2
For example, it is possible to carry out virtually all aspects of banking operations in Hong Kong and yet, provided credit is only made available outside Hong Kong, no tax need be paid. As a result, the yield from profits tax on interest has not, and is unlikely in the future, to keep pace with the growth of profits.
The Review Committee's Recommendation
5.
The Third Inland Revenue Ordinance Review Committee recommended that, in respect of banks and financial institutions engaged in deposit-taking and related business, the profits chargeable to tax should include profits from interest which these businesses, actively carried on in Hong Kong obtain without the substantial intervention of any branch elsewhere. The Review Committee considered that,
where funds in the hands of a bank's Hong Kong office, are made available outside Hong Kong, the resultant profits on the interest derived from such lending operations ought to be brought to charge. The Committee argued that the organisation which a bank possesses in Hong Kong is brought into existence, and put to work, for the purpose of raising the very funds which are used, inter alia, for the purpose of entering into transactions which give rise to the subsequent receipt of interest. Thus, the activities of the bank's organisation here and the use which that organisation makes of Hong Kong are, in essence, the source of the profits earned on these transactions. The Review Committee concluded, therefore, that the profits tax charge should apply to the profits which arise from, such transactions. For the same reasons, the Review Committee further recommended that the charge should apply also to other institutions which engage in deposit-taking
and related business.
/The....