Legislative Council
Panel on Financial Affairs

Review of the Tax Reserve Certificate System
Discussion Paper


We have recently reviewed the tax reserve certificate (TRC) system with a view to improving its operation and making it more equitable to taxpayers as well as to Government. This paper sets out our recommendations and seeks the views of the Panel on them.


Types of TRCs

2. TRCs are provided for tax payment purposes. There are two categories of TRCs : normal TRCs, which are purchased by taxpayers who wish to prepare for the future payment of tax; and conditional TRCs, which the Commissioner of Inland Revenue (CIR) requires taxpayers who have objected to tax assessments to purchase, to cover the total amount or part of the tax in dispute. Conditional TRCs in general account for less than 5% in the total number of the TRCs sold but some 80% in value of the total sales. In 1997-98, 58 554 TRCs with a total value of $1,569 million were sold. Of these, 1 083 TRCs (1.8%) with a total value of $1,287 million (82.1%) were sold in respect of objection and appeal cases.

TRC interest rate

3. Formerly, the interest rate on TRCs was based on the six months' moving average of the six-month time deposit rates offered by the three note-issuing banks for deposits of $100,000 and was reviewed every three months. The long time lag in reviewing the interest rate however meant that there was sometimes a large discrepancy between the TRC rate and the prevailing market interest rate.

4. In order to be more responsive to changes in interest rates in the market, we have recently revised the basis for deriving the interest rate for TRC by referring to the average of the prevailing six-month time deposit rates for $100,000 offered by the three note-issuing banks and carrying out the review every month. As a result, the TRC rate now reflects more closely changes in the time deposit interest rates offered by banks. We consider the current basis for determining the interest rate more equitable to both TRC purchasers and the Government.

Interest earning period

5. Each normal TRC is interest earning provided that it is redeemed for tax payment purposes and each one has a maximum interest-earning period of 36 months. This gives flexibility to TRC purchasers either to provide more than their tax liabilities or to redeem their current year's provision for settlement of ensuing years' tax liability in case of unexpected changes in statutory tax allowances or their assessable income. As the average period for holding TRCs is only six months, we consider the 36-month period adequate. As regards conditional TRCs, there is no maximum interest earning period as the time to conclude a particular objection or appeal case varies. If a taxpayer's objection or appeal succeeds, the tax in dispute will be discharged and the amount held in the form of TRCs will be repaid to the taxpayer concerned together with the interest accrued. In the case where the objection or appeal fails, and hence the assessment of the Commissioner of Inland Revenue (CIR) in respect of the tax payable is upheld, CIR will redeem the TRCs concerned to settle the tax liability of the taxpayer. For such cases, no interest will be paid as the taxpayer should have paid the tax at the original due date. We consider that this arrangement is equitable and do not propose to change the basis for it.


6. We have recently reviewed the operation of the TRC system. We consider that although both normal TRCs and conditional ones are bought for tax payments, they are bought under different circumstances. As such, we recommend that different arrangements should apply to the two types of TRCs in order to reflect their difference. The proposed changes are set out in detail in the following paragraphs.

(a) Abolition of paper certificates of normal TRCs and extension of scripless TRCs to cover all taxpayers

7. At present, certificates of TRCs are issued to TRC purchasers except in the case of the optional Pay-As-You-Earn (PAYE) Scheme which is restricted to civil servants and civil service pensioners. For participants of the PAYE Scheme, the Inland Revenue Department (IRD) maintains individual TRC accounts and deducts the appropriate amounts on a monthly basis from the salaries and pensions of these participants for crediting into the TRC accounts. IRD issues mid-year statements in September each year as well as statements near their tax due dates to the participants and automatically redeems the TRCs on a first-bought-first-redeemed basis for salaries tax payment when the tax in due. The taxpayers would be asked to pay the outstanding tax balance, if any. On the other hand, surplus value of TRCs will be carried forward for payment in the following year. Amongst the 58 554 certificates issued in 1997-98, there were 57 471 (98%) normal TRCs with 34 547 (60%) scripless TRCs bought by those who had joined the PAYE Scheme. It is also noted that most of the normal TRCs buyers are regular buyers.

8. The scripless PAYE Scheme has worked very well. We are planning to extend it to all taxpayers (individuals and companies) as announced in the Chief Executive's Policy Address last October. IRD will take the opportunity to enhance the scripless feature of the system by establishing electronic accounts which can be accessed by the Payment-By-Phone System and banks, the latter of which include automatic teller machines. This will increase the flexibility of the purchase pattern by allowing taxpayers to choose the time when they wish to buy TRCs instead of requiring them to make regular monthly payments for the purchase as at present. For those who choose to deduct savings from the salaries or pensions on a monthly basis into TRC accounts, they will continue to be so classified under the Scheme. To better reflect the nature of the Scheme, we propose to rename it as the "Save-As-You-Earn" (SAYE) Scheme. PAYE has the connotation that the tax is paid when income is received. That is not the case in practice. Under the scheme, money is saved for tax payment. SAYE is therefore a more appropriate description of the scheme.

