Hong Kong’s Court of First Instance considered that the power to issue multiple assessments would not result in any unfairness or injustice.
In a judicial review decision1 handed down in May, the Court of First Instance (CFI) held that the Commissioner of Inland Revenue (CIR) can issue multiple assessments in respect of the same set of profits to different taxpayers on alternative bases, so long as there is no double recovery of tax.
The CFI considered that the power to issue multiple assessments would not result in any unfairness or injustice because each taxpayer could object to the assessment they received if they felt aggrieved.
The CFI decision, the first on this issue, confirms the legitimacy of the Revenue’s practice of issuing multiple assessments on alternative bases where circumstances warrant such an approach.
The resolution of disputes relating to the basis of an assessment is nonetheless a complicated matter and taxpayers should seek professional advice where necessary.
The facts of the case are simplified and depicted in the diagram below.
BVI Co and HK Co were wholly-owned subsidiaries of a Hong Kong listed group engaged in the manufacture and sale of footwear.
As shown in the above diagram, goods produced by Factory Co in mainland China were sold to BVI Co, which on-sold the goods under back-to-back contracts to HK Co.
HK Co then sold the goods to the ultimate customers in the United States and Europe.
BVI Co claimed that its business was carried on outside Hong Kong and therefore the profits of HK$3,000,000 were not chargeable to tax in Hong Kong.
In February 2008, the Inland Revenue Department (IRD) instituted a tax audit on the group.
Subsequently, in March 2008, the Assessors issued multiple tax assessments to BVI Co and HK Co on three alternative bases.
Effectively, these assessments each of HK$3,000,000 sought to tax the same business profits.
The table below summarizes the bases for these three alternative assessments.
Summary of the three alternative assessments issued to BVI Co and HK Co
|Assessment issued||Basis of assessment||Explanations of the basis of assessment|
|Alternative 1||An assessment on BVI Co of HK$3,000,000||Section 14||The CIR considered that BVI Co was carrying on business in Hong Kong and the profits were sourced in Hong Kong.|
|Alternative 2||An additional assessment on HK Co of HK$3,000,000||Section 61A||The CIR was of the view that the interposition of BVI Co between Factory Co and HK Co was for the sole or dominant purpose of reducing HK Co’s profits tax liabilities (i.e., a tax benefit obtained by HK Co). As such, the additional assessment effectively sought to counteract the alleged tax benefit by disregarding BVI Co as if HK Co had purchased the goods at HK$7,000,000 from Factory Co directly.|
|Alternative 3||An agency assessment on HK Co of HK$3,000,000||Section 20||The CIR considered that the business between HK Co and BVI Co was so arranged that it produced to HK Co profits which were less than the ordinary profits that might be expected to arise in or derive from Hong Kong. As such, the CIR invoked Section 20 of the IRO to deem the business of BVI Co to be carried on in Hong Kong, and to charge to tax the profits of the BVI from its business done with HK Co in the name of HK Co, as if HK Co was an agent of BVI Co.|
BVI Co and HK Co lodged valid objections against all three assessments.
Thereafter, dissatisfied with the IRD’s issuance of the multiple assessments and the manner in which their objections were handled by the IRD, in March 2011 BVI Co and HK Co applied to the CFI for a judicial review.
One of the reliefs sought in their application was to quash the above multiple assessments on the grounds that they were ultra vires and a nullity.
BVI Co and HK Co contended that it was not open to the Assessors to issue multiple assessments against different taxpayers in respect of the same set of profits because such a power was not authorized by the IRO.
1Canray International Ltd and others v CIR HCAL 18/2011