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Publications and Press Releases :
Press Release
: News Archives
Legislative Council Passes Inland Revenue (Amendment)
Bill 2000
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The Legislative Council passed the Inland Revenue
(Amendment) Bill 2000 today (16 June).
Introduced in October 2000, the Bill seeks to amend the Inland Revenue
Ordinance (Cap. 112) mainly to strengthen anti-avoidance provisions,
align provisions with the original policy intentions, and introduce
changes to taxing arrangements in light of changes in market practices.
The amendments cover five main areas:
(a) strengthen the anti-avoidance provisions on deduction of interest
expenses;
(b) revise the provisions relating to royalty income, in the light
of a ruling of the Court of Final Appeal (CFA);
(c) revise the provisions relating to the depreciation of industrial
and commercial buildings;
(d) expand the scope of self-education expense deduction; and
(e) revise the provisions relating to the determination of certain
costs and fees for tax appeal cases handled by the Board of Review.
The Bill does not cover any major policy change.
Moving the motion to resume the Bill for the second reading in LegCo
today, the Secretary for Financial Services and the Treasury, Mr
Frederick Ma, said "The main purpose of the Bill is to effectively
combat tax avoidance activities which take advantage of the loopholes
that exist in the current provisions on deduction of interest expenses
and royalty income for profits tax purposes."
"The Bill, if adopted, can recover tax revenue or prevent tax
revenue loss amounting to tens of billions of dollars, according
to the Inland Revenue Department's estimate," he stressed.
Professional bodies, trade associations and chambers have been fully
consulted on the proposals and made a number of suggestions, many
of which have been incorporated into the Committee Stage Amendments
proposed by the Administration.
Following are the major provisions:
Strengthening anti-avoidance for interest deduction
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A key objective of the Bill is to strengthen the anti-avoidance
provisions for interest deduction to prevent abuse by disallowing
interest deduction involving indirect interest flow-back and to
reflect more clearly the policy intent that companies should not
be able to gain interest deduction benefits by creating artificial
interest expense streams through issuing debentures or commercial
papers and then subscribing to them through their associates.
The present proposal has struck a balance between the uniformity
and fairness of the taxation policy, consideration of market operation,
international practice and the need for revenue protection.
Revising provisions relating to royalty income
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Another major purpose of the Bill is to revise the provisions relating
to royalty income to bring them into line with the principle of
deeming the sums received for the use of or right to use of any
intellectual property in Hong Kong to be trading receipts if such
sums are allowed to be deducted the profits tax liability. This
was a well-established assessment practice adopted by IRD until
a recent CFA ruling. The amendment helps prevent tax avoidance through
changes to the manufacturing process.
The proposed amendment is consistent with the original policy intent
and the practice in other jurisdictions. If the Ordinance is not
amended, huge amounts of tax revenue will be at stake. The loss
may increase in multiples as and when more enterprises are aware
of this ruling and take advantage of it to reduce their tax liability,
given that most of our manufacturing base has been relocated outside
Hong Kong.
Revisions to the provisions relating to the depreciation of industrial
and commercial buildings
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The proposal enables all the depreciation allowances previously
granted to a building, which has been used both as an industrial
building and as a commercial building, to be accounted for in the
calculation of balancing charge and allowances of the building upon
its disposal.
These amendments are needed in view of the frequent changes in the
use of buildings from industrial to commercial, and vice versa.
The existing provisions may require the Inland Revenue Department
to provide for an over-generous and distorted depreciation allowance
claim upon disposal of the building. This loophole needs to be plugged
to protect revenue.
Expansion of scope of self-education expenses deduction
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Under the amendments proposed in the Bill, the scope of the self-education
expense deduction is extended to cover examination fees for courses
provided by eligible education providers or professional, trade
or business associations.
In addition, in response to the request of the Bills Committee,
the scope of deduction has been further extended to cover courses
not necessarily provided but recognised or accredited by the major
trade associations for the regulated professions. The courses accredited
or recognised by a total of 35 organisations which are related to
the setting of standards of the professions regulated by legislation
and two other statutory training institutions (the Vocational Training
Council and the Construction Industry Training Council) qualify
for the deduction.
More taxpayers may now benefit from this self-education expense
deduction. The amendments relating to the expansion in scope of
the deduction are in line with the Government's policy of encouraging
self-education.
Provisions relating to the Board of Review
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The Bill seeks to remove from the main legislation to a new Schedule
two costs/fees in relation to the Board of Review in order to streamline
the legislative procedures. After the amendments, the Secretary
for Financial Services and the Treasury is empowered to vary the
amounts by an order, which is subject to Legislative Council's approval.
The Bill also empowers the Board of Review to extend the time for
lodging notice of appeal, thereby improving the arrangements for
taxpayers lodging tax appeal applications.
Application
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Different parts of the amendments have different application schedules.
Basically, the concessions would take retrospective effect while
the new anti-avoidance rules would only take effect from the 2004/05
assessment year.
Ends/Wednesday, June 16, 2004
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