Bill for tax deductions of spectrum utilization fees (SUFs) gazetted

Different ranges of frequencies of radio spectrum by which mobile network operators (MNOs) use to transmit their telecommunication signals in their business operations in Hong Kong have been assigned to them by the Communications Authority (CA) of Hong Kong.

Previously, the assignments of radio spectrum (generally for 15 years) were made by way of the CA charging them SUFs based on their annual turnover for the period concerned, i.e., an annual royalty payment method.  

Since 2007, the annual royalty payment method for such assignments has been replaced by a fixed price set at spectrum auctions, albeit the amount set could be agreed to be paid over several annual instalments.  

The Inland Revenue Department (IRD) has taken the position that such SUFs, whether payable by way of several annual instalments or in one lump sum, would be non-deductible capital expenditures under the existing law. 

One of the MNOs took the Commissioner of Inland Revenue (CIR) to courts for disallowing its amortization of the upfront lump-sum SUFs paid. However, its case against the CIR has been dismissed by both the Court of First Instance and the Court of Appeal. 

This bill is introduced in response to the lobbies made by the MNOs that the existing law should be changed to allow for tax deductions of SUFs paid, with a view to incentivizing the MNOs to invest in and enhance the telecommunication infrastructure in Hong Kong.  

This alert discusses the major provisions of the bill. Clients who have any questions on the latest developments on the tax deductibility of SUFs can contact their tax executive.