MACAO TAXATION 

by Ho Mei Va, Louisa, Certified Public Accountant of Macao

INTRODUCTION

Macao’s tax regime originated from Portuguese taxation early this century. After various reforms over the years in coping with the changing business environment in the Territory, the Macao tax system has been developed into the present framework with its own features. Macao taxation adopts the territorial source concept of which any person or entity shall be taxed on all income or profits arising in or derived from Macao.

Low tax rates and simple tax structure are the general characteristics of Macao taxation compared to the tax systems of other countries and regions. In Macao, there are in total seventeen taxes divided into two general classifications, namely direct and indirect taxation. Direct taxation is directly levied on taxpayers’ income and assets which mainly includes ‘Complementary Tax’, ‘Professional Tax’, ‘Industrial Tax’, ‘Property Tax’, ‘Inheritance and Gift Tax’, ‘Property Transfer Tax’, and ‘Franchise Tax’. Indirect taxation is levied on consumption of goods and services which generally includes ‘Excise Tax’, ‘Tourism Tax’, and ‘Stamp Duty’.

Among the above taxes, levies of franchise tax are commonly accounted the major source of the Territory’s revenue. Franchise tax is imposed on the franchising businesses, generally including gambling, telecommunication, and public transportation, in accordance with the agreements worked out by the government and related franchisees through negotiations. Details of the levies are determined by government according to the nature of operations of respective franchising businesses. For years the levies of various gambling taxes have continued to predominate in the franchise tax revenues.

The Macao complementary income tax levies are governed by the Law No. 21/78/M of 9th September 1978, "Regulations of Complementary Tax". The Regulations have been modified many times since its promulgation in 1978. The complementary tax is equivalent to the income tax or profit tax in other countries and regions. Macao complementary income tax is regarded as a complement to the levies of industrial tax, professional tax, and urban property tax.

Individuals and corporations, irrespective of their residence or location of head offices, who carrying on commercial or industrial activities in Macao are subject to complementary tax on income arising in or derived from Macao. Taxpayers subject to complementary tax are classified into two groups, group A and group B. Group A taxpayers are those who have maintained appropriate accounting books and records, including anonymous companies with limited liability, companies limited by shares, etc., and any companies with registered capital not less than MOP1,000,000 or with annual average taxable profits for the preceding three years of more than MOP500,000. Individuals or companies with appropriate accounting books and records may elect to be assessed under the group A category by filing applications to the Macao Finance Department. The annual financial accounts prepared by group A taxpayers should be audited and counter-signed by accountants or auditors registered with the Macao Finance Department. Group A taxpayers’ tax liabilities are assessed by the tax authority based on their financial accounts submitted, subject to tax adjustments determined by the authority. Group B taxpayer are those individuals or corporations without appropriate accounting books and records. Tax liabilities of these taxpayers are determined by the tax authority on a deemed profit basis for Macao tax purposes. All taxpayers are required to submit complementary tax returns within the prescribed periods set out in the regulations. Group A taxpayers are obliged to file the returns to the Macao Finance Department in respect of the preceding year between April and June each year, whereas the tax filing period of group B taxpayers is between February and March each year.

The Regulations define the income to mean receipts from carrying on commercial or industrial activities such as sales and the services rendered, financial income, and so on, whether of a recurrent or occasional nature, principal or incidental, are all subject to complementary tax.

Article 21 of the Regulations provides that those outgoings and losses incurred in the activities directed toward the production of income are allowed as deductions from such income. For example, it encompasses operating costs and expenditures, personnel expenses, financial expenses, and allowable depreciation and loss provisions. The deduction for depreciation is set out in the Decree-Law No. 4/90/M "Regulations of Depreciation and Amortisation on Fixed Assets" which classifies the fixed assets into 10 general groups and defines the prescribed depreciation rates for each category of fixed assets. The deduction for provisions is defined in Article 25 to include the allowable provisions for bad debts and stock losses. The Article states that the provision for bad debts not exceeding an amount equal to 2% of accounts receivable balance at end of financial year is deductible, while the maximum deduction for stock loss provision is restricted to 3% of the closing stock value. Certain expenditures may be disallowed by the Macao Finance Department, such as the proportion of entertainment and travelling expenses that the tax authority considers excessive, complementary income tax payments and tax penalties, etc. A tax loss incurred by a group A taxpayer in one financial year may be carried forward and deducted against the taxpayer’s taxable profits of the succeeding three financial years. Taxpayers other than group A shall not be entitled to such deduction of losses carried forward.

