XN000022-1996-07-10 — Page 53

(a)

(b)

- 31.

excluding stock brokers and investment advisers from potential profits tax liability in respect of share trading and fund investment profits derived by non-resident investors for whom they act as agents; and

including a specific tax exemption for certain income derived from bona fide offshore funds managed in Hong Kong.

Secondly, the Bill seeks to extend the current tax exemption for stock borrowing and lending transactions to cover also stocks not listed in Hong Kong. This is in response to a request made by the financial services sector for promoting stock borrowing and lending transactions in Hong Kong.

After the publication of the Bill, we have received submissions from the Law Society of Hong Kong, the Hong Kong Society of Accountants, the Joint Liaison Committee on Taxation, the Taxation Institute of Hong Kong and the Stock Exchange of Hong Kong. We are grateful for their views on the Bill. I would also like to thank the Hon Eric Li for his valuable advice on the Bill. We have carefully examined these views and, as a result, I will move at Committee Stage a number of amendments. I shall explain at that stage the reasons for the amendments; but I would like to take this opportunity to address two points concerning the legislative intent of the Bill in respect of the first objective which I just described.

Section 20AA as proposed in the Bill seeks to exclude brokers and investment advisers from potential profits tax liability for acting as agents for non-resident investors. We note the concern expressed by various parties in respect of the restriction imposed under the Bill that the provisions in section 20AA would not apply in cases where the investors and the agents have an "associate" relationship. We have thoroughly examined this issue and are remain of the view that the imposition of the restriction is justified and necessary. In such cases, the agent, being the associate of his client, should be able to ascertain whether there is any potential liability to profits tax and the question of uncertainty which we aim to address in the Bill by providing the tax exemption therefore should not arise. There is a limit to how far the tax exemption provided under the proposed legislation should go without creating opportunities for tax avoidance. We believe that we have struck the right balance in the Bill. Our proposal does not imply that the parties concerned under an "associate" relationship would automatically be chargeable to profits tax. This is by no means the case. Whether a tax liability arises will depend on the circumstances of each case and on the application of the existing provisions of the Inland Revenue Ordinance. The situation for these cases with "associate" relationship will not be inferior to what it is now, before the proposed legislation is enacted. There is also no question of the proposed legislation preventing a non-resident investor from, or placing any restriction on him in, making use of an associated agent in Hong Kong.