TNAG-1645-FCO40-2292-Company-law-reform-in-Hong-Kong-Companies-(Amendment)-(No.-2-1987 — Page 95

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Plainly it is not: all the

This

that the total tax payable would be increased to $198,900.

raises the question of whether section 157G is binding on the

Commissioner of Inland Revenue.

section does is to make unlawful for company law purposes a particular

formula for calculating a director's remuneration.

One further example may be added to illustrate the confusion

that can arise from section 157G. If a company agrees to pay a

director $830,000 "free of tax", and to pay the tax thereon of

$141,100, under the Inland Revenue Ordinance the director's income

for Salaries Tax purposes would be $971,100 and not $830,000 as

section 157G directs. The total tax payable under the Inland Revenue

Ordinance would therefore be $165,087 and not $141,100. If the

company paid the addition tax on tax further tax would be due and so

it might go on ad infinitum. The problems are theoretically worse than

this because the addition of tax on tax to income for Provisional

Salaries Tax will compound the amount payable to refund tax year by

year. Quite how section 157G(2) would operate in such circumstances

is not clear.

In practice foreign multinationals with Hong Kong subsidiaries

invariably ensure that their Hong Kong based directors are paid a tax

inclusive gross salary that will yield the required "free of tax"

remuneration and no problem occurs with the Inland Revenue Ordinance.

However, my inquiries indicate that section 157G(2) is either ignored

or misconstrued. The subsection is derived from section 189 of the

Companies Act 1948 and correctly construed means that the "prohibited

remuneration is to be construed as a provision for the payment of the

stipulated sum to the director, leaving him to pay the ... tax in

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