Court of Appeal upholds that upfront lump-sum spectrum utilization fees non-deductible

Court of Appeal upholds that upfront lump-sum payments for assignment of 2G and 4G radio spectrum for 12-year and 15-year periods were non-deductible capital expenditure.

In our previous Hong Kong Tax alert, we reported that the Court of First Instance (CFI) ruled that upfront lump-sum spectrum utilization fees (SUFs) paid by the Appellant to the government for the assignment of 2G and 4G radio spectrum for 12-year and 15-year periods were capital in nature and non-deductible.

The Appellant lodged an appeal against the CFI decision. Recently, the Court of Appeal (CA) handed down its decision on the case upholding the lower court’s decision and dismissing the taxpayer’s appeal .

Before the CA hearing, Counsel for the Appellant advanced a new primary argument that the CFI judge misunderstood the Appellant’s manner of earning its profits and misapplied the relevant tests in determining the nature of the upfront SUFs.

This new primary argument was however premised on the “agreed facts” that the upfront SUFs were incurred by the Appellant to use specific bands of the radio spectrum and sold the same to its customers. The upfront SUFs were therefore in the nature of circulating assets that came back “penny by penny” with the customers’ subscriptions to the mobile telecommunication services operated by the Appellant. As such, the upfront SUFs should be regarded as ordinary revenue operating costs of the Appellant’s business and tax deductible. 

However, this new contention was only raised for the first time before the CA. No evidence was adduced before the tax tribunal of the Board of Review (BoR) for the BoR to make findings of facts as regards these “agreed facts”. The CA therefore held that the new primary argument must be rejected as the Courts in Hong Kong must only base their decisions upon the facts found by the BoR. 

In addition to the new primary argument, Counsel also pursued in the CA all the same grounds of appeal which he relied on in the CFI. The CA also rejected all these grounds of appeal essentially on the same reasons as those given by the CFI judge. 

This alert discusses the CA decision.