Column: HK Technical Column(s)

Before the enactment of the Inland Revenue (Amendment)(No.7) Ordinance 2018 in relation to the enhanced tax deduction for research and development (“R&D”) expenditure, section 16B of the Inland Revenue Ordinance (“IRO”) provided 100 per cent tax deduction for expenditure on R&D with respect to 1) payments to approved research institutes or 2) expenditure incurred in-house by the taxpayers themselves. Moreover, capital expenditure on machinery and equipment for the purposes of R&D also qualifies for 100 per cent deduction in the year it was incurred.   During his 2018/19 Budget Speech, Mr. Paul Chan, the Financial Secretary of Hong Kong, highlighted the importance of innovation and technology for the Hong Kong economy:   “To shine in the fierce innovation and technology race amidst keen competition, Hong Kong must optimise its resources by focusing on developing its areas of strength, namely biotechnology, artificial intelligence, smart city and financial technologies (Fintech), and forge ahead according to the eight major directions set out by the Chief Executive.”   In line...

This article reviews the cases reported in the first and second supplements of Volume 35 of the Board of Review Decisions (the “Decisions”), which were published in May and June 2021, respectively. There are seven salaries tax cases (one salaries tax case, D11/19, is classified as a profits tax case in the Decisions), seven profits tax cases, one administrative issue case, and one penalty tax case reported. Three of the salaries tax cases concern income received after termination of employment, which the taxpayers argued was not payment for services but was compensation or payment for something else. D11/19 is now under appeal at the Court of Appeal. Of the seven profits tax cases, two concern source of profits (one source case also considers deduction of specified capital expenditure), two consider deductibility of expenses under section 16, and three cases are related to the sale of property. It is worthwhile to note that in many cases the Board imposed a costs...

Introduction   In perhaps one of the most important works of contemporary Italian fiction, The Leopard,[2] Giuseppe Tomasi di Lampedusa has one of his main characters, a scion of the decaying Sicilian aristocracy, quip that “if we want everything to stay as it is, everything has to change”. Those fateful words would in these days of base erosion and profit shifting (“BEPS”) appear to be likewise applicable to Hong Kong’s Inland Revenue Ordinance (“IRO”). We never tire of touting the merits of Hong Kong’s ‘low and simple’ tax regime,[3] though it is by any objective standard neither especially low nor especially simple. If current thinking within the Organisation for Economic Co-operation and Development (“OECD”) and, most pressingly as at the time of writing, the European Union (“EU”) has cast serious doubt on the viability of Hong Kong’s territorial tax code, now would be a good time for the Legislature to take the initiative and to commence a proactive dialogue with Hong Kong’s...

Introduction   A charitable institution or trust of a public character may obtain tax exemption status from the Inland Revenue Department (IRD) under section 88 of the Hong Kong Inland Revenue Ordinance (“IRO”).   In our article published in the November 2020 issue of the Asia Pacific Journal of Taxation, we pointed out that a charitable organisation’s tax exemption status does not automatically relieve it from tax on any profit it derives from carrying on any trade, profession, or business. The conditions as set out in the proviso to section 88 of the IRO must be satisfied for such profit to be tax exempted. This article analyses further the points to note when considering whether certain common activities of charities constitute a “business” and when considering the tax implications of a charity’s non-Hong Kong activities.   In addition to the proviso to section 88 of the IRO, charitable organisations should also be aware that the tax exemption status granted under that section does not extend to...

This article reviews the cases reported in Volume 34 and the first supplement of Volume 34 of Board of Review Cases, which were published in December 2019 and March 2020, respectively. There are eight profits tax cases, one salaries tax case, and five penalty tax cases reported. Regarding the eight profits tax cases, three concern property disposal, two concern source of profits, two concern deductibility of expenses, and one concerns appeal out of time. The Board ordered costs in all but one of the penalty cases because of the incompetency of the professional advisors involved. In two of the penalty cases, the Board expressed that if it were not for the need for confidentiality, the cases would have been referred to the relevant professional bodies for disciplinary investigation due to the incompetency of the representatives or the professional misconduct of the taxpayer....

This article reviews the cases reported in the second and third supplements of Volume 34 of the Board of Review Decisions (“Decisions”), which were published in June and September 2020, respectively. There are nine salaries tax cases, four profits tax cases, one property tax case, and two penalty tax cases reported (one penalty case, D10/18, is classified as a profits tax case in the Decisions). Of the four profits tax cases, two concern deductibility of expenses; one considers 50/50 offshore claim, deduction of depreciation allowances, and deduction under section 16G; and one case is related to the sale of property. It is worthwhile to note that in many cases the Board imposed a costs order on the taxpayers....

The literature on the Hong Kong Basic Law is considerable and a substantial part of it addresses the constraints on the Government’s taxing and spending powers. This article aims to add to it by making two main points. First, whilst the provisions in the Basic Law dealing with the SAR Government’s budgetary processes are based on the Westminster model, they are also, in important respects, unique. Secondly, the meaning and justiciability of the provisions dealing with the Government’s taxing and spending powers (in particular, the rules enshrining the low tax policy and the Government’s obligation to balance its budgets) is unclear and is likely to be put to the test at some point. Keywords: Hong Kong, China, tax, taxing and spending power, constitution, Basic Law, fiscal constitutionalism, low tax policy, handover, Westminster model, fiscal firewall, balanced budget...

Under section 88 of the Hong Kong Inland Revenue Ordinance (“IRO”), a charitable institution or trust of a public character may obtain tax exemption status from the Inland Revenue Department (IRD). Many charities in Hong Kong could very easily fall into the illusion that they are automatically exempt from tax for all sorts of income they derive once they are recognised by the IRD as “a charitable institution or trust of a public character”. However, the revised version of the Tax Guide for Charitable Institutions and Trusts issued by the IRD in April 20201 has made it clear that this is not the case for charities carrying on a trade, profession, or business. Charitable organisations should be aware that their tax exemption status does not preclude the IRD from reviewing them. In particular, profits from specific income-generating activities of a tax-exempt charity may be taxed despite the charity’s overall tax exemption status....

This article will review the cases reported in the second and third supplements of Volume 33 of Board of Review Cases, which were published in April and July 2019, respectively. There are four profits tax cases, five salaries tax cases, one property tax case, one appeal out of time case, and one case on penalty and costs of a hearing. Regarding the four profits tax cases, two are on property disposal, one is on a source issue, and one looks at whether the lending of money constitutes business. The salaries tax cases cover the issues of deduction of professional subscription fees, deduction of home loan interest, source of employment, chargeability of termination payment, and finalization of tax liability....

The tax treatment of carried interest (often referred to simply as “carry”) has been a contentious issue in Hong Kong for a number of years and one which has never been comprehensively addressed by the Inland Revenue Department (IRD). In this article, we examine the practices which have emerged in relation to the issue in Hong Kong, consider the extent to which those practices can be reconciled to the law, and explore ways in which the issue could be dealt with in order to better align with the law and provide an equitable outcome with high levels of certainty....