For many years taxpayers have relied on the Inland Revenue Department’s Departmental Interpretation Practice Notes (“DIPN”). Indeed, these have proved to be extremely helpful and have frequently assisted taxpayers understand how the provisions of the Inland Revenue Ordinance are to be interpreted. However, on the front of each DIPN it is stated that;
“These notes are issued for information and guidance of taxpayers and their authorised representatives. They have no binding force and do not effect a person’s right of objection or appeal to the Commissioner. The Board of Review or the Court”.
In a recent Board of Review Case, B/R 92/2007, the taxpayer contended that it had conformed with the conditions stated in paragraph 15 and 16 DIPN 21 and was therefore entitled to the 50/50 offshore tax concession available to Hong Kong taxpayers who manufactured their products in Mainland China under a processing agreement. Whilst the taxpayer relied heavily on DIPN 21 and the recent decision of the Court of First Instance in CIR v Datatronics Ltd the Inland Revenue Department maintained that it was not bound by the concession in DIPN 21 and sought to rely on the charging provisions of the Inland Revenue Ordinance.
The Board of Review came to the conclusion that there was sufficient evidence to conclude that part of the Taxpayer’s profit making activities took place in Mainland China. Hence, the case was submitted back to the Commissioner of Inland Revenue and the Taxpayer to agree a basis of apportionment.
I find the Inland Revenue Department’s approach in this case quite astonishing seeing that the concessionary 50/50 basis of apportionment in DIPN 21 was introduced to prevent taxpayers getting into endless discussions as to the correct basis of apportionment. Are we in future to negotiate every single offshore claim to establish if a taxpayer should be taxed on 55/45, 60/40 basis, etc?
Whilst I do not know if the Inland Revenue Department will appeal this case the consequences of not doing so could prolong the settlement of many tax disputes and lead to uncertainty, something taxpayers never want.