In accordance with the Regulations, taxable profits below MOP300,000 are taxed at progressive rates specified in the annexed schedule of the Regulations. Taxpayers with taxable profits exceeding MOP300,000 are taxed at a flat rate of 15%. The following are the current complementary tax rates:

Taxable profits Marginal tax rate Average tax rate

(MOP) % %

Up to $20,000 -- 2

$20,001 to $40,000 3 2.5

$40,001 to $60,000 4 3

$60,001 to $80,000 6 3.75

$80,001 to $100,000 8 4.6

$100,001 to $120,000 10 5.5

$120,001 to $140,000 12 6.5

$140,001 to $160,000 14 7.3

$160,001 to $180,000 16 8.3

$180,001 to $200,000 18 9.3

$200,001 to $220,000 20 10.3

$220,001 to $240,000 22 11.3

$240,001 to $260,000 24 12.3

$260,001 to $280,000 26 13.3

$280,001 to $300,000 28 14.3

Over $300,000 -- 15

Article 9 of the Regulations expressly provides that some organisations are excluded from the charge to complementary income tax, such as government departments and their associated organisations, and incorporated religious organisations. In accordance with the provisions of tax incentive scheme by the government for the industrial sector, certain industrial organisations with new establishment or expansion may apply for a 50% reduction of complementary income tax for a prescribed period agreed by the authorities.

The Macao professional tax is imposed under the Law No.2/78/M of 25th February 1978, "Regulations of Professional Tax". Parts of the provisions have been amended from time to time since the implementation of the Regulations.

According to the Article 5 of the Regulations, individuals subject to professional tax are classified into two groups; group 1 taxpayers are those who are employed by others and receiving employment income, and group 2 taxpayers are those who generate income from carrying out business or providing services in connection with the professions or activities specified in the annexed schedule of the Regulations. Employers of the group 1 taxpayers are required to deduct at source the professional tax in respect of salaries or wages paying to employees. Professional tax collected by employers is payable to the tax authority on a quarterly basis. Further, these employers are also obliged to lodge with the tax authority by end of February each year the professional tax returns in respect of payroll and deducted tax details of employees of the preceding year. Group 2 taxpayers are required to submit annually their personal tax returns within the prescribed period. For those taxpayers of this group without appropriate accounting books and records, the returns in respect of the preceding year should be filed by the end of February each year. Group 2 taxpayers with appropriate accounting books and records should submit to the tax authority their returns relating to their activities in preceding year not later than 15 April of each year.

Articles 2 and 3 of the Regulations provide that all personal earnings including salaries, wages, other remuneration or rewards whether in cash or in kind, regular or occasional, periodical or casual, must be included in assessable income for tax purposes.

Under the Regulations certain allowances or subsidies received by taxpayers, such as medical allowances with supporting documents, family subsidies and pension fund, and so on, may be excluded from the charge of professional tax. Article 17 deals with the deductions that may be claimed by group 2 taxpayers, which generally relate to those inevitable expenditures incurred in carrying on the activities for the purpose of gaining assessable income, such as rental, utilities, communication and insurance expenses, etc.

Professional tax liability is calculated at progressive rates up to maximum of 15% with a personal allowance of MOP85,000 currently available to each individual. For a taxpayer aged over 65 or proved to be a disabled with physical incapacity over 60%, the personal allowance will be MOP120,000. The current professional tax rates are outlined as follows:

Annual assessable income Tax rate

(MOP) %

up to $85,000 Nil

$85,001 to $100,000 10

$100,001 to $115,000 11

$115,001 to $145,000 12

$145,001 to $205,000 13

$205,001 to $295,000 14

Over $295,000 15

Article 9 of the Regulations provides that full exemptions are allowed for the employment income received by certain individuals, including employees of government departments, employees of charitable institutions and ministers of religious organisations. However, the exemptions are limited to the extent of the income derived from the exempted professions defined under the Article. Any other non-exempted income received by such individuals is subject to professional tax.

