SECRET
FM HONG KONG
TO IMMEDIATE FCO
TELNO 1845
OF 061204Z DECEMBER 93
SECRET
HIKA 253/1
INFO ROUTINE PEKING, UKREP JLG HONG KONG
1994
310
132261
MDHIAN 5801
TOP COPY |_ Q DIST?
Your Telno 975 : HMOCS : Tax and Payment arrangements
1
A possible way for the HKG to help would be to pay out the Lump sum compensation through a HKG advance account fully backed by HMG cash deposits in an escrow account in favour of the HKG. Payments made from the advance account would be readily cleared by transfers from the escrow account.
2.
Payments through advance accounts do not require Finance Committee approval, but will, we think provide the Hong Kong cover for UK tax purposes. Receipts from escrow accounts for the purpose of clearing disbursements from advance accounts will not be subject to Finance Committee scrutiny or the normal discipline for Government receipts under the Public Finance Ordinance.
3.
There are however likely to be problems with Hong Kong tax Liability irrespective of whether HMG or the HKG makes the actual payments. Our tax experts have advised that such lump sum payments would be liable to tax unless it could be proved that they were payments for abolition of office or employment. At best there would be an arguable case that lump sum payments to those who leave in 1997 should be tax free and even to argue this would require the compensation scheme to be cast as a compulsory abolition of office scheme. However those who stay on would certainly be liable to tax on the compensation. This however raises the possible implication that the payment and tax arrangements could constitute an incentive to leave the service, which is not the impression we wish to
convey.
4.
An alternative course which may need to be considered is grossing up the compensation factors for Hong Kong tax.
5.
We should be grateful to know how your thinking develops on this issue and if you would consult us again before any final decisions are taken.
No comments yet.
Private notes are available after approval.