Of all the built-in anti-avoidance provisions, section 16EC(4)(b) has caused the most controversy and debate.
A new law allowing tax deductions for registered trademarks, copyrights and registered designs contains several anti-avoidance provisions.
This tax alert examines the new law across the following topics:
The tax deduction rules and anti-avoidance provisions
The use of a relevant IPR outside Hong Kong
The new law
The Inland Revenue (Amendment) (No. 3) Ordinance 2011 was enacted in December 2011 to grant tax deductions for capital expenditure incurred on the purchase of registered trademarks, copyrights and registered designs (hereinafter referred to as “relevant intellectual property rights or IPRs”) effective from the year of assessment 2011/12.
The new law however contains several anti-avoidance provisions. These include denial of the tax deductions when a relevant IPR is purchased from an associate. The term “associate” is so widely defined that it virtually precludes a group restructuring from qualifying for the tax deductions.
Of all the built-in anti-avoidance provisions, section 16EC(4)(b) has caused the most controversy and debate. This section denies tax deductions when a relevant IPR is used outside Hong Kong under a licensing arrangement wholly or principally by a person other than the taxpayer.
Section 16EC(4)(b) is modeled on section 39E(1)(b)(i) of the Inland Revenue Ordinance (IRO). The latter section has been controversially invoked by the Inland Revenue Department (IRD) to deny tax depreciation allowances on capital expenditure incurred by Hong Kong taxpayers for plant or machinery provided rent-free by such taxpayers to their contract manufacturers in mainland China established under import processing arrangements.
The IRD has denied the relevant tax depreciation allowances in such scenarios even though the profits derived by taxpayers from import processing arrangements are fully chargeable to tax in Hong Kong.
Despite the controversy, the section 16EC(4)(b) legislative proposal was passed into law in its original form without any changes. Clients who are contemplating to purchase a relevant IPR either as an individual acquisition or part of a broader business acquisition should be aware of section 16EC(4)(b) and the other anti-avoidance provisions of the new law.
These provisions, together with the fact that the use and the purchase cost of a relevant IPR may be specially attributable to a particular territory, may provide scope for structuring the acquisition of the relevant IPR in a tax efficient manner (the below examples refer).
These are complicated matters and clients who are required to deal with these issues should seek professional tax advice.