XN000022-1978-08-16 — Page 5

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WEDNESDAY, AUGUST 16, 1978

LOOPHOLE IN PROFITS TAX CHARGE PLUGGED

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THE INLAND REVENUE (AMENDMENT) BILL 1978, WHICH SEEKS TO AMEND THE CHARGE TO PROFITS TAX ON FINANCIAL INSTITUTIONS WITH A VIEW TO PLACING THEM IN A SIMILAR POSITION TO OTHER BUSINESSES, WAS PASSED INTO LAW BY THE LEGISLATIVE COUNCIL TODAY.

SPEAKING AT THE RESUMED DEBATE ON THE BILL, THE FINANCIAL SECRETARY, THE HON. PHILIP HADDON-CAVE, SAID THAT TO THIS END, THE BILL SEEKS TO CHARGE TO PROF ITS TAX INTEREST WHERE IT ARISES THROUGH, OR FROM, THE CARRYING ON BY A BANK OR OTHER FINANCIAL INSTITUTION OF ITS BUSINESS IN HONG KONG, IRRESPECTIVE OF THE PROVISION OF CREDIT TEST.

EXPLAINING THE UNDERLYING PRINCIPLES OF THE BILL, MR. HADDON- CAVE SAID THE APPLICATION OF A CREDIT TEST, BY THE COMMISSIONER FOR INLAND REVENUE WAS BASED ON THE PLACE WHERE THE CREDIT IS MADE AVAILABLE TO THE BORROWER. THE PRESENT POSITION IS THAT IT IS POSSIBLE TO CARRY OUT ALL MATERIAL OPERATIONS IN HONG KONG AND YET, PROVIDED THE CREDIT IS MADE AVAILABLE OUTSIDE HONG KONG, NO TAX IS PAYABLE. THIS HAS RESULTED IN FINANCIAL INSTITUTIONS RÉCEIVING, IN PRACTICE, FAVOURABLE TREATMENT WHICH IS NOT AVAILABLE TO OTHER BUSINESSES IN HONG KONG.

+WITHOUT THE ENACTMENT OF THIS BILL, THE EXISTING LOOPHOLE, THROUGH THE APPLICATION OF THE PROVISION OF CREDIT TEST. WILL REMAIN UNPLUGGED AND THE LOSS OF LEGITIMATE REVENUE INVOLVED WILL BECOME PROGRESSIVELY LARGER AS THE FINANCIAL SERVICES SECTOR OF OUR ECONOMY EXPANDS, MR. HADDON-CAVE SAID.

THE FINANCIAL SECRETARY THEN REPLIED TO POINTS RAISED IN THE COUNCIL LAST WEEK BY UNOFFICIAL MEMBERS ON THE BILL.

(1)

ALLEGED INCONSISTENCY WITH THE TERRITORIAL SOURCE CONCEPT

MR. HADDON-CAVE STRESSED THE BILL IS NOT INCONSISTENT WITH THE TERRITORIAL SOURCE CONCEPT IN THAT IT DOES NO MORE THAN CORRECT THE ANOMALOUS SITUATION WHICH HAS ARISEN AS A RESULT OF THE REVENUE'S SOLE RELIANCE ON THE PROVISION OF CREDIT TEST.

+ THE TOUCHSTONE OF THE LIABILITY TO CHARGE IS THE CARRYING ON OF BUSINESS IN HONG KONG AND NOT THE TAXPAYER'S RESIDENCE. INDEED, NON-RESIDENTS AND RESIDENTS ARE TREATED ALIKE.+

(2)

EXISTING LAW IS ADEQUATE FOR THE PURPOSE

THE FINANCIAL SECRETARY DISAGREED WITH THE ARGUMENTS THAT THE LOOPHOLE IS CAPABLE OF BEING PLUGGED WITHOUT AN AMENDING BILL AND THAT THE COMMISSIONER FOR INLAND REVENUE IS ENTITLED TO BRING THESE PROFITS TO CHARGE IN THE ABSENCE OF A CONTRARY DECISION OF A HONG KONG COURT ON THE APPLICATION OF THE PROVISION OF CREDIT TEST WHICH, IN THE IR VIEW, NEED NOT BE THE ONLY DETERMINING FACTOR.

/+IF THE COMMISSIONER