Chan. We would then be happy to advise on what causes of action may be available in Hong Kong.

New international collaboration expands our offering in the Insurance sector

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Hong Kong law firm, Oldham, Li & Nie (OLN) is pleased to have agreed on a new collaboration with international law firm, DAC Beachcroft LLP as it continues to expand and develop new business groups.

The firms will draw on each other’s respective insurance and reinsurance practices and cooperate in additional areas of the law to provide a full range of services to clients in Hong Kong, based on DAC Beachcroft’s extensive insurance practice and OLN’s local Hong Kong expertise and relationships.

Greg Crichton will lead the collaboration on behalf of OLN. Prior to joining OLN, Greg Crichton worked for many years in the insurance and reinsurance industry in Asia and was a Director, EVP and General Counsel at American International Assurance (AIA).

Insurance and reinsurance partner in DAC Beachcroft’s Singapore office, Steven Dewhurst, who leads the firm’s Asian practice is driving this collaboration for the firm. Steven is admitted to practice in Hong Kong as well as England and Wales, and has decades of experience in insurance and reinsurance matters. As part of the move, Steven will also become a consultant with OLN.

“Closely collaborating with DAC Beachcroft, and its market leading insurance practice, is a tremendous development for OLN. It brings together a heavy weight team led jointly by Steven, Greg and Adelina, who share a profound knowledge of the global insurance sector and close client relationships in Hong Kong and throughout the Asia Pacific region.” Stated Gordon Oldham, Senior Partner of OLN.

DAC Beachcroft Managing Partner, David Pollitt, said: “We are pleased to have formalised this new collaboration with OLN, a firm with deep local and sector knowledge and with which we share a commitment to our clients. Driven by client demand, this goes beyond simply cross-referrals; the new arrangement will enable us to provide comprehensive legal solutions for our multi-national clients in this important region for our business. We look forward to working with them.”

Legal Update: Is an insurer vicariously liable for an agent’s fraud?

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Vicarious liability is the legal doctrine that holds one party liable for wrongdoing committed by another, typically where the party held liable is superior to or has some right to control the other’s actions.  This most commonly arises in the employment context, where an employer is generally held liable for any tort committed by an employee in the course of his/her duties.  However, vicarious liability is not limited to the employment relationship and can extend to the relationship between insurer and insurance agent. 

Recent cases affirm that the relationship between insurer and agent can give rise to vicarious liability, even though the agent is not the insurer’s employee and the agent’s contract with the insurer explicitly denies any employment relationship.  In deciding whether to impose vicarious liability, courts will consider if this is fair, just and reasonable taking into account the overall relationship (including the insurer’s control over the agent) and enterprise risk considerations, including the insurer’s business model, the regulatory framework governing the insurance industry and deterrence of future harm.  In Hong Kong, many agents are tied exclusively to one insurer and even non-exclusive agents are bound under the HKFI Code of Practice to represent no more than four insurers, including no more than 2 long-term insurers.  These ties between insurer and agent, and the functions performed by the agent on the insurer’s behalf, tend to create circumstances where a court may find vicarious liability.

Case Analysis

A recent Singapore case, in which a major life insurer was held vicariously liable for an agent’s fraud, is instructive.  In that case, the agent had sold the plaintiffs (an elderly Indonesian couple) a fictitious 5-year life insurance policy.  Funds remitted by the plaintiffs for the fake policy were used by the agent to buy unauthorized policies in the plaintiffs’ names, which the agent later deceived the plaintiffs into surrendering.  The funds were then misappropriated by the agent.  Throughout this process, the insurer relied on the agent to liaise with the plaintiffs regarding the policies they held and to transmit instructions as to how to handle their money, refund cheques and surrender proceeds. 

In finding the insurer vicariously liable for the agent’s fraud, the Singapore High Court applied a 2-stage test, under which vicarious liability will be imposed where:

  1. There is a “special relationship” between the tortfeasor (fraud perpetrator) and the defendant making it “fair, just and reasonable” for liability to be imposed; and
  2. The conduct of the tortfeasor is closely connected to his/her relationship with the defendant, particularly where that relationship materially increases the risk of the fraud being committed.

In applying this test for vicarious liability, the Singapore Court followed an established line of UK and Canadian caw law which identified two policy considerations for imposing liability:  1) effective compensation for the victim; and 2) enterprise risk theory, which holds that an enterprise which engages agents to advance its business interests and creates the risk of those agents committing wrongs against third parties should bear responsibility for the consequences, since it is best placed (and should be incentivized)  to manage the risks and prevent wrongdoing. 

Under the first stage of the test (requiring a special relationship between tortfeasor and defendant), vicarious liability is no longer restricted to employment relationships and the court will examine the facts to see if the relationship has some of the same fundamental qualities inherent in employer-employee relationships, including control over the tortfeasor (agent) and integration of his/her activities in the defendant’s (insurer’s) enterprise.  On the facts of the Singapore case, the court found that these elements were present, noting that even though the agent’s contract with the insurer specifically stated that the agent was not an employee, she represented the insurer exclusively and performed a wide range of functions on the insurer’s behalf.  Further, the insurer’s control over her was very similar to that of an employer training, managing, supervising and disciplining its employees. 

