Charities deemed to be undermining national security will lose their tax exemption status, Secretary for Financial Services and the Treasury Christopher Hui Ching-yu warned yesterday.
That comes with the Inland Revenue Department amending its “tax guide for charitable institutions and trusts of a public character,” which applies to more than 9,000 charities including the Hong Kong Confederation of Trade Unions’ funds and the Hong Kong Council of Social Service.
“If any group supports, promotes or engages in activities that endanger national security, the Inland Revenue Department will no longer recognize it as a charity and will revoke their tax exemption status,” Hui declared on his blog.
The revised guide applies to new applications and all existing charities listed as being tax exempt.
Hui said the IRD will also review charities “regularly to check whether they have changed from their original purposes. The department will revoke the charities’ tax-exempt status if they are believed to have deviated from their charitable purpose.”
He said charities must be founded for public interest or charitable purposes, including helping the poor, facilitating education and promoting religions.
“While charitable activities for the public interest are certainly to be encouraged, we should guard against groups which endanger national security under the name of charities,” Hui added.
The 9,000-plus charities enjoying tax exemption include schools, social welfare organizations, arts organizations and religious groups.
Two Hong Kong Confederation of Trade Unions’ funds – the CTU Education Foundation and the HKCTU Workers’ Support Recycling Centre – are also listed as charities.
The confederation said it believed those funds would not be affected by the new code, and it has not had inquiries from authorities.
“The two companies are non-profit-making organizations and have applied for exemption of tax under [the IRD],” confederation chairman Wong Nai-yuen said.
They “focus on training for workers and have never breached the national security law, so I think the amendment of guidelines will not affect us.”
Nor did the Council of Social Service see the operations of social welfare groups being affected by the amendment.
“Currently, there are more than 9,500 tax-exempt charities, and around 10 percent of them offer social welfare services,” a spokesman said.
“The consequences of violating the national security law are very serious, and it’s more than the loss of tax-exempt charity status. We believe the social welfare organizations would not defy the law.”
Simon Lee Siu-po, a senior lecturer at Chinese University’s School of Accountancy, told The Standard that if charities lose tax-exempt status they must pay tax based on profit.
“Under the two-tiered profits tax rates regime, the profits tax rate for the first HK$2 million of assessable profits is 8.25 percent for corporations and 7.5 percent for unincorporated businesses,” Lee explained.
And the tax rate doubles if profit exceeds HK$2 million.
If a charity receives a HK$4 million donation and spends HK$1 million, it would have to pay tax on a HK$3 million profit with a rate of 16.5 percent, meaning HK$495,000 would be due.
“It is based on profit,” Lee said. “No profit, no tax.”
Hui also said his bureau will handle an investigation into 612 Humanitarian Relief Fund, which is not on the list of tax-exempt charities, in accordance with the new tax guide. What the fund had done in the past made people believe the cost of breaking the law was low, Hui said.
Executive councillor Ronny Tong Ka-wah said the 612 Humanitarian Relief Fund and some other crowdfunding platforms could not be regarded as charities.
But the fund does not need to pay tax because one-off donations and crowdfunding do not involve making commercial profits, he said.
Asked if charities receiving donations from the fund would break the law, Tong said they could be guilty of money laundering if they knew funds were proceeds of crime.
Tong said the amendment does not involve policy changes because authorities have always had strict control over charities, so what the updating does is provide clearer instructions for charities.
All charities in the SAR have been required to stay out of politics, he added, so they would not endanger national security.