The BOR found that the moulds were excluded fixed assets, unable to qualify as prescribed fixed assets under Section 16G (6) of the IRO.
However, the BOR rejected Counsel’s above argument, taking the view that it had no basis to ignore the statutory definition of the term “lease” contained in Section 2(1) of the IRO.
The BOR reasoned that when the word “include” is used in an interpretation clause of a statute to define a word or phrase, it is ordinarily used to enlarge or expand the ordinary meaning of the word or phrase.
The BOR then took the view that the contractual arrangement under which the Taxpayer allowed Company C to use the moulds to manufacture goods ordered by the Taxpayer in the circumstances described above constituted a lease arrangement under the extended definition of term contained in Section 2(1) of the IRO.
As such, the BOR found that the moulds were excluded fixed assets, unable to qualify as prescribed fixed assets under Section 16G (6) of the IRO.
Thus, the BOR held that the Taxpayer was not eligible to claim any tax deductions under Section 16G (1) of the IRO in respect of the cost of acquisition of the moulds.
Commentary
The moulds in this case were manufacturing machinery or plant generally qualifying for either a 100% immediate tax write-off in the year of acquisition under Section 16G(1), or tax depreciation allowances over several years in accordance with Section 39B of the IRO.
The Taxpayer in this case did not lodge an alternative claim for tax depreciation allowances in respect of the moulds under Section 39B, only seeking a tax deduction under Section 16G (1) of the IRO.
However, regardless of whether the Taxpayer lodged an alternative claim for tax depreciation allowances in respect of the moulds, the claim would likely be disallowed by the IRD’s controversial application of Section 39E of the IRO.
In this regard, two BOR cases have previously upheld the IRD’s position that tax depreciation allowances in respect of a fixed asset will be denied under Section 39E when the asset is wholly or principally used outside Hong Kong under the terms of a lease by a person other than the taxpayer concerned.
These two previous BOR cases also held that an arrangement whereby fixed assets were provided by the two taxpayers to their contract manufacturers outside Hong Kong as constituting a “lease” within the extended definition of the term contained in Section 2(1) of the IRO for the purposes of Section 39E1.
While the taxpayers in those two previous BOR cases did not appeal, the Taxpayer in this case has filed an appeal to the Court, the hearing of which is expected to take place later this year.
The appeal will likely focus on whether the legal or ordinary meaning or the extended definition of the term “lease” contained in Section 2(1) of the IRO, should be used to interpret Section 16G (6) of the IRO.
Conceivably, another point of argument could be whether the arrangement whereby the Taxpayer only permitted Company C to use the moulds in a particular manner, for a specific purpose, would be sufficient to constitute the former granting the latter the “right” to use the moulds even within the extended definition of the term “lease” contained in Section 2(1) of the IRO.
Tax dispute or litigation is by its nature a complicated matter and clients facing similar situations should seek professional tax advice where appropriate.
1You may refer to our Hong Kong Tax alert issued in November 2009 in which we discussed the decision in one of these two BOR cases.
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