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Source, Residence, and the Future of Hong Kong Tax

Hong Kong tax practitioners are accustomed to emphasising the supposed sharp distinction between Hong Kong’s territorial, source-based approach to taxation and the revenue codes of other jurisdictions, such as the United Kingdom, which, by contrast, are identified as taxing on the basis of residence. This apparent divergence in approaches to raising revenue has made the territorial system of taxation in Hong Kong a scal totem, to which successive Governments both before and after the 1997 handover have remained committed and would prefer to leave undisturbed. A system that worked well in the fat years of Hong Kong’s post-war economic miracle is, however, coming under strain as both the Inland Revenue Department (IRD) and, in some cases, the Board of Review (the “Board”) and the lower courts have begun to extend the scope of territoriality, apparently proceeding under the assumption that certain persons should be taxable in Hong Kong.