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This chapter focuses on the continuation of Hong Kong's remarkable growth from 1981 to 1997. In 1981, it was already an internationally important trading and financial centre, but by the time it was returned to Chinese rule in 1997, it was one of the richest cities in the world. The chapter also explains why the colonial government abandoned its original goal of a normal income tax and how, having given up on the possibility of structural reform, it turned its attention instead to the amendment of the schedular system in the Inland Revenue Ordinance.

This chapter discusses post-war developments in Hong Kong's system of income taxation as shaped by Sir Mark Young and Sir Alexander Grantham. Young's term in office was marked by his attempt to introduce a normal income tax, resulting in the Inland Revenue Ordinance 1947, which resurrected, in a modified form, the “partial income tax” provided for by the War Revenue Ordinance 1941. Shortly after the Ordinance became law in May 1947, however, he retired and so it fell to Grantham to pursue the goal of a normal income tax. However, the public record suggests that Grantham was reluctant to do anything which would antagonise Hong Kong's business community and that his prevarications effectively transformed the supposedly temporary Ordinance into a permanent feature of Hong Kong's tax system.

This chapter examines Sir Arthur Clarke's term as Financial Secretary and the works of the First Review Committee. Clarke had arrived in the Colony in 1930 and served as Commissioner of War Taxation in 1940 and 1941. After the war, he was promoted to Deputy Financial Secretary under Follows and secured the top job when Follows retired at the end of 1951. In 1952, Governor Alexander Grantham established the First Inland Revenue Ordinance Review Committee to review the Inland Revenue Ordinance. Clarke served as the Committee's chairman, but as will be seen, its terms of reference forbade it to consider the possibility that Hong Kong should have a normal income tax, or that the schedular taxes should be extended to cover offshore income.

This chapter discusses the factors which contributed to the failure of the restructuring of the colonial tax system in Hong Kong. First, the yield of the Inland Revenue Ordinance 1947 was greater than the government had expected and speedily paid off its alleged debt to Britain and went on to accumulate enormous reserves. Secondly, the British government did not insist on the establishment of a normal income tax. Thirdly, Hong Kong's business interests continued to oppose reform and the Chinese business community remained unrelentingly hostile to anything resembling a normal income tax. Lastly, Sir Alexander Grantham, who succeeded Sir Mark Young as Governor in 1947 and served until 1957, also opposed reform and made no attempt to carry out London's instructions. This may be due to the well-known phenomenon of colonial Governors “going native”, and identifying with “their” colonies' interests rather than Britain's.

This chapter focuses on Hong Kong's tax system in the 1970s. Murray Maclehose and Philip Haddon-Cave were the two key figures in the colonial administration in the 1970s. In 1976, Maclehose established a committee to review the tax system—the Third Inland Revenue Ordinance Review Committee. Unlike the First and Second Committees, the Third was intended to review the basic structure of the tax system; and unlike their predecessors, Maclehose and Haddon-Cave committed themselves to a highly visible campaign to institute reform. Ultimately, however, this campaign came to very little: the system's basic schedular structure remained intact; offshore profits remained untaxed, whether attributable to an offshore branch or not; and the plan to introduce a tax on dividends was abandoned. In all three respects, the Ordinance remains unchanged today.

This chapter focuses on the British Handover of Hong Kong to China. On 30 June 1997, Hong Kong ceased to be a British colony and became a Special Administrative Region (SAR) of the People's Republic of China. This transition entailed no change in the territory's tax system. The Inland Revenue Ordinance, like almost all the legislation left behind by the colonial regime, remained in force. China promised that Hong Kong would enjoy a high degree of autonomy and that the structure of its government would remain unchanged. More particularly, China made it clear that there still would be a complete separation between Hong Kong's tax system and public finances.

The system of taxation provided for by the Inland Revenue Ordinance has been extraordinarily successful. It has almost always, together with the other sources of public revenue, produced more money than the government has wanted to spend. More importantly, the Hong Kong people seem curiously content with the combination of very low spending and very light taxes. One answer, therefore, to the question “Where to go from here?” is, “If it ain't broke, don't fix it.” In other words, one conclusion to be drawn from the Hong Kong tax system's extraordinary record of success is that reform is neither required nor desirable.