XN000022-1984-03-29 — Page 26

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THURSDAY, MARCH 29, 1984

THE FIRST PROPOSAL IS THAT THE DEDUCTION OF INTEREST AND RELATED EXPENSES IN RESPECT OF BORROWINGS FROM FINANCIAL INSTITUTIONS (OTHER THAN BORROWINGS BY THE FINANCIAL INSTITUTIONS) WILL BE PROHIBITED WHERE THE MONEYS BORROWED ARE SECURED OR GUARANTEED, IN WHOLE OR IN PART, AGAINST A DEPOSIT MADE WITH A FINANCIAL INSTITUTION (WHETHER THE LENDING INSTITUTION OR ANY OTHER SUCH INSTITUTION) BY A CLOSELY CONNECTED PERSON.

MR POON EXPLAINED THAT THE AIM OF THIS PROPOSAL WAS TO PREVENT TAX AVOIDANCE BY BACK-TO-BACK ARRANGEMENTS, WHEREBY SURPLUS FUNDS WERE PLACED WITH A FINANCIAL INSTITUTION TO EARN NON-TAXABLE INTEREST BUT SIMILAR FUNDS WERE BORROWED, ON THE SECURITY OF THE SAME DEPOSITS, WITH THE INTEREST CHARGED TO THE COMPANY TO REDUCE PROFITS TAX LIABILITIES.

HE SAID, +PRESUMABLY, THE WORD 'DEPOSIT IN THE PHRASE 'DEPOSIT MADE WITH A FINANCIAL INSTITUTION' REFERS TO CASH OR BANK DEPOSITS AND DOES NOT INCLUDE PROPERTIES, SHARES OR PERSONAL GUARANTEES GIVEN TO SECURE THE BORROWINGS OTHERWISE NORMAL COMMERCIAL ARRANGEMENTS WILL BE UNFAIRLY HINDERED.+

MR POON ALSO SAID IT WAS ALWAYS DIFFICULT TO DEFINE OR TO ENFORCE ANY LEGISLATION WHICH REFERRED TO A CLOSELY CONNECTED PERSON', HOWEVER, UNLESS SUCH A PROVISION WAS PUT IN, THE PROPOSED LEGISLATION COULD BE EASILY AVOIDED.

THE SECOND PROPOSAL IS THAT THE DEDUCTION OF INTEREST AND RELATED EXPENSES IN RESPECT OF BORROWINGS (OTHER THAN BORROWINGS FROM FINANCIAL INSTITUTION) WILL BE PROHIBITED WHERE THE MONEY BORROWED, IN RESPECT OF WHICH THE INTEREST AND RELATED EXPENSES ARE PAID ARE MADE AVAILABLE OUTSIDE HONG KONG.

+THE PROPOSAL INTRODUCES PROFITS TAX ON INTEREST EARNED IN LOCAL OR FOREIGN CURRENCY BY BUSINESSES CARRIED ON IN HONG KONG, WHETHER THE INTEREST IS DERIVED FROM FUNDS MADE AVAILABLE TO BORROWERS IN OR OUTSIDE HONG KONG,+ MR POON SAID.

+THE PROPOSAL HAS SOME SUPPORT IN THE THIRD INLAND REVENUE ORDINANCE REVIEW COMMITTEE IN 1976, + HE CONTINUED.

+THIS, HOWEVER, IS A MAJOR CHANGE BEING A RE-EXAMINATION THE 'PROVISION OF CREDIT' TEST IN DETERMINING THE LOCATION OF INTEREST INCOME AND WILL BE QUITE CONTROVERSIAL.

+ IT MAY BE INTERPRETED BY SOME AS AN INDICATION OF DEPARTURE FROM THE TERRITORIAL CONCEPT OF TAXATION IN HONG KONG. GOVERNMENT SHOULD THEREFORE CLARIFY ITS INTENTION TO ALLAY THE FEAR OF FURTHER EXTENSION OF THE TAX NET TO OTHER INCOME OR PROF ITS EARNED OVERSEAS, HE ADDED.

AS REGARD GOVERNMENT ASSISTANCE TO BUSINESSES AND INDUSTRIE>, MR POON URGED THE FINANCIAL SECRETARY TO REVIEW THE REBUILDING ALLOWANCE ON COMMERCIAL BUILDING' WHICH WAS AT PRESENT GRANTE ANNUALLY AT THE FLAT RATE THREE-FOURTHS OF ONE PER CENT WITHOUT ANY INITIAL ALLOWANCE AT ALL.

/THIS MEANT