Column: HK Technical Column(s)

A total of 32 Hong Kong Inland Revenue Board of Review decisions were published in Volume 23 of the IRBRD and the first and second supplements, collectively. This total consisted of 12 Salaries Tax cases, 12 Profits Tax cases, six Penalty Tax cases and two Property Tax cases. The following is a summary of these cases....

Article 3 of the Corporate Income Tax Law of the People’s Republic of China1 (CIT Law) provides that China-sourced incomes of non-tax resident enterprises2 (non-TRE) that have no  establishment in China shall be subject to Chinese corporate income tax (CIT). These incomes, as specified in Article 19 of the CIT Law, include dividends, interest, rental income, royalties received by non-TRE, and gains derived from disposal of assets by non-TRE. Such incomes are taxed at source, and generally the payers have the obligation under Article 37 of the CIT Law to withhold and to settle the withholding income tax (WHT) on passive income and capital gains with the Chinese tax authorities when payment of the passive income is made or due. The applicable withholding tax rate was originally 20 per cent in the CIT Law and has been reduced to 10 per cent according to Article 91 of the Detailed Implementation Regulations of the Corporate Income Tax Law...

The appeal case of Ngai Lik Electronics Company Limited v. The Commissioner of Inland Revenue was heard on 8 July 2009 and the judgment was handed down by the Court of Final Appeal (CFA) on 24 July 20091 partially in favour of the taxpayer. The appeal case is an antiavoidance case under section 61A of the Inland Revenue Ordinance (IRO). Under this section, where a transaction (including an operation or scheme) which has been entered into and, with consideration of the specified seven factors in the same section, for the sole or dominant purpose of enabling a person to obtain a tax benefit, the Inland Revenue Department (IRD) is empowered to assess that person either as if the transaction had not been entered into or in such other manner it considers appropriate to counteract the tax benefit....

The appeal case Commissioner of Inland Revenue v. Datatronic Limited was heard by the Court of Appeal of Hong Kong on 25 June 2009 and its judgment was delivered on 15 July 2009. In essence, the Court of Appeal overruled the previous year’s decision of the Court of First Instance and allowed the appeal in favour of the Inland Revenue Department. In this article, we discuss the case background and the rationale leading to the Court of Appeal’s decision. We then provide critical commentary on the decision and its implications for the controversial source principle of the Hong Kong profits tax regime. Lastly we also explore the matter of the treatment of plant and machinery used in an import processing arrangement....

Hong Kong is famous for having a welladministered tax system, a flexible economy, and a track record of embracing new ideas. Its Government has a policy of “user pays” wherever possible. It also has, like many communities, environmental problems, and it has a vibrant civil society calling for faster action to fix them. In theory, Hong Kong should be on the cutting edge of using taxation to help achieve environmental goals. In practice, however, it has so far found it difficult to make significant progress. This article examines the hurdles officials have faced in applying green taxes to reduce pollution and waste and encourage environmentally friendlier practices, and asks what might happen in the future....

Judgement in the appeal case of the Ngai Lik Electronics Company Limited (“the appeal case”) was handed down by the Court of Appeal (COA) on 15 October 2008. The appeal was an anti-avoidance case under section 61A of the Inland Revenue Ordinance (IRO). Under seven provisions specified in section 61A of the IRO, where a transaction has been entered into for the sole or dominant purpose of enabling a person to obtain a tax benefit, the Revenue is empowered to assess that person either as if the transaction had not been entered into or in such other manner it considers appropriate to counteract the tax benefit. As in other precedent court cases, the judges of the COA in the appeal case had to make their decisions with reference to these key provisions of section 61A, namely 1) whether the transaction would have the effect of conferring a tax benefit; 2) whether the sole or dominant purpose of the transaction was...

The Board of Review (the Board) has published the Third Supplement to Volume 22 of the Hong Kong Inland Revenue Board of Review Decisions. This Supplement contains a total of 10 cases, including five on salaries tax, three on profits tax, one on property tax, and one on application to state a case. At the outset, two points are noteworthy. First, of the 10 decisions, five are in Chinese, which reflects the growing importance and popularity of the use of Chinese in Hong Kong judicial procedures. Second, the Board only partly allowed one profits tax case in D49/07 and dismissed all other appeals, again raising concern over whether taxpayers are possibly abusing the Board of Review appeal system. These decisions are reviewed below....

In light of the criticisms of the Court of Final Appeal (CFA) in ING Baring Securities (Hong Kong) Ltd v. CIR,1 it is appropriate to review the tax appeals system in Hong Kong and make recommendations for reform, in particular to the structure of the Inland Revenue Board of Review (BoR).2 This article consists of three Parts. Part I sets out an introduction and methodology. Part II contains the key recommendations for reform. Part III contains suggestions for reviewing some procedures concerning the work of the BoR, which might be regarded more as “internal matters” for consideration by the Board....

Sections 61 and 61A of the Inland Revenue Ordinance (IRO) are the two main general antiavoidance provisions in Hong Kong tax legislation. Section 61 deals with artificial or fictitious transactions and allows the Inland Revenue Department (IRD) to disregard such transactions when assessing taxpayers, while section 61A considers transactions entered into for the sole or dominant purpose of obtaining a tax benefit. Under section 61A, where a transaction has been entered into and, with respect to the seven factors specified in the section, it would be concluded that the person, or one of the persons, who entered into or carried out the transaction, did so for the sole or dominant purpose of enabling a person to obtain a tax benefit (the relevant person), the IRD is empowered to assess that person as if the transaction had not been entered into or in such other manner it considers appropriate to counteract the tax benefit. Historically, the application of section 61 has...

Probably because of the many perceived drafting deficiencies of section 20, a specific antiavoidance provision contained in the Inland Revenue Ordinance (IRO) targeting certain nonarm’s-length pricing arrangements between a resident and a closely connected non-resident of Hong Kong, the section has seldom be invoked in practice. Instead, the Inland Revenue appears to be keener to invoke the general anti-avoidance provision contained in section 61A of the IRO to attack non-arm’s-length transfer pricing arrangements generally....