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Hong Kong Private Hospitals' Tax Exemption Under Attack

by Mary Swire, Tax-News.com, Hong Kong

14 December 2012


In reply to a recent question in the Legislative Council, on whether the uses of private hospitals' income and assets have deviated from their charitable purposes, Hong Kong’s Secretary for Financial Services and the Treasury, Professor K C Chan, only confirmed that the Inland Revenue Department (IDR) conducts reviews "from time to time" of tax-exempt charitable bodies.

The questioner pointed to the dissatisfaction that has been expressed by a number of citizens that, while they had hoped to have access to the quality healthcare service of local private hospitals, the significant increase in service charges in recent years has deterred them from doing so.

It was added that, as most of private hospitals are charitable institutions which are exempt from tax under the Inland Revenue Ordinance (IRO), and as such should be subject to periodic reviews by the IRD of their account statements and other relevant documents, the question was whether their activities have deviated from their charitable objects, whether their business and profits still meet IRO requirements, what criterion is used by the IRD, and whether it has issued any warnings in that respect.

Chan replied that, at present, among the 11 private hospitals in Hong Kong, nine of them are operated by seven charitable bodies which have obtained tax exemption status in accordance with the IRO, and that, over the past 10 years, the IRD has conducted a total of 19 reviews of the above-mentioned charitable bodies.

Owing to the secrecy provisions in the IRO, however, the IRD could not disclose information of any tax cases, including the details and results of the reviews concerning private hospitals, but confirmed that, for revenue protection, the IRD conducts from "time to time" reviews of tax-exempt charitable bodies.

Similarly to the treatment of other tax-exempt bodies, the IRD would require charitable bodies operating private hospitals to furnish account statements, financial reports, annual reports and any other information related to their activities, to verify if they are still in compliance with the legal requirements.

If any tax-exempt charitable bodies are found to be carrying out activities incompatible with the charitable objects stated in their governing instruments, or if their income and assets are found not wholly used for the charitable purposes stated, the IRD would require them to provide further information so as to decide whether their tax exemption status should be retained or revoked.

Generally, the IRD would allow the charitable bodies concerned to give an explanation and take appropriate remedial measures, including termination of all activities not relating to the charitable objects of their governing instruments, before revoking their tax exemption status. If they fail to comply on or before the deadline, the IRD would revoke their tax exemption status, and, in the 10 financial years between March 2002 and December 2011, the IRD has revoked the tax exemption status of a total of 909 charitable bodies.

While it was confirmed that the charitable bodies which operate private hospitals are all on the list of tax-exempt bodies under the IRO, the IRD could not disclose if it has ever issued warning letters to any of the charitable bodies which operate private hospitals, owing to the secrecy provisions in the IRO.

Nevertheless, Chan did conclude that, from a taxation perspective, the IRD considers that the relevant provisions in the IRO have served the dual purposes of granting appropriate tax exemption for various types of charitable bodies and protecting revenue.

TAGS: compliance | tax | business | tax compliance | health care | Hong Kong | tax breaks | charities

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