XN000022-1984-03-29 — Page 3

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THURSDAY, MARCH 29, 1984

REASSURANCE SOUGHT ON TAXATION PRINCIPLE

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IT WOULD BE REASSURING IF THE FINANCIAL SECRETARY COULD RECONFIRM THAT GOVERNMENT REMAINS WEDDED TO THE BASIC PRINCIPLE THAT TAXATION SHOULD ONLY BE APPLIED TO INCOME ARISING IN HONG KONG, HON W.C.L. BROWN SAID IN THE LEGISLATIVE COUNCIL ANNUAL BUDGET DEBATE TODAY.

HE POINTED OUT THAT THE PROPOSAL TO MOVE FURTHER AWAY FROM THE TERRITORIAL CONCEPT OF NOT TAXING TRANSACTIONS MADE OUTSIDE HONG KONG WAS ONE OF A NUMBER OF ISSUES ARISING FROM THE BUDGET WHICH WERE OF FUNDAMENTAL IMPORTANCE TO THE FUTURE OF OUR ECONOMY.

THE OTHER ISSUES ARE THE POSSIBILITY OF DEFICIT BUDGETING BECOMING A PERMANENT FEATURE OF OUR FINANCIAL AFFAIRS AND MEASURES WHICH SOME BELIEVE WILL RESULT IN RETROACTIVE TAXATION.

ON THE PROPOSAL TO TAX TRANSACTIONS MADE OUTSIDE HONG KONG, MR BROWN SAID, TO A LARGE EXTENT BUSINESS HAS BROUGHT THIS MODIFICATION OF THE TERRITORIAL CONCEPT ONTO ITS OWN HEAD BY THE DEGREE IT HAS USED THE PROVISION OF CREDIT TEST TO AVOID PAYMENT OF PROFITS TAX, AND IT IS DIFFICULT TO ARGUE AGAINST THE VIEW THAT THE NEW RULES ARE REASONABLE IN EQUITY AND WILL LEAD TO A FAIRER DISTRIBUTION OF THE OVERALL TAX BURDEN.+

HOWEVER, HE WONDERED WHETHER GOVERNMENT HAD SUFFICIENTLY ASSESSED THE LIKELY EFFECT OF TAX AVOIDANCE MEASURES ON ITS ESTIMATES OF THE $350 MILLION ADDITIONAL REVENUE TO BE DERIVED FROM THIS MEASURE AND WHETHER THE SIDE EFFECTS HAD BEEN FULLY TAKEN INTO ACCOUNT.

+ IN REGARD TO THE FORMER WE ARE ALREADY WITNESSING 'SMART ALECS' DEVISING NEW AVOIDANCE SCHEMES, AND IN THE LATTER CONTEXT THE FINANCIAL SECRETARY'S WORDS, TAKEN AT THEIR FACE VALUE, COULD MEAN THAT COMPANIES INCORPORATED IN HONG KONG, REGARDLESS OF THE NATURE OF THEIR ACTIVITIES, COULD BE TAXABLE UPON INTEREST RECEIVED OVERSEAS,+ HE OBSERVED.

+ IF SO, WE COULD WITNESS, AT BEST,

INTERMINABLE ARGUMENTS

WITH THE INLAND REVENUE AUTHORITIES AND AT WORST AN EXODUS OF MANY COMPANIES WHO TAKE ADVANTAGE OF HONG KONG'S STATUS AS AN INTERNATIONAL FINANCIAL CENTRE TO REGISTER THEMSELVES HERE BUT WHO DO NOT CONDUCT A TRADE OR BUSINESS HERE IN THE NORMAL SENSE OF THESE WORDS, HE SAID.

IN REGARD TO THE TAXATION OF INTEREST EARNED BY COMPANIES CARRYING ON BUSINESS IN HONG KONG, HE HOPED THAT THE ENABLING LEGISLATION WOULD SPELL OUT IN CLEAR AND PRECISE TERMS THOSE COMPANIES DEEMED TO FALL WITHIN THIS DEFINITION FOR AS CURRENT EVENTS IN THE MARKET ILLUSTRATE OUR ENTREPRENEURS WILL NOT HESITATE TO TAKE PREVENTIVE ACTION IF THEY BELIEVE THEIR COMMERCIAL INTERESTS TO BE THREATENED.

/MR BROWN