XN000022-1977-02-16 — Page 5

WEDNESDAY, FEBRUARY 16, 1977

THE COMMITTEE FELT THAT AS IT WAS HARD TO DECIDE WHETHER THE RECEIPT OF A DIVIDEND COULD JUSTLY BE CONSIDERED TO CONSTITUTE A SEPARATE SOURCE OF INCOME, IT WAS NECESSARY TO EXAMINE THE PROPOSALS FOR IMPOSING A DIVIDEND WITHHOLDING TAX AND THE RELATED UND ISTRIBUTED PROF ITS TAX AND, HAVING DONE SO, IT CAME TO THE CONCLUSION THAT (A) IN THE LEGISLATION AS DRAFTED THE NEED FOR SIMPLICITY AND THE REQUIREMENT OF EQUITY WERE IN CONFLICT= AND (B) THAT THE SIMPLER APPROACH OF RAISING THE PROFITS TAX RATE ON THE ASSESSABLE PROFITS OF COMPANIES WOULD BE JUST AS APPROPRIATE WHEN A METHOD IS SOUGHT TO REGULATE THE TAX BURDEN ON SHAREHOLDERS WHO ARE INDIVIDUALS,

4.

THAT IN BROAD TERMS THE EXISTING RESTRICTION OF THE VARIOUS

CHARGES IN THE ORDINANCE TO INCOME HAVING A HONG KONG SOURCE SHOULD

BE MAINTAINED BUT THAT BUSINESS PROFITS ACCRUING TO A TRADE OR

BUSINESS EXERCISED IN HONG KONG, WHICH ARE NOT SUBSTANTIALLY CAUSED

BY THE ACTION OF A BRANCH OUTSIDE HONG KONG SHOULD ALSO BE BROUGHT

TO CHARGE. THIS EXTENSION OF THE CHARGE WOULD ALSO APPLY WHERE THE

BUSINESS PROFITS TAKE THE FORM OF INTEREST DERIVED BY BANKS AND

ALLIED INSTITUTIONS.

THE COMMITTEE FELT THAT THE EXISTING TESTS TO IDENTIFY THE ORIGIN OF PARTICULAR PROFITS HAVE OVER THE YEARS BEEN PUT UNDER CONSIDERABLE STRAIN AND THAT AN INTERMEDIATE CATEGORY OF PROFITS, WHILST EXEMPT FROM HONG KONG TAX AT PRESENT, ARISES FROM THE EXISTENCE OF A BUSINESS AND ITS MANAGEMENT IN HONG KONG. IT IS POINTED OUT THAT THE FAILURE OF THE HONG KONG ADMINISTRATION TO TAX THESE PROFITS IS LIKELY TO PRODUCE THE RESULT THAT THEY DO NOT SUFFER TAX ANYWHERE. THE COMMITTEE THEREFORE FELT THAT IN INCLUDING THESE PROFITS, THE DOUBLE TAXATION PROBLEMS FEARED BY ITS PREDECESSORS WOULD NOT ARISE.

THE COMMITTEE STATED THAT IT DID NOT, AS DID ITS PREDECESSORS, FEEL THAT THE EXTENSION OF THE PROFITS TAX CHARGE IN THE WAY RECOMMENDED WOULD BE INCONSISTENT WITH THE HONG KONG TAX STRUCTURE AND, WHILST IT RESPECTED ITS PREDECESSORS' DOUBTS AS TO WHETHER THE EXTENSION WOULD BE EFFECTIVE, NEVERTHELESS IT CONSIDERED THAT THE ATTEMPT SHOULD BE MADE.

5. THAT THE CHARGE TO INTEREST TAX SHOULD BE EXTENDED TO INCLUDE

IN ITS AMBIT INTEREST PAID BY A PERSON CARRYING ON A TRADE OR

BUSINESS HERE ON MONEY BORROWED BY HIM OR EMPLOYED OR EXPENDED IN

OR IN CONNECTION WITH THE PRODUCTION OF THE ASSESSABLE PROFITS OF

THAT TRADE OR BUSINESS.

/AFTER