Hong Kong Tax Alert: 4 December 2012
Decision of the Court of First Instance
Counsel for the Company argued that the relevant sums are not chargeable to tax in Hong Kong because:
a) The sums were not paid for the “use” of, or the “right to use” any copyright material and, therefore, not caught by Section 15(1)(ba).
b) Alternatively, the relevant rights granted under the two license agreements are right to exhibit the relevant television programs. The taxability of sums received for the granting of such right is solely governed by Section 15(1)(a).
However, in respect of television programs, Section 15(1)(a) specifies that only sums received for the exhibition or use in Hong Kong are chargeable to tax in Hong Kong. Therefore, the license fees, being consideration for the right to exhibit the relevant television programs outside of Hong Kong in Taiwan, do not fall within ambit of Section 15(1)(a).
The taxability of the license fees cannot be looked at again under Section 15(1)(ba) as to whether the fees were received for granting the use of, or right to use the copyright materials which subsisted in the television programs. This is because, as a matter of statutory construction, the legislature must have intended that the matter to be solely governed by Section 15(1)(a) only.
c) The technical costs were payments for services rendered by Muse in Taiwan to the Company, and not for the “exhibition” or “use” of any television programs or copyright materials, and therefore do not fall within Sections 15(1)(a) or 15(1)(ba).
Were the sums for the “use” of, or the “right to use”, any copyright materials?
Counsel’s contention in point (a) above was premised on his argument that “use” of a copyright work (except for computer programs) is technically not an infringement from the point of view of the copyright law. Therefore, the license fees cannot be described as sums paid for the “use” of, or “right to use” the copyright materials which subsisted in the relevant television programs in the technical sense required of by Section 15(1)(ba) – where without the payment would have constituted an infringement.
The judge was however not attracted to Counsel’s submission on this point, saying that the argument was unduly technical and reliant on unnecessarily complicated considerations as to what would or would not constitute an infringement of copyright.
The judge noted that as the phrase “for the use of or right to use” in Section 15(1)(ba) appears before all the words “any patent, design, trade mark, copyright material, secret process or formula or other property of a similar nature”, the proper interpretation of the phrase must attempt to provide some meaning as respect all the words that follow. The judge added that this is unlikely to be achieved if a very technical approach is taken, where different intellectual property rights might have different ways of being exploited, and where the word “use” in the context of the rights might or might not have a technical meaning.
The judge therefore accepted the CIR’s argument that in ordinary language a person who has the right to use an intellectual property right is a person who can exploit that right or exploit the intellectual property. The judge then noted that if not for entering into the two license agreements, the Company would not have had the right to exhibit the relevant television programs in Taiwan. As such, the judge held that the license fees were paid for the use of, or right to use the copyright materials which subsisted in the relevant television programs in Taiwan. Thus, the license fees were caught by Section 15(1)(ba) since the Company was entitled to claim the fees as tax deductible in Hong Kong.
At this stage it is not known whether the Company will further appeal against the CFI’s decision. As it now stands, the decision has ruled that license fees received by a non-Hong Kong resident for the exhibition or use of any media works covered by Section 15(1)(a) outside Hong Kong, would likely be chargeable to tax in Hong Kong under Section 15(1)(ba) of the IRO, provided that the payer would be entitled to claim the payments as tax deductible in Hong Kong.
However, as the decision indicates, what constitutes payments for the use of, or right to use of a relevant intellectual property right would depend on the reasons for the payment and the terms of a license agreement.
Hong Kong payers who make payments of this nature should be aware of this decision and make the necessary withholding and reporting of the Hong Kong tax liabilities of the non-Hong Kong residents under the relevant provisions of the IRO. Where appropriate, clients should seek professional tax advice on the matter.