The judgement by Mr Justice Ribeiro PJ in the Court of Final Appeal case of Ngai Lik Electronics Company Limited and the Commissioner of Inland Revenue provides very clear guidance as to the correct approach to take when applying Hong Kong’s general anti-avoidance legislation, Section 61A Inland Revenue Ordinance.
Mr Justice Ribeiro PJ criticised the approach taken by the Inland Revenue Department in raising the additional assessments on the taxpayer and emphasised the need for the Board of Review to clearly identify the tax benefit which was being challenged by the Inland Revenue Department, the transaction which conferred the benefit on the taxpayer and the person or persons having the sole or dominant purpose of conferring the tax benefit.
In Mr Justice Ribeiro PJ’s opinion;
“The practice of the Board in Section 61A cases should be to issue directions to such particulars to be supplied by the Revenue which may be particulars in support of alternative cases before the start of the hearing. That is not to say the Revenue’s particulars cannot be altered. Amendment should be permitted if the evidence or submissions support the existence of a viable alternative or different scheme or tax benefit unless this causes unfairness which cannot be alleviated by case management measures… The aim should be that everyone knows at every stage how Section 61A is sought to be applied in the particular case.”
This opinion is refreshing and most welcome. Only too often the Inland Revenue Department issue far reaching additional assessments that extend beyond the transaction conferring the tax benefit, a fact illustrated by Mr Ho, counsel for the Commissioner of Inland Revenue, who in the words of Mr Justice Ribeiro PJ stated that;
“It was not for the Commissioner to justify the assessments made but for the taxpayer to discharge the onus of showing that the additional assessments were excessive or incorrect pursuant to Section 68(4) of the Ordinance.” The Court found in the present case that the exercise of the Commissioner’s power had been miscarried.
However, often in cases of this nature, a taxpayer may have been required to purchase tax reserve certificates paying derisory rates of interest should the taxpayer’s contention be found to be correct.
I have always questioned why the rate of interest payable on tax reserves certificates should not be the same as the rate of interest payable on unpaid tax, afterall the affect has been to deprive the taxpayer of working capital which is no different from the depriving the Inland Revenue Department of it’s revenue.
Following this decision I sincerely hope that considerably more care and thought is given by the Inland Revenue Department to the methodology applied in determining the profits to be assessed under Section 61A, or indeed other charging sections within the Inland Revenue Ordinance.
