(Source : Government Information Centre)
Amendments to the Inland Revenue Ordinance proposed
The Government proposes to introduce a composite bill to amend the Inland Revenue Ordinance in different provisions for various purposes. The most important purposes are to amend the provisions relating to profits tax on royalty income following a recent Court of Final Appeal ruling; to tighten anti-avoidance provisions on interest payment deductions; and to revise provisions on depreciation allowances for buildings having regard to the latest market practices.
Highlighting the major provisions in the Bill, a Government spokesman said that it was necessary to amend the provisions relating to profits tax on royalty income received by an overseas business entity in respect of the use of its trademark in Hong Kong.
"The need stems from a recent Court of Final Appeal decision which ruled that royalties payable for the use of a trademark on goods sold outside Hong Kong should not be chargeable to profits tax and that, in the circumstances of the case, only those royalties paid on goods manufactured in Hong Kong were chargeable to profits tax. This deviates from the long-standing practice of the Inland Revenue Department whereby royalty income has been charged to profits tax as long as the trademark has been used by a Hong Kong business entity in producing assessable profits, irrespective of where the goods concerned were manufactured or sold. Given that a substantial part of our manufacturing activities has been re-located outside Hong Kong, this decision may give rise to significant revenue losses from profits tax, estimated to be in the order of $200 million a year."
"The proposed amendment seeks to deem royalty income earned by a non-Hong Kong business entity to be chargeable to profits tax where the payer (a business entity in Hong Kong) is allowed a deduction as an expense incurred in deriving assessable profits in Hong Kong. This, in effect, will enable the Inland Revenue Department to continue with the assessing practice it has applied since this provision was enacted in 1971,"the spokesman explained.
Another important objective of the Bill is to strengthen anti-avoidance provisions relating to deductions for interest payments -- one of the allowable deductions under profits tax.
The existing provisions aim at combating tax avoidance schemes which seek to create allowable interest deduction where the corresponding interest income is not taxable, or where the actual recipient of the interest income is an associate of the borrower.
"We consider it necessary to tighten the existing anti-avoidance provisions, in the wake of increasing incidence of aggressive tax avoidance schemes which cannot be readily caught by such provisions. They involve schemes making use of various tax planning tools, such as trusts, alienation of interest income, and artificial public issues of debentures in overseas stock exchanges, for the purpose of engineering artificial interest payment situations through circular flows of funds within companies in a group without any genuine external borrowing which requires real interest expenses," the spokesman explained.
The proposed legislative amendments seek to counteract the identified types of avoidance arrangements, by restricting more stringently the deductibility of interest payments where associated parties are involved.
The third most important part of the proposed amendments under the Bill concern provisions relating to depreciation allowance for capital expenditure on industrial and commercial buildings under profits tax..
As the law now stands, when a commercial or industrial building is disposed of, the difference between the disposal price and the written down value will either be granted as a balancing allowance (if disposal price falls below written down value) to the taxpayer, or imposed as a balancing charge (if disposal price exceeds written down value) on the taxpayer. However, the calculation of the balancing allowance or balancing charge presently only takes into account the allowances granted in respect of the current use of the building at the time of its disposal. In other words, if the use (from industrial to commercial or vice-versa) has changed at any time prior to disposal of the building, all the allowances granted in respect of its previous use are not taken into account.
"As it has become quite common for industrial buildings to be converted into commercial buildings, such provisions do not adequately cater for the latest developments in the market, and are vulnerable to abuse. We therefore propose to amend the Ordinance to the effect that any initial, annual and balancing allowances granted, and balancing charges made, when the building was used previously as either an industrial or commercial building, will be aggregated with the allowances granted under its current use (industrial or commercial as appropriate) to derive the net overall position when calculating the balancing charges or allowances at the time of the building's disposal. The amendments will also provide for the appropriate calculation of annual allowances where a change of usage takes place," the spokesman said.
"We would also like to take this opportunity to propose a series of miscellaneous amendments to the Inland Revenue Ordinance for the purpose of clarifying legislative intent, remedying irregularities, and streamlining legislative procedures. These include proposals to bring claims relating exclusively to examination fees for qualifying courses within the scope of self-education expenses under the salaries tax; to remove the mandatory requirement that a car parking space must be valued together with the dwelling concerned as a single tenement in order to qualify for the home loan interest deduction under the salaries tax, so long as it is financed by the same home loan; and to empower the Board of Review to extend the time for lodging notice of appeal in respect of assessments to additional tax."
The Inland Revenue (Amendment) Bill 2000 will be gazetted on 5 October, and introduced into the Legislative Council on 18 October.
A summary of the specific purposes underlying each of the amendments in the Bill is at Annex.
Summary of specific objectives underlying proposals in the Inland Revenue (Amendment) Bill 2000
1. To revise the provisions relating to royalty income for revenue protection to subject royalty income received by non-residents from local businesses to Profits Tax, irrespective of whether the goods covered by the royalty are manufactured in Hong Kong.
2. To strengthen anti-avoidance provisions to restrict more stringently deduction for certain interest payable to non-associated persons only.
3. To revise provisions relating to the depreciation of industrial and commercial buildings to cater for changes in market practice to take into account any prior usage of a building or structure in calculating balancing allowances and charges for commercial and industrial buildings and structures; to deal with the method of computation of annual allowances to be applied to a subsequent user of a building or structure; and to consolidate and amend the provisions on balancing allowances and charges for both commercial and industrial buildings and structures.
4. To remedy some irregularities to clarify legislative intent
(a) to bring claims relating to exclusively examination fees for qualifying courses (i.e. without tuition fees) within the scope of self-education expenses;
(b) to remove the requirement that a car parking space must be valued together with the dwelling concerned as a single tenement in order to qualify for the mortgage loan interest deduction;
(c) to empower the Board of Review to extend the time for lodging notice of appeal.
(d) to remove doubt as to when assessments become final and conclusive in case an appeal to the Board of Review is withdrawn; and
(e) to make a technical amendment to the Chinese text of the term "any charitable institution or trust of a public character".
5. To revise provisions on costs and fees
(a) to provide for the maximum amount of costs which may be imposed by the Board of Review to be specified in a schedule to the Ordinance and empower the Secretary for the Treasury to vary the amount by an order; and
(b) to provide for the amount of the fee payable to the Board of Review for an application to state a case to be specified in a schedule to the Ordinance and empower the Secretary for the Treasury to vary the amount by an order.
6. To repeal spent provisions.
Section 89(1) and Schedule 5, which concern transitional arrangements and apply to the year of assessment commencing on 1 April 1989, are now time-barred under section 60(1).
End/Wednesday, October 4, 2000