Ordinary Gweilo

The government is apparently thinking of bringing forward the start date for the concession on the domestic helper levy.  It’s often a mistake for a government to announce something too far in advance – the classic example being the abolition of dual mortgage tax relief by the UK government 20 years ago.  People rushed to buy before the deadline, prices shot up – and then fell dramatically, leaving many people with negative equity. 

Clearly this change is nothing like so dramatic, but it still creates opportunities for people to take advantage of the concession.  One option I hadn’t thought about is mentioned in an editorial in the SCMP today (Relief on maids levy must be fair to all – subscription required):

The arbitrary nature of the relief for employers leaves potential loopholes that can be exploited at the expense of helpers. Their representatives have raised fears that unscrupulous employers would terminate helpers’ contracts so they could sign new ones from September 1 without paying the levy, a tactic they could repeat before the suspension expires on August 31, 2010, in order to get another two years’ relief. The Department of Immigration is expected to announce more details of the new policy next week. The change needs to be seen to work fairly for both employers and their helpers. The government tacitly acknowledged this yesterday by suggesting that suspension of the levy could be brought forward.

Most employers will eventually receive some benefit – when they sign or re-sign a contract with a helper during the two-year period. But if the change had been thought through better, the government would have made the changes immediate and refunded employers on a pro-rata basis for the part of their helper’s contract that falls within the suspension period. This would ensure all employers are treated equally and none are tempted to break contracts or hold off on hiring in order to take advantage. It is not too late to make it that simple and transparently fair.

It can be made even simpler if they refund the levy on all current contracts (as of the announcement date).  I don’t see why there is any need to make a pro-rata calculation – the levy will have been paid for a two-year period and that is the length of the concession.  Employers who sign new contracts after the announcement won’t benefit, and the only case in which this would be unfair would be if an old contract had expired just before the date and a new one was signed just afterwards, but that would only affect a tiny number of people.    

However, I’m still puzzled that people seem not to realize that terminating a contract early means that you lose however much of the levy you have already paid.  

They didn't think this through, did they?

On Wednesday, the government announced that the current domestic helper levy of HK$400 per month would be suspended from 1 September for 2 years (which is the length of a domestic helper contract).  However, this concession only applies to contracts signed on or after that date, so if you start a new contract on or before 31 August you would have to pay the levy for the next two years.  In theory, you would then benefit when you sign the new contract starting in August 2010, but that depends on a couple of things – if this turns out to be a permanent concession then of course you have missed out on the saving for two years, and if doesn't then you would need to sign the new contract by 31 August.

So, of course, employers are considering waiting until 1 September to sign a new contract, or may even terminate an existing contract in order to start a new one and get the benefit as soon as possible (though this may not be worthwhile doing).  Which would be fair enough, except for the big problems this will cause to the domestic helpers – would have to leave Hong Kong (because of immigration rules), which means paying the airfare on top of the loss of the salary they would have earned if they had started a new contract immediately).

The SCMP reports that the government thinks this will not be a problem (Fears that maids will be sacked rejected – subscription required):

The Immigration Department yesterday dismissed fears that the timing of a two-year suspension of the levy on foreign maids could lead to widespread sacking of helpers.  Suspension of the HK$9,600 levy, announced on Wednesday, applies only to contracts signed on or after September 1. This has led to fears that employers would terminate contracts of maids they now employ to take advantage of the decision.

Concern has also been voiced that employers whose helpers' terms are ending would delay hiring until September, forcing out-of-contract maids to leave Hong Kong until then.

A department spokesman said details of the new policy would be  announced early next week.  He said he did not think the new policy would lead to helpers' contracts being terminated.  "If employers terminate contracts, they have to pay for the air ticket, one month's pay and wages for the helper's holidays," he said.

It's strange that they don't mention the levy under the existing contract would have already been paid, so there doesn't seem to provide much incentive to terminate a contract early.  However if the contract expires in August you could simply wait until 1 September to start a new contract, so there would be no need to pay one month's wages in lieu of notice.  If you think that the levy will actually be abolished in two years rather than being re-introduced then you might think it worthwhile to give one month's notice to terminate the contract – but only if it expires within the next few weeks.

Joseph Law, chairman of the  Employers of Overseas Domestic  Helpers Association, said the government should backdate introduction of the policy to July 1.  "I am afraid if the government uses September 1 as a cut-off date, some employers will wait until then [to hire helpers]," he said. "As a consequence, the helpers who finish their contracts in the next few weeks will have to leave Hong Kong, as new employers will not sign new contracts."

That seems possible, except that parents are not going to want to be without a helper during the school holidays, so maybe the impact will be limited.

Part of the problem here is that this is such a strange tax. It is due upon signing a contract, and can either be paid as a lump sum or in four fixed installments.  If the contract is terminated, the government does not refund the money that has been paid (and any outstanding payments are still due), but it will be offset this sum against the next contract for the same employer.  It's not clear whether the government will follow the same rules and offset the levy that's been paid against a future contract that starts after 1 September 2010).   

If the levy was paid monthly, the government could suspend the payments for 2 years, which would make it all quite simple, instead of which we have this mess.

The other point that needs to be made is that when this levy was introduced it was really a tax on domestic helpers' salaries, because their salaries were cut by the same amount as the levy.  Now the government is suspending the levy, and it is the employers who are getting the benefit.