35
Plainly it is not: all the
This
that the total tax payable would be increased to $198,900.
raises the question of whether section 157G is binding on the
Commissioner of Inland Revenue.
section does is to make unlawful for company law purposes a particular
formula for calculating a director's remuneration.
One further example may be added to illustrate the confusion
that can arise from section 157G. If a company agrees to pay a
director $830,000 "free of tax", and to pay the tax thereon of
$141,100, under the Inland Revenue Ordinance the director's income
for Salaries Tax purposes would be $971,100 and not $830,000 as
section 157G directs. The total tax payable under the Inland Revenue
Ordinance would therefore be $165,087 and not $141,100. If the
company paid the addition tax on tax further tax would be due and so
it might go on ad infinitum. The problems are theoretically worse than
this because the addition of tax on tax to income for Provisional
Salaries Tax will compound the amount payable to refund tax year by
year. Quite how section 157G(2) would operate in such circumstances
is not clear.
In practice foreign multinationals with Hong Kong subsidiaries
invariably ensure that their Hong Kong based directors are paid a tax
inclusive gross salary that will yield the required "free of tax"
remuneration and no problem occurs with the Inland Revenue Ordinance.
However, my inquiries indicate that section 157G(2) is either ignored
or misconstrued. The subsection is derived from section 189 of the
Companies Act 1948 and correctly construed means that the "prohibited
remuneration is to be construed as a provision for the payment of the
stipulated sum to the director, leaving him to pay the ... tax in
136