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Employment Tax Obligations: Employer’s return & Salaries Tax

By FastLane Team, March 31, 2020 (10 mins)

Introduction

As an employer of Labour in Hong Kong, a business owner needs to be aware of the labor and employment requirements in Hong Kong, as well as the tax reporting obligations. In General, Hong Kong employers have obligations to report the remuneration paid to all staff members who have earned salary during the financial year. This report has to be prepared using the Hong Kong government acceptable form popularly known as the Employer’s return form or IR56A and IR56B forms. 

Although handling employment tax obligations is a fundamental task, careless mistakes may trigger penalties from the Inland Revenue Department (IRD). In this article, we look to provide guidance on employment remuneration reporting from both employers’ and employees’ perspectives.

 

​​TLDR: Employer’s returns (IR56A/B) are reporting requirements for employers. Salaries tax is the income tax imposed on employees. The purpose of having an employer’s return is to ensure the accuracy of salaries tax filing. You can request an extension of the submission deadline if you have a good reason for putting in the request. Inaccurate filing attracts penalties or persecution.

 

Employer’s Returns – Companies

Employer’s Returns, also known as BIR56A and Form IR56B, are reporting disclosures issued annually by the Hong Kong Inland Revenue Department (“IRD”) to Hong Kong employers. The forms are used by the Inland Revenue Department to facilitate the accurate assessment of the employee’s salary tax liabilities annually. The form is usually issued to companies on the 1st of April annually.

BIR56A Sample

What are the submission requirements for Employer’s Return? 

The Inland Revenue issues hard copies of the employer’s return form on the 1st of April annually which needs to be filled and submitted 1 month after the issue date of the employer’s return form. The issue date of the form is usually stated in the first paragraph of the BIR56A form. 

 

However, starting from 25 September 2019 the IRD has begun allowing Hong Kong employers to utilize Payroll software such as Workstem to prepare and upload their Employer Returns and subsequent files to the government’s e-filing site. Hong Kong Employers who wish to submit their Employer Returns in this format should ensure that their Payroll software meets the requirements set out by the IRD before attempting submission using the platform. Employers may also utilize the IRD’s Employer’s Return e-Filing Services (“ER e-Filing Services”) to submit their Employer Return online and free of charge.

 

What Information should be stated in the employer’s return form?

For every specific employee, you should fill in their related information in the form, which includes: 

  • Employees’ Name
  • HKID details
  • Personal residential address
  • Period of employment
  • All different income sources, including bonus, commission
  • Marital status and spouse info if married

 

When is the Deadline for Submitting an Employer’s Return and How Can I Extend the Deadline?

Normally, the IRD will issue an Employer’s Return to employers on the first working day of April each year. Even if a Hong Kong company has not hired any employees, has not commenced, or has ceased during their year of assessment, they are required to complete and submit Form IR56A within one month from the date printed on the form.

If an employer requires additional time to prepare their IR56B, they may file for an extension with the IRD. The request for an extension must be in written format and should include the employer’s file number, company name, the year of assessment concerned, the additional time required, and details to support the argument for an extension. 

For a recently incorporated Hong Kong company, the BIR56A will be issued approximately 3 to 6 months after the Hong Kong company files its first audit.

 

Penalty for non-compliance

The Inland Revenue Ordinance (“IRO”) imposes strict requirements on Hong Kong companies in relation to the timely and accurate filing of returns, including Employer Returns. Employers who fail to comply with the IRO’s reporting requirements, either by failing to submit their IR56B or reporting false/inaccurate information without a reasonable excuse will be subject to penalties in accordance with section 80(1) of the IRO. For instance, in the event that an employer, who without reasonable excuse failed to comply with their obligation to submit an annual IR56B, will be subject to a fine of HKD10,000 and the Hong Kong courts may order the employer to complete their obligations within a specified time.

 

Do Company Directors need to file an Employer’s Return for themselves?

Yes. Company Directors are to be considered as employees. As such, the personal particulars and details of their remuneration package must also be disclosed in the Employer Return. 

Company Directors are usually remunerated for their services through regular salary payments or in form of director’s fee payment. A salary is a fixed regular payment, typically paid on a monthly basis. Director fees are paid at the end of a financial year, upon the review of the annual performance of both the Company Director and the Company.

In Hong Kong, director fees are subject to salaries tax, regardless of the nationality of the Company Director and whether the income was deemed to be derived outside of Hong Kong. As such, a Hong Kong employer must always declare the director’s fees made to the Company Director in the Employer’s Returns form.

