Hong Kong Tax Alert: 2 January 2013
Decision of the CFI and the CA
Decision of the CFI and the CA on the main issues
The CFI ruled against the CIR on all grounds. On the CIR’s further appeal, the CA upheld the CFI’s decision on all issues essentially for the same reasons given by the CFI. For a detailed discussion of the basis on which the CFI decided the case, please refer to our Hong Kong Tax alert issued on 30 August 2011 (pdf, 327.7kb).
Decision of the CA on the balancing charge issue
In addition to the argument as to whether the Sum was capital or revenue in nature, Counsel for the CIR raised for the first time at the CA the issue of whether a balancing charge should be computed, despite this issue not being raised at the CFI. Despite AFSC’s procedural objection to allowing the CIR to raise this additional issue, the CA exercised its discretion and allowed the CIR to raise the point.
Counsel for the CIR contended that the Sum received by AFSC constituted sale or compensation monies in respect of the Facility. Therefore, Counsel argued that if the CA upheld that the Sum was not chargeable to tax, then a balancing charge in respect of the Facility should be made in the year the Facility was transferred from AFSC to the Authority, i.e., recouping the tax depreciation allowances previously granted to AFSC in respect of the Facility.
However, in a very brief decision on this point, the CA held that the relevant assets for which depreciation allowances were claimed had passed from AFSC to the Authority by way of succession (and not by way of sale). As a result, a balancing charge was not required by virtue of Sections 39B(7) and 39D(3) of the IRO.
While the CA reasoned that the Authority had succeeded to the business of AFSC of exploiting the Facility by way of continuing to receive the Facility Payments from the Operator, it did not elaborate on why it considered that no part of the Sum was sale or compensation monies in respect of the Facility.
As yet, the CIR has not indicated whether he will appeal the decision to the Court of Final Appeal. In the meantime, clients evaluating capital versus revenue arguments surrounding compensation payments, contractual or otherwise, should seek professional tax advice where appropriate.