CODE 18 - 1
18
Reference......
Mr Smith
ގ
1.
2.
Mr Stewart (HKGD)
w bound/ for know's meeting pas
REPORT OF THE THIRD INLAND REVENUE ORDINANCE COMMITTEE
1. The principal areas covered by the report are as follows:-
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Interest payments
Company profits and dividends
Income from property
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Income of wives
Income in kind
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Various minor matters are dealt with including the aggregation of income for the purpose of taxation, the definition of expenses and the taxation of shipping companies.
2. The first two areas contain the most controversial of the proposals which strike at the traditional role of Hong Kong as a tax haven for foreign companies. The second two areus contain proposals which in the main are uncontroversial. The recommendations in the final area are to be faulted both in terms of social policy and also in terms of the professed desire for neutrality and equity between tax payers. The paragraphs below deal with the recommendations in more detail.
3. The problem which the long Kong authorities face when taxing interest payments and company profits arises from their determination to tax only incone which arises in Hong Kong. To quote the Report "The purpose must be to subject all significant flows
of income which are the result of activity carried on in Hong Kong rather than elsewhere."
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For loans and interest payrents the courts have decided that the origin of the income flow in the place where the credit came into being. Since there is no control over capital move- ments in Hong Kong, the place where a credit originates is clearly arbitrary (as money can be transferred around the world at little cost). Thus it is possible to avoid interest tax by routing a loan via an offshore tax haven. The Report suggests a modification so that the criteria for taxing interest should be the place where the loan is used. So that if a loan is used in Hong Kong, the borrower will have to deduct interest tax before payment of the interest to the lender. A non resi lent lender will be brought more securely into the net of Hong Kong taxation, for non residents receiving other forms of income the net has already been fairly well drawn. The objection that this change in taxation will shift income tax liability to the borrower rather than the lender is incorrect. A non resident has always been liable to Hong Kong tax, the change is in the definition of the origin of an income flow. The principle of the chane seems laudable, its effect though will be to raise the cost of external finance for llong Kong
/companies