Provisional Legislative Council

Panel on Financial Affairs Information Paper on Tax Reserve Certificates


This paper briefs Members of the Provisional Legislative Council Financial Affairs Panel on the operation of the Tax Reserve Certificates (TRCs) system.


2. TRCs were first introduced in 1955, primarily to help taxpayers to set aside funds for payment of tax when due. In 1985, the law was amended for TRCs to be purchased as a form of security for tax held over pending the outcome of objections or appeals.

3. There are at present two main categories of TRCs, namely -

  1. those purchased by taxpayers who wish to prepare for the payment of tax in future; and

  2. those required to be purchased by taxpayers who have objected to tax assessments in respect of tax in dispute.

4. TRCs under category 3(b) in general account for less than 5% in number of the TRCs sold but some 80% in value of the total sales. In 1996-97, 44,458 TRCs with a total value of $2,182 million were sold. Of these, 1,069 TRCs (2.4%) with a total value of $1,815 million (83.2%) were sold for objection and appeal cases.

Collecting tax prior to the decisions on appeal/objection cases

5. Section 71(2) of the Inland Revenue Ordinance provides that the Commissioner of Inland Revenue (the Commissioner) may make an order for tax to be held over pending the result of an objection or appeal. It has been the policy of the Inland Revenue Department to allow such hold-over, unless the objection or appeal is considered to be frivolous or to have little or no merit, or if there are doubts about the ultimate collection of the tax involved.

6. Annually, substantial amounts of tax are held over pending the outcome of objections and appeals. As at 31 March 1997, earnings and profits tax in the region of $9 billion was so held over, as compared with $84 billion of earnings and profits tax collected in 1996-97.

7. The Inland Revenue Ordinance was amended in 1985 to enable the Commissioner to make a tax hold-over order conditional upon the purchase of TRCs or the furnishing of a banker's undertaking.

8. The main purposes of requiring the purchase of TRCs as securities for tax held over are :-

  1. to prevent any abuse of the hold-over provisions as a means of deferring tax payment; and

  2. to avoid any possible loss of revenue in the event that tax held over ultimately becomes irrecoverable.

Payment of interest

9. Upon settlement of an objection or appeal, TRCs previously purchased are to be redeemed -

  1. with interest payable if the objection or appeal succeeds; or

  2. without the payment of interest if the objection or appeal fails.

10. 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. The payment of interest under such circumstances is to compensate the taxpayer for the temporary loss of the use of funds during the processing of the objection or appeal. In the case where the objection or appeal fails, and hence the Commissioner's assessment in respect of the tax payable is upheld, there are no reasons for the payment of interest to the taxpayer concerned as the taxpayer should have paid the tax had he not objected or appealed.

11. In recent years, of TRCs redeemed upon settlement of objections or appeals, the total value involving payment of interest was roughly the same as that without interest payment. In 1995-96, $285 million (53%) of TRCs redeemed upon settlement of objections or appeals involved payment of interest, while in 1996-97 $333 million (45%) redeemed involved payment of interest.

Interest earning period

12. Each TRC purchased voluntarily by taxpayers for tax payment has a maximum interest-earning period of 36 months, and interest ceases to be earned afterwards. This gives flexibility to those taxpayers who have purchased TRCs in amounts greater than their tax liabilities. We consider the 36-month period adequate. The average period for holding TRCs is only six months.

13. For TRCs purchased in objection or appeal cases where tax has been held over, the 36-month rule does not apply and there is no limit on the interest earning period. This ensures fairness to the taxpayers whose tax has been held over as the finalisation of objections or appeals of a complex nature could take more than 36 months.

Interest rate

14. Since the deregulation of the interest rate system of the Hong Kong Association of Banks in early 1996, the interest rate on TRCs has been determined on the basis of the moving average of the 6-month fixed deposit rates offered by the three note-issuing banks. This reflects the period for which TRCs are held on average, i.e. 6 months prior to redemption. The interest rate is reviewed every three months to take into account changes in interest rates offered by the note-issuing banks. Changes in the interest rate are published in the Gazette for public information.

15. Changes in the interest rate of TRCs in the past 12 months are as follows -


Interest Rate

2 December 1996 - 1 June 1997

4.80% per annum

2 June 1997 - 31 August 1997

4.92% per annum

1 September 1997 - 30 November 1997

5.52% per annum

On or after 1 December 1997

6.24% per annum


16. We consider the current TRCs system reasonable. It strikes an appropriate balance between the interest of the taxpayers and the protection of revenue.

Finance Bureau
December 1997

FIN CR 3/2306/54 Pt. 7