Hong Kong Tax Alert: 8 February 2013

The case Braitrim (Far East) Limited v CIR

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Unless the context otherwise requires, a lease defined is a lease defined

The Court of Appeal (CA) has recently handed down its written judgment of the case Braitrim (Far East) Limited v CIR. The CA upheld the decision of the Board of Review (BOR) that the provision of moulds by the taxpayer to its contract manufacturers in mainland China constituted a lease arrangement, regardless that the moulds had been provided to enable the manufacturers to manufacture products to the specifications ordered by the taxpayer.

As such, the CA also upheld the decision by the BOR that the moulds did not qualify as prescribed fixed assets eligible for a 100% immediate tax write-off under section 16G of the Inland Revenue Ordinance (IRO).

The taxpayer has applied to the CA for leave of appeal to the Court of Final Appeal (CFA). The CA will hear the leave application in April this year. 

Tax dispute or litigation is by its nature a complicated matter, clients facing similar situations should seek professional tax advice where appropriate.  

Brief facts

The facts of the case are depicted in the diagram below.

For the years of assessment 2000/01 to 2002/03, Braitrim (Far East) Limited (the “Taxpayer”) carried on a business of supplying plastic garment hangers and related packaging materials to its UK parent company. The parent in turn supplied the relevant products to a number of UK retailers. The hangers, bearing the trademark of the parent, were customized and were designed by the parent in conjunction with its customers.

The products were manufactured in mainland China by two unrelated contract manufacturers engaged by the Taxpayer for this purpose. The moulds used to manufacture the products were produced by one of these two contract manufacturers under the guidance and at the cost of the Taxpayer.

As a result, the Taxpayer owned the moulds from the outset and authorized the two contract manufacturers to use the same rent-free for the purposes of manufacturing the products ordered by the Taxpayer.   

The design of each product traded by the Taxpayer was unique and bore certain trademarks. The required moulds were therefore very specific in nature and could only be used (and were only used) by the two contract manufacturers to manufacture the products required by the Taxpayer.

The Taxpayer claimed that the moulds were its prescribed fixed assets eligible for a 100% immediate tax write-off in the year of acquisition under section 16G (1) of the IRO.  

The Commissioner of Inland Revenue (CIR) however, denied the Taxpayer’s claim. The denial was made on the basis that the provision of the moulds by the Taxpayer to the contract manufacturers constituted a lease arrangement and, as such, the moulds did not qualify as prescribed fixed assets as defined in section 16G(6) of the IRO. The BOR dismissed the Taxpayer’s appeal against the CIR’s denial of its claim.

The Taxpayer then appealed against the BOR’s decision directly to the Court of Appeal (CA).