WEDNESDAY, NOVEMBER 14, 1990
1
GOVERNMENT TO RESTRICT USE OF LEVERAGED LEASING AS A TAX SHELTER
*
THE FINANCIAL SECRETARY, THE HON SIR PIERS JACOBS, MADE A STATEMENT IN THE LEGISLATIVE COUNCIL THIS (WEDNESDAY) AFTERNOON LEVERAGED LEASING. THE FULL TEXT OF HIS STATEMENT IS AS FOLLOWS:
SIR,
ON
I HAVE BECOME CONCERNED AT THE INCREASING USE BEING MADE IN HONG KONG OF LEVERAGED LEASING AND SIMILAR ARRANGEMENTS AS TAX SHELTERING DEVICES. THE AMOUNT OF TAX REVENUE DEFERRED AS A RESULT OF THESE TRANSACTIONS IS ALREADY THREATENING TO REACH $1,000 MILLION THIS YEAR, A LEVEL THAT CANNOT BE TOLERATED. I THEREFORE PROPOSE TO SEEK AN AMENDMENT TO THE INLAND REVENUE ORDINANCE TO RESTRICT THE SCOPE OF THE TAX BENEFITS AVAILABLE TO PERSONS ENTERING INTO LEVERAGED LEASING ARRANGEMENTS.
A
WHICH ACQUIRES
SMALL
A LEVERAGED LEASE TRANSACTION IS TYPICALLY ONE IN LIMITED PARTNERSHIP OF INVESTORS, USUALLY CORPORATIONS, MACHINERY OR PLANT, COMMONLY AIRCRAFT, WHICH IS THEN LEASED BY THAT PARTNERSHIP FOR A TERM OF 10 YEARS OR MORE TO A LESSEE. BY REASON OF THE "LEVERAGE" OBTAINED FROM BORROWING A SUBSTANTIAL NON-RECOURSE LOAN, THE PARTNERSHIP IS EFFECTIVELY AT RISK FOR NO MORE THAN A PART OF THE ASSET COST. ON THE OTHER HAND, FOR HONG KONG TAX PURPOSES THE PARTNERSHIP IS ENTITLED TO INITIAL AND ANNUAL DEPRECIATION ALLOWANCES ON THE FULL COST OF THE ASSET, AND THE INDIVIDUAL MEMBERS OF THE PARTNERSHIP CAN SET OFF THEIR RESPECTIVE SHARE OF THE RESULTANT PARTNERSHIP LOSS AGAINST TAXABLE PROFITS THEY MAY DERIVE FROM OTHER BUSINESSES.
1986 IN
LEGISLATION WAS INTRODUCED WITH THE INTENTION OF DENYING DEPRECIATION ALLOWANCES WHERE SHIPS OR AIRCRAFT HAD BEEN ACQUIRED THROUGH LEVERAGED LEASE TRANSACTIONS AND THE LESSEE, REFERRED TO AS
OPERATOR. THE END-USER, WAS NOT A HONG KONG SHIP OR AIRCRAFT HOWEVER, MORE AND MORE EXAMPLES OF SCHEMES ARE BEING ENCOUNTERED WHERE THE END-USER OF SHIPS AND AIRCRAFT ACQUIRED THROUGH A HONG KONG LIMITED PARTNERSHIP IS A FOREIGN OPERATOR.
UNDER THE NONETHELESS, EXISTING LEGISLATION DEPRECIATION ALLOWANCES CANNOT BE DENIED TO THESE SCHEMES.
SUBJECT TO THE ADVICE OF THE EXECUTIVE COUNCIL, AMENDMENTS WILL BE
INTRODUCED IN THE COMING YEAR TO ENSURE THAT FOREIGN OPERATORS DO NOT GET THE BENEFIT OF SUCH DEPRECIATION ALLOWANCES. IN ADDITION, I PROPOSE TO INTRODUCE FURTHER AMENDMENTS TO RESTRICT THE ABILITY OF THE PARTNERS OF A LIMITED PARTNERSHIP TO SET OFF THEIR SHARE OF THE LOSSES INCURRED BY SUCH A PARTNERSHIP. IN FUTURE, THE SHARE OF LOSS THAT CAN THE AMOUNT THE OFF AGAINST OTHER INCOME WILL BE LIMITED TO BE SET LIMITED PARTNER ACTUALLY HAS AT RISK IN THE PARTNERSHIP.
SUBJECT
ΤΟ ITS
LEGISLATION WILL APPLY TOMORROW'S DATE, THAT IS,
BEING PASSED IN THIS
TO TRANSACTIONS ENTERED 15 NOVEMBER 1990.
THE COUNCIL,
PROPOSED
INTO ON OR AFTER
/FOR THE