XN000022-1978-03-01 — Page 14

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WEDNESDAY, MARCH 1, 1978

MR. HADDON-CAVE SAID THE REMAINING RECOMMENDATIONS OF THE REVIEW COMMITTEE ARE STILL BE ING EXAMINED BY THE OFFICIAL WORKING PARTY. THESE INCLUDE TWO MAJOR RECOMMENDATIONS RELATING TO MANDATORY ASSESSMENTS OF AGGREGATE INCOME AND THE CONSEQUENTIAL TREATMENT OF PROPERTY INCOME AS BUSINESS PROFITS, A RECOMMENDATION RELATING TO THE TAXATION OF SHIPPING PROFITS AND A SUGGESTION THAT THE PRESENT TABLE OF RATES OF DEPRECIATION COULD, WITH ADVANTAGE, BE SIMPLIFIED.

ON THE TAXATION TREATMENT OF INTEREST, MR, HADDON-CAVE SAID THE REVIEW COMMITTEE RECOMMENDED THAT THE EXISTING CHARGE ON INTEREST AS SUCH, AND ON INTEREST WHICH FORMS PART OF THE PROFITS OF A BUSINESS, SHOULD CONTINUE TO BE RESTRICTED TO INCOPE ARISING IN OR DERIVED FROM HONG KONG, BUT THAT THE CRITERION NEEDS TO BE REINFORCED BY LEGISLATION.

+FIRST, IN RESPECT OF INTEREST GENERALLY, THE REVIEW COMMITTEE RECOMMENDED THAT THIS REINFORCEMENT SHOULD BE BY WAY OF EXTEND ING THE TERRITORIAL SOURCE CRITERION, SO AS TO TAX INTEREST RECEIVED ON FUNDS USED BY THE BORROWER TO PRODUCE PROFITS CHARGEABLE TO HONG KONG TAX UNLESS, OF COURSE, THE INTEREST IS ALREADY BEING TAXED UNDER THE PROVISION OF CRÉDIT TEST.

+SECONDLY, THE REVIEW COMMITTEE RECOMMENDED THAT, IN RESPECT OF INTEREST WHICH FORMS PART OF THE PROFITS OF BANKS AND OTHER DEPOS IT-TAK ING INSTITUTIONS, THE REINFORCEMENT SHOULD BE EFFECTED EY INCLUDING ALL INTEREST WHICH A BANK ING BUSINESS ACTIVELY CARRIED ON IN HONG KONG OBTAINS WITHOUT SUBSTANTIAL INTERVENTION OF ANY BRANCH ELSEWHERE,+ MR. HADDON-CAVE SAID.

HE POINTED OUT THAT UNDER THE INLAND REVENUE ORDINANCE, TAX IS LEVIED AT THE STANDARD RATE ON INTEREST ARISING IN OR DERIVED FROM HONG KONG.

BUT THE ORDINANCE LAYS DOWN NO TEST FOR DETERMINING THE PLACE WHERE THE INTEREST ARISES IN OR IS DERIVED FROM.

+HOWEVER,+ MR. HADDON-CAVE SAID, +EASED ON CASE LAW IT HAS BEEN ESTABLISHED THAT THE TEST TO BE USED IS THE PROVISION OF CREDIT TEST, THAT IS TO SAY, THE PLACE WHERE THE CREDIT IS MADE AVAILABLE TO THE BORROWER.+

+THE PROVISION OF CREDIT TEST TO IDENTIFY THE SOURCE CF INTEREST CHARGEABLE TO TAX HAS PROVED OPEN TO MANIPULATION. +

WITH THE EMERGENCE OF HONG KONG AS A FINANCIAL CENTRE AND ITH MORE GOPHISTICATED INSTRUMENTS NOW BECOMING AVAILABLE, R. HADDON- CAVE SAID, THERE IS A POSSIBILITY THAT EVEN FURTHER ERCSIC OF THE YIELD FROM INTEREST TAX WILL BE EXPERIENCED.

→IT HAS BEEN FOUND THAT LOAN AGREEMENTS CAN BE SO STRUCTURED THAT INTEREST ESCAPES HONG KONG TAX COMPLETELY EVEN WHEN THE PROCEEDS ARE REMITTED BACK TO HONG KONG FOR USE MENE, HE SAID.

LIR. HADDON-CAVE