CO129-617-2 Hong Kong Telephone Company 22-2-1947 - 3-11-1947 — Page 20

Colonial Office,

Downing Street,

S. W. 1.

8th August, 1947.

20.

Dear Follows,

I am sorry to have been a little slow answering your letter of the 23rd June about the Hong Kong Telephone Company, but it has necessitated some research to see just what papers are available here. The correspondence which actually is available may not help you much as only a comparatively short account was given at the time of the discussions which led up to the Amending Ordinance of 1940, but I enclose a copy of the "Objects and Reasons" appended to the Bill and of Butters' speech in moving the First Reading in the Legislative Council.

I have also consulted Butters personelly, since, as you probably know, he is now working temporarily in the Office. On the particular point which you rise of the reason for the

mortization provision, neither my recollections nor Butters can help you much as we do not go back far enough. You will no doubt realise that the 1940 Ordinance was not regarded as ideal in itself, but was a compromise with a powerful bested interest which had already got pretty favourable terms in the previous 1925 Ordinance. In my own negotiations with the Telephone Company, I had considerable doubts whether the original provision for amortization had been justified, but I did not feel that the principle, having been once conceded, could successfully be challenged. What the 1940 Ordinance did was to substitute a different form of amortization provision in order to meet certain difficulties from a technical point of view, and produce something which was more workable. The figure given, by the way, in paragraph 3 of your letter is not correct, the mount the Company was allowed to deduct from profits for amortization purposes before the 1940 Ordinance was $170,482, not #02,577. figure was the new sum substituted in 1940 under the revised arrangements by which the interest und dividends from the accumulated investments also went into the capital reserve. will note that the sum which the Company now puts forward is almost identical with that which was allowed before 1940.

You

Looking at the thing simply on its merits a priori, I do find it difficult to understand why the Company should have smortization of its capital as well as full provision for depreciation of its actual plant. I should, therefore, want a good deal of convincing that it was justifiable to increase the original amortization of new capital which may have to be invested at this stage. I should certainly see every objection to provision being made which would enable this particular Company to recover its war damage losses at the public expense irrespec- tive of any general scheme which may be worked out to deal with war damage. That would, I think, be the effect of the proposal outlined in your letter. I should, therefore, advise you to resist that pretty strongly, although, of course, there may be a case for it on the Company's side which has not yet been clearly set out.

Finally, there is one point about which I admit I WAS doubtful when we saw the 1940 Ordinance here, but which we did not take up at the time. That was the provision for the deduction of war profits tax before calculating the excess profits to be divided between the shareholders and the Government. If I understand that provision correctly, it had the effect of guaranteeing the shareholders 12% free of tax, and, if so, I think it was wrong. I suggest, therefore, that on the intro- duction of income tax, you make no corresponding provision with regard to the deduction of that, but leave the shareholders to bear income tax on their 12%, as I am sure it is equitable that they should.

Yours sincerely,

C.G. FOLLOWS, ESQ.

MATTAIG

C.M.G.

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