 

Do companies need to file an Employer’s Return for the Staff whose employment has been terminated?

Upon the termination of an employee, a Hong Kong employer must file an Employer’s Return for the terminated employee in question, specifically Form IR56F.

Form IR56F Sample

 

Do companies need to file an Employer’s Return for part-time staff and freelancers?

A Hong Kong Employer is obligated to report the remuneration details paid to not only full-time employees but also part-time staff and freelancers. Part-time staff and their remunerations may be disclosed in IR56B. However, to the extent that the Hong Kong Employer has also engaged freelancers, they will be required to complete and submit Form IR56M. 

Form IR56M Sample

Form IR56M will disclose remuneration paid to persons other than employees. Careful consideration should be made when disclosing payments made to local persons and non-resident entertainers/sportsmen.

 

What if the employee is leaving Hong Kong for good?

If the employee of a Hong Kong company has left the city on a permanent basis, the Employer should complete IR56G no later than 1 month before the employee’s date of departure. 

Form IR56G Sample

It is important to note that a Hong Kong employer should not make any payment of money or any other form of remuneration to the employee in question, for a period of 1 month from the date of notice on the IR56G.

 

What is the complete list of reportable remunerations to be reported under IR56B?

Other than commonly known reportable items such as salary, leave pay, bonus, director’s fee, and  commissions, the following items are also reportable items under IR56B:

  1. Back pay
  2. Payment in lieu of notice
  3. Gratuities eg: lump sum payment on termination of service/contract of service excluding severance payment or long service payment (only the amount exceeding the statutory entitlement per Hong Kong’s Employment Ordinance is reportable)
  4. Employer’s MPF/ORSO voluntary contribution received by the employee on termination of services (applicable to employees with less than 10 years of service-calculation subject to a proportionate rule)
  5. Education benefits or educational costs reimbursed by the employer
  6. Gain realized under a Hong Kong Company’s share option scheme 
  7. Perquisites in cash or being such nature that either they may be converted into cash or are money’s worth such as gift, employee’s membership with professional bodies paid or reimbursed by the employer
  8. Cash allowances of any type  
  9. Payment contracted by the employee but paid by the employer eg: medical insurance premium if the policy owner/holder is not the employer
  10. Amount paid by the employer for holiday journeys enjoyed by the employee and/or his/her family members
  11. Tips or other payment received by the employee from other parties (not employer) associated with the services under the employment
  12. Housing allowances
  13. Overseas Income

The Hong Kong tax system is not only incredibly friendly to businesses, but is also friendly to individual taxpayers! Hong Kong Salary Tax, also commonly referred to as income tax, is among the most accommodating tax systems in the world as individuals are not only able to claim progressive tax rates but they also have a multitude of allowances and exemptions available that they may utilize. In the following part,  we look to provide greater guidance to clear up any misconceptions individuals may have as they receive their Salary Tax returns.

Salaries Tax – Individual

Salaries tax, known as BIR60, is one of the income taxes imposed in Hong Kong. It is imposed on the annual earnings and perquisites received from an employee’s work and employment in Hong Kong. Hong Kong employees are obliged to submit annual salaries tax to the Inland Revenue Department.

 

How much is the salary tax in Hong Kong?

Individual taxpayers in Hong Kong who have income arising in, or derived from Hong Kong on any employment, office, and pension are liable to pay Salary Tax at a progressive rate, or a flat rate of 15% of net income after allowable deductions. 

Year of Assessment 2018/19 onwards:

1819 Salaries Tax (English)

In addition to a standard salary, benefits in kind may also be subject to Salary Tax. For instance, any commission received, allowances or perquisites or any Salary Tax paid by an employer, on behalf of their employee will be computed and subject to tax.

Salary earners are also subject to several deductions based on eligibility. These deductions range from personal allowance, concessional deductions, standard deductions, and employment expenses.

For further information on the eligibility of these various deductions, please visit the government website or speak to our professional tax consultants here.

 

Salaries Tax Return Filing Process

While the process of completing and submitting a Salary Tax Return, which is also known as a BIR60, may be considered intimidating, it is actually very simple. The standard Salary Tax Return filing process is as follows:

  1. Employers must notify the IRD of an employee’s chargeability to Salaries Tax (via Form IR56E) within 3 months after employing the employee
  2. Upon receipt of Form IR56E, the IRD tax system will automatically create a tax file in the employee’s name and will issue a salaries tax return (if necessary) within 5 months

The employee will be required to complete and submit the tax return to the IRD in accordance with the date printed on the salaries tax return (along with any supporting documentation if deemed necessary)

BIR60 Sample

When can I expect to receive my salary tax return?