Property tax is regulated by the Law No.19/78/M of 12th August, "Regulations of Urban Property Tax", introduced in 1978. Property tax is levied on the revenues from real properties in the Territory for each year of assessment. The real properties are defined by the Regulations to exclude those properties solely for agriculture. The taxpayers under this Regulation are those who are entitled to any revenue of the properties. Such taxpayers include the registered owners of the real properties, or the ones physically occupying the properties. Chapter 2 of the Regulations clearly defines that the property tax is generally levied on two categorised real properties. The first category is referred to the leased properties of which the levies are based on the actual rental income. Properties of the second category are those have not been let, such as owner occupied properties and vacant properties. Tax is levied on the deemed rental value of such properties assessed by the relevant authorities.

Article 4 of the Regulations provides that the property revenues include the actual rental income as well as the economic benefits obtained from the properties. The current property tax rate for the leased properties is 16% on the rental income. Properties not leased are taxed at the rate of 10% on taxable revenues deemed by the government based on the estimated value of the properties. The estimated value of properties will be periodically revised by the authorities, taking into account all relevant factors and circumstances from time to time in determining the value of properties. Taxpayers subject to property tax are required to remit their tax payments to the authority generally between June and August each year. A deduction of up to 10% on the taxable revenue of properties of both categories is available to taxpayers to cover repairs and maintenance and other related expenses, provided that such expenses are borne by the taxpayers. For purpose of claiming the deduction, taxpayers must file to the Macao Finance Department the prescribed declaration form in January each year to detail the expenditure items.

With respect to the tax exemptions and relief, the Regulations allow some real properties owned by certain organisations to be exempted from property tax levy, for example, real properties of government departments, religious organisations, and non profit-making educational institutes. Taxpayers of the newly constructed properties, commercial or residential, are entitled under the Article 9 to an exemption from property tax during the initial period; 4 years for properties in Macao city and 6 years for properties on outlying islands. This exemption also applies to those renovated or expanded properties. To qualify for the exemption, the reconstruction costs of such properties should be more than 50% of their market values. Exemptions are also available for industrial properties, where the properties in Macao city are exempted from property tax for the initial 5 years and the properties on outlying islands are exempted for the initial 10 years. According to the relevant tax incentives offered by Macao government to the industrial sector, certain industrial organisations with newly constructed or expanded real properties may apply for exemption from property tax for a period of up to 10 years for properties in Macao city, and a period of up to 20 years for properties on outlying islands. Also, some other tax incentives are available to certain approved corporations and organisations carrying on business in the tourism industry. These taxpayers may apply for exemption from property tax for a given period prescribed by the authorities.

Industrial tax is levied in accordance with the Law No.15/77/M of 31st December 1977 "Regulations of Industrial Tax". Few provisions contained therein have been amended by subsequently implemented laws. The tax is to be chargeable based on the number and type of the industrial or commercial activities carried on by individuals and corporations in the Territory. Tax is levied on yearly basis with fixed sums corresponding to each type of activity. The Regulations set out that individuals or corporations are required to apply to the Macao Finance Department for tax registration of newly commencing industrial or commercial activities in Macao. The taxpayer may only be allowed to commence the operations of a particular activity after registering with the tax authority and settling the initial industrial tax payment. Thereafter, the taxpayer is taxed on each registered activity with the authority for each year. Industrial tax is required to be remitted to the Macao Finance Department generally between February and March each year. In view of the above, the industrial tax in Macao embodies the features of annual business registration and tax registration. The industrial and commercial activities defined under the Regulations exclude the business activities carried out by sole-proprietors which are subject to professional tax provisions.

Industrial tax is levied in accordance with fixed tax sums specified in the activities schedule annexed to the Regulations. There are totally 363 different types of activities classified in the schedule ranging from the minimum tax sum of MOP150 to the maximum of MOP180,000. Most activities are taxed the sum of MOP300 annually.

