Hong Kong Tax Alert: 4 December 2012
Brief facts and issue in dispute
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Brief facts
Turner Entertainment Networks Asia, Inc. (the Company) carried on an entertainment business in Hong Kong. Muse Communication Co. Limited (Muse), which was a non-Hong Kong resident company not carrying on any business in Hong Kong, held rights to certain television programs in Taiwan in the language of Chinese Mandarin with Chinese subtitles.
Under two license agreements entered into in 2005 and 2006, Muse granted the Company the right to exhibit the relevant television programs in Taiwan in return for certain license fees.
In addition to the license fees, the Company also paid a certain amount of technical costs to Muse under the two license agreements. The technical costs were paid in respect of Muse providing dubbed and subtitled tracks for the relevant television programs.
Issue in dispute
Incomes generated by the Company from the exhibition of the relevant television programs in Taiwan were fully chargeable to tax in Hong Kong.
The Assessor considered that the license fees and technical costs received by Muse from the Company should be chargeable to Profits Tax in Hong Kong under Section 15(1)(ba) of the Inland Revenue Ordinance (IRO). Therefore, the Assessor charged Muse to tax in the name of the Company, the Company being the person who paid or credited the relevant sums to Muse under Section 20B(2) of the IRO.
The Company objected to the relevant assessments on behalf of Muse. The Deputy Commissioner of Inland Revenue (CIR) determined the objection against the Company.
The Company appealed on behalf of Muse against the CIR’s determination and subsequently, pursuant to Section 67 of the IRO, agreed with the CIR to transfer the appeal to be heard directly by the Court of First Instance (CFI), thereby bypassing a tax tribunal hearing.
Provisions of the IRO relevant to the dispute
Sums received by a non-Hong Kong resident not carrying on business in Hong Kong from a Hong Kong payer are nonetheless deemed to be chargeable to tax in Hong Kong under Sections 15(1)(a), 15(1)(b) or 15(1)(ba) of the IRO in the respective circumstances as illustrated in the table below:
| For the payer’s use in Hong Kong of the following items (regardless of whether the payer can claim the sums as tax deductible in Hong Kong): | |
| Section 15(1)(a)* | From the exhibition or use in Hong Kong of television film [and of certain other items including cinematograph film, tape and sound recording] |
| Section 15(1)(b)* | For the use of or right to use in Hong Kong any copyright material [and certain other types of intellectual property rights including patent, design and trademark] |
| For the payer’s use outside Hong Kong of the following items where the payer can claim the sums as tax deductible in Hong Kong: | |
| Section 15(1)(ba)# | For the use of or right to use outside Hong Kong any copyright material [and certain other types of intellectual property rights, as those listed in Section 15(1)(b), including patent, design and trademark] |
Notes
* Enacted in 1971
# Subsequently enacted in 2000 in order to override the decision of the Court of Final Appeal in Emerson Radio Corporation where the use of the trademark in question was held to be outside Hong Kong and, therefore, outside the ambit of Section 15(1)(b), despite the payer being entitled to claim the payments as tax deductible in Hong Kong.