XN000022-1978-04-12 — Page 6

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WEDNESDAY, APRIL 12, 1978

THE REVIEW COMMITTEE'S RECOMMENDATION

THE THIRD INLAND REVENUE ORDINANCE REVIEW COMMITTEE RECOMMENDED THAT, IN RESPECT OF BANKS AND FINANCIAL INSTITUTIONS ENGAGED IN DEPOSIT-TAKING AND RELATED BUSINESS, THE PROFITS CHARGEABLE TO TAX SHOULD INCLUDE PROFITS FROM INTEREST WHICH THESE BUSINESSES, ACTIVELY CARRIED ON IN HONG KONG OBTAIN WITHOUT THE SUBSTANTIAL INTERVENTION OF ANY BRANCH ELSEWHERE.

THE REVIEW COMMITTEE CONSIDERED THAT, WHERE FUNDS IN THE HANDS OF A BANK'S HONG KONG OFFICE, ARE MADE AVAILABLE OUTSIDE HONG KONG, THE RESULTANT PROFITS OF THE INTEREST DERIVED FROM SUCH LENDING OPERATIONS OUGHT TO BE BROUGHT TO CHARGE. THE COMMITTEE ARGUED THAT THE ORGANISATION WHICH A BANK POSSESSES IN HONG KONG IS BROUGHT INTO EXISTENCE, AND PUT TO WORK, FOR THE PURPOSE OF RAISING THE VERY FUNDS WHICH ARE USED, INTER ALIA,

FOR THE PURPOSE OF ENTERING INTO TRANSACTIONS WHICH GIVE RISE TC THE SUBSEQUENT RECEIPT OF INTEREST. THUS, THE ACTIVITIES OF THE BANK'S ORGANISATION HERE AND THE USE WHICH THAT ORGANISATION MAKES OF HONG KONG ARE, IN ESSENCE, THE SOURCE OF THE PROFITS EARNED ON THESE TRANSACTIONS.

THE REVIEW COMMITTEE CONCLUDED, THEREFORE, THAT THE PROFITS TAX CHARGE SHOULD APPLY TO THE PROFITS WHICH ARISE FROM SUCH TRANSACTIONS. FOR THE SAME REASONS, THE REVIE COMMITTEE FURTHER RECOMMENDED THAT THE CHARGE SHOULD APPLY ALSO TO OTHER INSTITUTIONS WHICH ENGAGE IN DEPOSIT-TAKING AND RELATED BUSINESS.

THE GOVERNMENT'S DECISION

THE GOVERNMENT ACCEPTED THE REVIE.. COMMITTEE'S VIES THAT IT IS A BANK'S ORGANISATION IN HONG KONG AND THE USE TO WHICH THAT ORGANISATION IS PUT TO RAISE FUNDS AND ON-LEND THEM WHICH ARE THE SCURCE OF ITS PROFITS FROM INTEREST. ACCORDINGLY, THE GOVERNMENT AGREED THAT SUCH PROFITS CUGHT TO BE CHARGEABLE TC TAX HERE IN THE SAME SAY AS CONTISSIONS, FEES AND FOREIGN EXCHANGE DEALING PROFITS ARE CHARGED AT THE PRESENT TIME.

WITH THE RAPID EXPANSION OF OFFSHORE BUSINESS, AN INCREASING PROPORTION OF THE PROFITS SC EARNED WOULD OTHERWISE ESCAPE TAX. THERE IS NO JUSTIFICATION FOR THIS, INASMUCH AS THESE PROFITS ARE, AS A MATTER OF FACT, DERIVED FROM ECONOMIC ACTIVITIES CARRIED ON IN HONG KONG,

EASED ON PRESENT INFORMATION AVAILABLE IN THE INLAND REVENUE DEPARTHENT, THE ADDITIONAL REVENUE YIELDS, SHOULD THE DILL BE ENACTED, ÍLL BE ABOUT 144 MILLICH IN 1979-80 AND THEREAFTER ABOUT $80 MILLION PER ANNO.

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