WEDNESDAY, APRIL 12, 1978
INLAND REVENUE (AMENDMENT) EILL
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THE FINANCIAL SECRETARY THE HON. PHILIP HADDON-CAVE INTRODUCED THE INLAND REVENUE (AMENDMENT) BILL 1978 IN THE LEGISLATIVE COUNCIL TODAY.
HE SAID THIS BILL IS A REFORM MEASURE WITH TWO OBJECTIVES: FIRST, TO AMEND THE CHARGE TO PROFITS TAX ON BANKS AND OTHER FINANCIAL INSTITUTIONS, WITH A VIEW TO PLACING THEM IN A ERCADLY SIMILAR POSITION TO OTHER BUSINESSES- AND, SECONDLY TO IMPROVE THE YIELD FROM THE CHARGE, SO AS TO HELP THE GOVERNMENT MAINTAIN THE RATE OF TAX ON CORPORATE PROFITS GENERALLY AT THE EXISTING RATE OF 17 PER CENT FOR AS LONG AS POSSIBLE.
ACCORDINGLY, THE BILL SEEKS TO DEEM INTEREST ACCRUING
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TO A BANK OR A FINANCIAL INSTITUTION AS ARISING IN HONG KONG WHERE SUCH INTEREST ARISES DIRECTLY OR INDIRECTLY THROUGH, OR FROM, THE CARRYING ON EY A BANK OR OTHER FINANCIAL
INSTITUTION OF ITS BUSINESS IN HONG KONG. CONSEQUENTLY, PROFITS FROM SUCH INTEREST WILL BE CHARGEABLE TO PROFITS TAX.
BACKGROUND
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UNDER THE INLAND REVENUE ORDINANCE, PAYMENTS OF INTEREST TO THOSE PERSONS (FOR EXAMPLE, BANKS) HO ARE REQUIRED TO RETURN INTEREST AS PART OF THEIR BUSINESS PROFITS ARE EXEMPT FROM INTEREST TAX AS SUCH, BUT SUCH PAYMENTS ARE CHARGEABLE TO PROFITS TAX WHERE THE SOURCE OF THE INTEREST IS HONG KONG AND WHERE THE INTEREST IS DERIVED FROM A TRADE OR BUSINESS
CARRIED ON IN HONG KONG.
THE ORDINANCE LAYS DOWN NO TEST FOR DETERMINING THE SOURCE OF INTEREST, THAT IS TO SAY, WHERE THE INTEREST ARISES IN OR IS DERIVED FROM. HOWEVER, CASE LAW HAS ESTABLISHED THAT, FOR THE PURPOSE OF DETERMINING THE SOURCE OF INTEREST, THE TEST TO BE USED IS THE PLACE WHERE THE CREDIT IS MADE AVAILABLE TO THE BORROWER.
WITH THE EMERGENCE OF HONG KONG AS A FINANCIAL CENTRE, AND WITH MORE SOPHISTICATED TECHNIQUES NOW BECOMING AVAILABLE, THIS TEST HAS PROVED INCREASINGLY ARTIFICIAL AS A MEANS OF DETERMINING SOURCE.
FOR EXAMPLE, IT IS POSSIBLE TO CARRY CUT 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 REVT EN