Tax exemptions and relief are also available to certain organisations, such as the government departments and their associated organisations, charitable institutions, religious organisations, non profit-making educational institutes, and public services corporations. In addition, the taxpayers on outlying islands are entitled to a 50% reduction of the industrial tax. In accordance with various tax incentive schemes by Macao government to the industrial and tourism sectors, some qualified taxpayers may apply for exemption from industrial tax for a given period agreed by the authorities.

According to the relevant regulations, any acquisition of real property in Macao with consideration is subject to property transfer tax which is payable by the purchaser of the property. The tax is generally charged on the assessable value of the property to be transferred. The assessable property value is determined by the relevant authorities based on the selling price agreed by the seller and purchaser of the subject property. The current rate of property transfer tax is 6% for properties in Macao city and 4% for properties on outlying islands.

In order to stimulate the local property market, the government provides concessions on the property transfer tax of newly constructed properties. The concessions apply to the acquisitions of the properties which are exempted from property tax for the initial period. If property transfer tax is to be paid, a 2% reduction is available to the conveyancing of such properties in Macao city and on outlying islands, that is, the effective rate of the former is 4% and the latter is 2%, respectively. Further, the government offers tax incentives in this aspect to taxpayers in the industrial and tourism sectors, which allow some particular industrial organisations to apply for a 50% tax reduction and some taxpayers in the tourism industry who satisfy certain conditions to be exempted from property transfer tax on their properties acquired for tourist business purposes.

Gift and inheritance tax applies to the transfers of properties, including real estate and personal effects, without consideration. The tax is payable on the value of the underlying properties and the tax rates applied vary with the relationship between the deceased and inheritor, or the transferor and transferee, increasingly in order of descendants, parents and grandparents, spouse, brothers and sisters, relatives and other parties, etc. The property value is regarded as the assessable value of the property determined by the relevant authorities based on the value information provided by the beneficiaries. In accordance with the relevant regulations, the said property transfer with assessable value exceeding MOP1,000 will be subject to gift and inheritance tax at rates from a minimum of 5% to a maximum of 36% for properties valued at over MOP1,000,000.

Tourism tax is applicable to the businesses of tourist trade such as hotels, restaurants, bar or fitness clubs, etc., but excluding tenements, cafe, bistros, and cake shops, etc. Tourism tax is charged to the customers at the standard rate of 5% on the invoice total with respect to the services rendered. Tax collected for the previous month must be reported accompanying with the remittance to the Macao Finance Department by the end of every month.

Excise tax is only imposed on certain special items being imported into the Territory, such as tobacco, spirits, petrol and vehicles, etc. There are two methods of charging the excise tax, namely, on quantity basis and on value basis. The former basis is to determine the tax based on the weight or volume of the goods, while the latter basis is according to the price of the goods being imported. Regarding the tax levied on imported vehicles, in accordance with the new regulations introduced by the government in 1996, vehicles are currently taxed at a rate ranging from 10% to 55% on their selling prices. Excise tax chargeable to tobacco and spirits is imposed at various rates on different items due to their wide diversity. For example, spirits are taxed variously from MOP1 to MOP20 per litre, processed tobacco is taxed at MOP2 per ounce, and so on.

CONCLUSION

After Macao’s sovereignty reverts to the People’s Republic of China, Macao will become one of the Special Administrative Regions in China. With its advantage of possessing a mixture of western and eastern cultures and the close relationship with Portugal, Macao will be playing a more significant role in linking the international trades between Mainland China and overseas countries, especially between China and the European Community in bilateral trading. Macao obviously has advantages unique in the region. The Macao government would be better off maintaining the current tax policies emphasising low tax rates and simplicity in order to preserve the existing advantages, enrich the business environment and enhance the confidence of investors in Macao. In the meantime, relevant amendments to those tax regulations which are no longer suitable for the existing economic development should be necessitated and initiated accordingly. The proposed new regulations should be adaptable and adherent to the Macao economy and need to be widely consulted with the entities concerned before the enactment and implementation of the new provisions, thereby a tax system which is equitable as well as keeping pace with the Macao’s economic development can be achieved. These achievements will ensure the stability of the community and underpin the progress in prosperity of the Macao economy in the next decade and beyond.