Salary Tax Returns are usually sent out by the IRD on/about the first working day of May each year and are to be completed and returned to the IRD in accordance with the due date printed on the individual Salary Tax Return.

BIR60 Due Date

To the extent that an individual is a first-time taxpayer, a salary tax return will normally be issued within 5 months after the receipt of the employer’s notification of employment (IR56E) or when the taxpayer has notified the IRD of their liability to salaries tax. 

Individuals who are liable to pay Salary Tax but have not yet received a tax return must notify the IRD of their chargeability to Salary Tax by 31 July of the year following that year of assessment.

 

What allowances/deductions can I claim in my salaries tax return?

Much like profits tax, salaries tax allows for the deduction of expenses that were wholly, exclusively and necessarily incurred in the production of assessable income. It is common that employers will not be privy to what expenses an employee has incurred on their own behalf (or sometimes even on behalf of the company). Individual taxpayers should thus ensure that they understand what deductions and allowances they are eligible for. When completing a salaries tax return, the following deductions may be claimed:

  • Outgoings and expenses (including expenses of self-education)
  • Concessionary deductions
  • Allowances (Except for taxpayers paying Salaries Tax at the standard rate)

While it is not necessary to provide any documents to verify your employment income, individuals who wish to claim the entirety or part of their employment income as exempt from salaries tax must provide supporting evidence. For record keeping purposes, it is recommended to maintain relevant receipts and documents for at least 6 years after the expiration of the relevant year of assessment.  

In addition to exemptions/deductions, taxpayers can also claim allowances or have elected personal assessments to reduce their total assessable income. For instance, all Hong Kong individual taxpayers are eligible for a Basic Allowance of HKD132,000 for the financial year 2018-19 onwards. Taxpayers can view the IRD’s allowances, deductions, and tax rate table here.

 

What are the penalties for non-compliance with salary tax payments?

Non-compliance with Salary Tax occurs when a taxpayer fails to notify the IRD on their chargeability to Salary Tax, fails to submit a tax return on time, or fails to settle tax payable as of when due. Taxpayers can expect the following penalties in accordance with their frequency of non-compliance.

First offence – 10% of the amount of tax undercharged

Second offence within 5 years – 20% of the amount of tax undercharged

Third or subsequent offence within 5 years – 35% of the amount of tax undercharged

 

Duplicate Returns

Oftentimes, individual taxpayers may not receive, may misplace or may even damage their tax returns. While one may panic initially, this is not something to be worried about as the IRD can assist in providing a duplicate tax return. You need the call the Inland Revenue general inquiry hotline so they can issue a duplicate copy of the salaries tax form.

 

Obligations for both parties

Employers’ Obligations

A Hong Kong employer is required to inform the IRD of any changes to their employees’ personal particulars, remuneration package, or employment status. This ensures that the IRD has the most updated information on employees, ensuring a limited communication gap between the government and employees.

 Therefore, simply make sure that you have filled in the correct information in the IR56A and IR56B forms, Send a copy to your employees in case of any disputes, and submit the completed forms to the government on or before the submission deadline.

 

Employee’ Obligations

As an employee, your Salary Tax obligations are primarily related to notifying the IRD your chargeability to Salary Tax, or any changes towards that status. To the extent that an individual has obtained a new source of revenue, or has lost any, the IRD must be notified accordingly.

If you are liable to tax in Hong Kong, you must inform the IRD in writing no later than 4 months after the end of the basis period (1 April to 31st March of the following year) for that year of assessment.

Individuals who are about to migrate to other countries, regardless of whether it is to study or work, are also required to notify the IRD in writing at least 1 month before the expected date of departure.

 

How can FastLane help? 

As a professional firm providing business support services, we understand how hectic it can be to prepare accurate tax obligations on employment. By partnering with professional firms, your mind and focus can be reallocated to drive business success. 

Trusted by 1000+ clients, FastLane Group provides the best-in-class services on payroll and HR management. If you want to know whether the service suits you in the current circumstance, please contact the FastLane Group for a free consultation!

 

Conclusion

Completing tax returns can be an intimidating process.  Everyone is scared of making a mistake, especially when doing so can be so costly! We hope this guide provides enough information for both parties to understand what their employment obligations are, and what is required in completing the tax returns stated. If you want to know more about business tax obligations, please check out our blog on profit tax returns



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