XN000022-1995-03-17 — Page 2

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Inland Revenue (Amendment) Bill 1995 gazetted

The Government has proposed legislation to combat the use of an interposed "service company" to disguise what is in substance a contract of employment so as to avoid or significantly reduce tax liability.

Details of the proposal are contained in the Inland Revenue (Amendment) Bill 1995 which was gazetted today (Friday).

A Government spokesman said in the 1994 Budget Speech, the Financial Secretary highlighted two types of tax avoidance arrangements of particular concern to the Government.

The first amounts to an attempt to disguise what is, in substance, an employer- employee relationship. The second involves the payment of inflated management fees by a firm to a service company that is controlled by the firm's proprietor or its partners.

The spokesman said: "Following the announcement in the 1994 Budget Speech, we have conducted consultations on how best to address these areas of concern. We have listened carefully to views expressed by the LegCo Panel on Financial Affairs, leading professionals and tax experts on the proposal.

"As a result, we have decided to limit the bill to the first type of arrangements (disguised employment) and to deal with the second type (payment of inflated management fees to service companies controlled by connected persons) by a Practice Note to be issued by the Commissioner of Inland Revenue.

"This compromise aims to achieve our basic objective of protecting public revenue whilst meeting interested parties' concerns about the equity and effectiveness of the original proposal."

In brief, the bill will tackle cases of disguised employment by treating remuneration paid to a company for services rendered by a person who controls that company as income derived by the person from employment and chargeable to salaries tax accordingly.