Turning to the second stage of the test (requiring a sufficient connection between the tortfeasor’s conduct and his/her relationship with the defendant), the court noted that the fraud had been perpetrated in the context of a business model in which insurers relied on agents to promote and market their policies by developing close relationships with high net-worth policy holders.  On the facts, the insurer further enhanced the risk of the agent’s fraud by allowing her to perform tasks on both sides without verification, including accepting her word as instructions and authorization from the customer.  Given this business framework and the policy justifications of victim compensation and deterrence, the court found that there was a sufficient connection between the agent’s fraud and her relationship with the insurer so as to justify imposing vicarious liability.

OLN Insights

1.  Recent case law confirms that vicarious liability is not confined to employment relationships and can render an insurer liable for its agent’s fraud.  Courts will look beyond the agent’s contract with the insurer in assessing if the agent is truly acting as an independent contractor or is effectively controlled by the insurer and integrated within the insurer’s enterprise. 

2. Policy considerations, and particularly enterprise risk considerations, may lead a court to hold an insurer vicariously liable for an agent’s fraud in the current regulatory context, which (in Hong Kong as in Singapore) expects insurance companies to take responsibility for the management of its agents, particularly where agents are representing no more than a few insurers, and are seen by the public as representatives of their appointing insurer and an extension of their enterprise.

3. To mitigate exposure, insurers would be well advised to institute more robust controls to verify policyholder instructions rather than relying exclusively on agents to communicate with customers.  Verification should be undertaken of significant policy-related requests from policyholders, including instructions on how to apply remitted and/or excess funds and policy surrender requests.  For example, policy approval confirmation letters, premium payment letters, policy surrender letters and refund cheques could be mailed directly to the policyholder (with proof of delivery) rather than passed on through the agent. 

About OLN’s Insurance Practice Group

OLN’s Insurance Practice Group has direct experience of the legal, regulatory and practical challenges facing insurers and reinsurers throughout Asia region. Members of our Group have worked in the insurance industry and have extensive experience working in and advising insurers and reinsurers on contractual and regulatory matters and risk management issues relevant to their businesses. We have particular expertise in the review and drafting of contractual documentation relating to insurance and reinsurance activities, including the development of policy wording for life, accident, medical and health insurance products, and the review and vetting of related proposals, product brochures and training materials. We also have experience advising on disputes over coverage for claims under both life and general insurance policies, and with support from OLN’s Dispute Resolution Group, are well placed to represent clients in all aspects of insurance litigation.

For more information about any other insurance-related matters, please contact:

Greg Crichton, Consultant

The US Tax Reform – Could it have an impact on you?

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The Tax Cuts and Jobs Act (the “New Tax Law”), which lowers business and individual tax rates and makes significant changes to the US tax rules, was effected and promulgated into law in late December last year and most of the changes would take effect from 1 January 2018.

The key changes are highlighted below:-

CorporateIndividual
Tax RatesReduced from 35% to 21%.
The New Tax Law also introduces a 20% deduction for Qualified Business Income including income from a partnership, S corporation or sole proprietorship to the non-corporate taxpayers (with many exclusions and exceptions). This aims to address the disparity of the lower corporate tax rate of 21% and the top individual income tax rate of 37%.		The top individual income tax rate for taxable years 2018 to 2025 has been reduced from 39.6% to 37%.
Other changesThe Corporate Alternative Minimum Tax (“AMT”, which is effectively a prepayment of tax as it generates a minimum tax credit for any AMT paid) of 20% has been abolished and taxpayers may claim a refund on any AMT credits carryforwards:-
– 50% of the remaining AMT credits in tax years 2018, 2019 and 2020;
– a refund on all remaining credits in the tax year 2021.		The standard deduction is roughly doubled:-
Filing status
Standard deduction
Single / Married Filing Separate
US$12,000 (up from US$6,350)
Married Filing Jointly
US$24,000 (up from US$12,700)
Head of Household
US$18,000 (up from US$9,350)
Regarding net operating losses:-

Under prior law:
– A carryback period of 2 years
– A carryforward period of 20 years
– Could offset 100% of taxable income for regular income tax purposes and 90% of AMT income

Under the New Tax Law
– No carryback period
– An indefinite carryforward period
– Could only offset 80% of taxable income		Taking into account of other measures included in the New Tax Law including changes to the itemised deductions, the New Tax Law might not necessarily result in a lower net tax payable for some taxpayers, such changes are as follows:-
– The deduction for state and local taxes will be capped at US$10,000 for Married Filing Joint or US$5,000 for Married Filing Separate / Single fliers (instead of unlimited).
– The deduction for mortgage interest will be capped at US$750,000 (instead of US$1,000,000).
The lifetime estate basic exclusion amount in determining the estate and gift tax has been doubled to US$11.2 million per individual (or US$22.4 million per married couple).

Changes to the US international tax rules

  • Qualified dividends received by US corporations from foreign subsidiaries would be entitled for a 100% dividends received deduction.
    • Accordingly, such dividend would only be taxed at the US individual shareholder’s level when an individual receives such dividend income at his / her individual income tax rate.
  • The New Tax Law introduces a new regime of which any accumulated foreign earnings of Controlled Foreign Corporations would be taxed at the rate of 15.5% for cash or cash equivalents and 8% for illiquid assets.

For a deeper discussion or any enquiry, please contact one of our members of the Tax Advisory team.