9. The issue of paper TRCs is resource intensive. Also, taxpayers are required to purchase the certificates in person or by post and the certificates are required to be presented to IRD for redemption. Issuing paper TRCs is therefore costly and not user-friendly. With the enhancement of the scripless system which will become more flexible, we should make use of the improved system to streamline the operation of the IRD as well as to improve efficiency in the operation of the TRC system. We therefore propose to abolish the issue of paper certificates for normal TRCs so that all those who purchase normal TRCs would be given an account instead of paper certificates to record all the transactions. As the purchase of normal TRCs is voluntary, we do not envisage that any taxpayer will be adversely affected by the proposal. Besides, we note that the majority of normal TRC purchasers are regular buyers. The provision of electronic accounts should be an improvement service for them.

10. As for redemption, at present holders of paper TRCs are allowed to choose the particular certificates they wish to redeem and the type of tax they wish the certificates to pay for. On the other hand, scripless TRCs purchased by taxpayers are redeemed automatically by IRD on the tax due date for salaries tax payment. To streamline the operation and minimise administrative work, we propose to standardise arrangements in future when the scripless scheme is extended to all TRC purchasers so that TRCs will be redeemed automatically on a first-bought-first-redeemed basis to settle all types of tax liability of individual and company taxpayers as and when their tax is due.

11. Regarding conditional TRCs, as there is no regular pattern of purchase by taxpayers and hence if an electronic account is to be established for each of them, it is likely that it would only be used once. Also, the number of cases involved is small (1 083 out of 58 554 certificates in 1997-98). We therefore propose that paper certificates should continue to be issued for conditional TRCs.

(b) Providing more equitable TRC interest rates

12. The interest rate applicable to a TRC is fixed at the time when the TRC is purchased by a taxpayer. At present the same rate applies for the entire interest earning period of the TRC concerned. As we have revised the fixed interest rate mechanism and we now review the TRC rate on a monthly basis, the TRC rate reflects closely the prevailing market interest rate. We have also considered the need of adjusting the interest rates in line with the prevailing TRC rates after the first six months. However, this would be cumbersome to administer and is not cost-effective. According to our records, the average holding period of normal TRCs is six months. The present basis for fixing the TRC interest rate is therefore an equitable one for both the TRC purchasers and the Government. In view of these factors, we do not consider it necessary to change the present arrangement in respect of applying the same TRC interest rate throughout the life of a TRC.

13. The situation, however, is different for conditional TRCs as their buyers are directed by CIR to purchase. It is possible that a taxpayer is required to buy a TRC at the time when the interest rate is very low or a taxpayer may be ordered to buy a TRC when the interest is very high. This is sometimes unfair to the taxpayers and sometimes to the Government. Besides, the holding time of conditional TRCs varies very significantly as such period depends on the time taken to conclude the relevant objection/appeal. The present formula of using the six-month time deposit rate does not match with the average holding period of conditional TRCs. We consider it more equitable to base the interest rate for conditional TRCs on the interest rates which are in force from time to time over the tenure of the TRC so that the problem of locking in the interest rate will not arise. This means that every time when the TRC interest rate is reviewed and changed, it will apply to all conditional TRCs.

14. We have considered an earlier suggestion by the Financial Affairs Panel that we should adopt similar arrangements as banks by offering a hierarchy of interest rates for conditional TRCs with reference to the values of the TRCs and the holdover periods. However, maintaining a hierarchy of interest rates for TRCs of different amounts and holding periods will be costly. Besides, as it is not possible to predict the time required for concluding each objection/appeal case, it would be difficult to determine the holding period of a TRC before it is redeemed and apply the appropriate interest rate. We therefore do not think that we are in a position to operate the TRC system in exactly the same way as a bank offering time deposit service. The reason for us to pay interest to taxpayers purchasing conditional TRCs is to cover the opportunity costs for those taxpayers for not being able to use their funds while their objection/appeal cases are being considered. The TRCs also provide a guarantee to CIR to ensure that tax payment for the objection/appeal cases is secured. Taxpayers may also apply for holdovers by providing a bank guarantee. Besides, the TRC system for conditional TRCs will be much improved and fairer when the interest payable on a conditional TRC is calculated based on the interest rates which are in force from time to time over the tenure of the TRC (as explained in paragraph 13 above). We therefore do not consider that we should offer a hierarchy of interest rates to conditional TRCs.


15. We intend to introduce the relevant legislative amendments for effecting the above changes into the Legislative Council as soon as possible. As IRD needs to alter its computer programmes to cater for the changes, the changes will be implemented at around September this year. The changes will only apply to newly purchased TRCs and hence existing TRCs will not be affected.

Finance Bureau
24 February 1999
FIN CR 3/2306/54 Pt. 8