Column: HK Technical Column(s)

The judgment of the Court of Appeal in Nice Cheer Investment Ltd (NCIL) v. Commissioner of Inland Revenue (CIR) [2012] HKCA 257 (Nice Cheer) upheld the decision by the Court of First Instance that unrealised gains on the revaluation of onshore trading investments at the balance sheet date were not taxable in Hong Kong whereas unrealised losses on the same investments in another year could be deducted. Such an asymmetrical treatment of unrealised profits and unrealised losses provides cash flow benefits to taxpayers: While tax is not paid until a gain is realised, a deduction can be claimed for an unrealised loss. Given the potential impact of the decision in Nice Cheer on tax collections, one would anticipate that the Hong Kong Inland Revenue Department (IRD) will be very cautious when handling similar claims lodged by taxpayers, especially before the Court of Final Appeal rules on this case later this year (2013)....

The Li & Fung (Trading) Ltd (Li & Fung) case was heard by the Court of Appeal (COA) on 14 and 15 February 2012. The COA upheld the Court of First Instance’s judgment and unanimously handed down the case on 19 March 2012.1 As the Inland Revenue Department (IRD) has decided not to appeal against the COA’s decision to the Court of Final Appeal (CFA), the COA’s decision that the commission earned by Li & Fung is offshore profit and not taxable is thus now final. It is observed that the COA’s decision follows the well-established principle in the CFA’s decision in ING Baring Securities (Hong Kong) Ltd v. CIR (ING Baring case)2 that to determine the source of profits, the focus should be on direct profitproducing transactions rather than on antecedent or incidental business activities. The COA’s decision also indicates that, where appropriate, the activities of a subagent or a subcontracted service provider would be relevant in determining the...

Aside from avoiding double taxation in respect of cross-border transactions and facilitating trade and investment between two jurisdictions by way of lowering withholding taxes on certain passive income flows, the prevention of tax evasion is also a key purpose of a comprehensive avoidance of double taxation agreement1 (“CDTA”). In this regard, a CDTA will normally include an exchange-of-information (“EoI”) article specifying that the tax authorities of the two jurisdictions can exchange certain information in respect of taxpayers in order to prevent tax evasion....

The First and Second Supplements of Volume 25 of the Inland Revenue Board of Review Decisions (IRBRD) have recently been published with 21 cases reported: one penalty tax case, one personal assessment, one property tax case, seven profits tax cases, and 11 salaries tax cases. This commentary includes cases on penalty tax, the meaning of “ordinarily resident” for the purpose of granting dependent parent allowance, the trading in landed properties, avoidance of profits tax, interest deduction on personal assessments, and more....

On 20 November 2010, the Government of the Hong Kong Special Administrative Region introduced a Special Stamp Duty (SSD) on residential property acquired and resold within 24 months. In June 2011, the Legislative Council passed the relevant amendment to the Stamp Duty Ordinance. This article first examines the reasons for and the mechanism of the SSD. It then looks at a number of issues, namely constitutional challenges, determination of holding periods, certainty and proportionality, use of shell companies, and transfers of payment arising from introduction of the SSD. Finally, it proposes that in addition to the SSD, the Government could make use of existing antiavoidance measures to combat ever-rising property prices....

The third supplements of Volume 25 and Volume 26 of the Board of Review Decisions have recently been published, with 26 cases being reported: 16 salaries tax cases, 8 profits tax cases, and 2 property tax cases. Among the cases included in this commentary are cases dealing with the assessment of share option benefits, a rental refund arrangement, property-dealing profits, a tax avoidance scheme, and the meaning of (a) “residence” for the purpose of home loan interest deduction and (b) “permanent resident” for the purpose of personal assessment election....

Since enacting a law in January 2010 to enable it to adopt a wider exchange of information article in its comprehensive double taxation agreements (“DTAs”), Hong Kong has achieved a significant expansion of its DTA network. Since making the relevant legislative amendments, Hong Kong has concluded 17 DTAs, bringing the total number of DTAs concluded with other jurisdictions to 22 as at 14 December 2011. In addition, Hong Kong is currently conducting DTA negotiations with at least a further 14 jurisdictions. Given this momentum, Hong Kong’s DTA network looks set to further expand at a rapid pace....

Li & Fung (Trading) Limited (Li & Fung) had its head office in Hong Kong, and many of its most senior staff were based there. Li & Fung normally entered into contracts with its customers under which it was appointed as the customers’ buying agent. The agency agreements specified the services to be provided by Li & Fung to its customers in connection with the manufacture, sale, and purchase of goods. Such services included finding suppliers to manufacture goods and selling the goods so sourced to Li & Fung’s customers as buyers. Li & Fung managed the sourcing and manufacturing processes to ensure that satisfactory goods were supplied to its customers.Li & Fung had entered into contracts with its overseas affiliates under which the latter had undertaken to perform certain services. These overseas affiliates usually had their own staff. Li & Fung engaged or acted through these overseas affiliates or sourcing companies in performing those services which it had contracted...

In Hong Kong, there are two different sets of authority that respectively govern the preparation of financial statements and the determination of assessable profits. Apart from the listing rules and relevant provisions contained in the Companies Ordinance Cap.32, where applicable, the preparation of financial statements is governed by the Hong Kong Accounting Standards (HKAS) and the Hong Kong Financial Reporting Standards (HKFRS) promulgated by the Hong Kong Institute of Certified Public Accountants (HKICPA), whereas the assessable profits for Hong Kong profits tax purposes are determined by the provisions contained in the income tax legislation (i.e. the Inland Revenue Ordinance (IRO) Cap.112) and relevant court decisions. In practice, the ascertainment of assessable profits starts off from the profit before taxation that is reported in the income statement. Taxpayers then make the necessary “book-to-tax” adjustments from the profit before taxation should there be any provisions of the IRO that prescribe a treatment that is different from the HKAS or the HKFRS and...

The recent surge in Hong Kong property prices has increased concerns about the affordability of property among low-to-middle class income residents, as well as a potential risk that a property bubble will be created as a result of speculative property-dealing activities. Since the onset of the global financial tsunami, the monetary policies of certain economies have helped to increase global liquidity and have resulted in a large inflow of “hot money” into the Hong Kong financial system, particularly from the Chinese Mainland. It has been reported that more than 600 billion Hong Kong dollars in hot money flowed into Hong Kong after the global financial meltdown in late 2008, a significant amount of which was injected into the stock and real estate markets. A substantial portion of hot money also flowed into Hong Kong following the 4 trillion renminbi Chinese stimulus package in November 2008, which led to a massive influx of buyers from the Chinese Mainland....