Recent legal case held on non-taxable for unrealised profits of listed securities
In Nice Cheer Investment Limited v Commissioner of Inland Revenue, 1 the taxpayer acquired listed
securities as its trading stock. Some of those listed securities have not been sold and appreciated in value.
The change in value was recorded as profits in the taxpayer?s financial statements according to prevailing
accounting standards, SSAP 24 and HKAS 39.
The Court examined the true and proper construction on the terms ?profits? and ?assessable profits? and
Statutory Regime
Any person who disagreed any tax assessment made against him/her may challenge it through the
objection and appeal process.1
Objection
A taxpayer may object to the tax assessment within one month of the date of the notice of assessment by
writing to the Commissioner stating precisely the grounds of objection. 2 The Commissioner must consider
the objection.3
If the Commissioner agrees with the taxpayer which means that he has validly objected to the assessment,
Hong Kong offers good opportunity for offshore arrangements. The territorial concept of its taxation system
renders only those profits which arise in or are derived from Hong Kong are subject to tax. The residence
or citizenship of a taxpayer is not relevant at all.
The tax law states clearly that only profits arising in or derived from Hong Kong are chargeable to profits
tax. It is well established law that the following three conditions must be satisfied before a profits tax liability
arises in Hong Kong:
Maintenance of the low tax regime and the status of international financial centre under Basic Law
Articles 7, 106, 107 and 108 of the Basic Law laid down the fundamental principles regarding the fiscal
system of the Hong Kong SAR, inter alia, that Hong Kong SAR shall have independent finances and the
financial revenues and shall be used exclusively for its own purposes; and also the principle of keeping
expenditure within the limits of revenues in drawing up budgets.
Establishing the geographical location of profit-producing transactions and distinct from those activities on
antecedent or incidental matters are important to determine whether profits are taxable as sourced in Hong
Kong.
Kwong Mile Services Ltd v. Commissioner of Inland Revenue [2004] 7 HKCFAR 275 and ING Baring
Securities (Hong Kong) Ltd v CIR [2007] 10 HKCFAR 417 are the leading authorities on this aspect of
section 14. One may refer to what Ribeiro PJ summarised in ING Baring Securities:
Advance Ruling under section 88A of the Inland Revenue Ordinance is for one who wishes to ascertain the
tax position of a contemplated transaction or arrangement make an application for a ruling from the
Commissioner.
Such ruling will only be given for a seriously contemplated transaction but not for hypothetical situation or
for a matter where the profits tax is due and payable.
The Commissioner will decline to make such ruling in some circumstances, such as the applicant has not
Fundamental Principles and Rules
The charge to profits tax is contained in section 14(1) of the Inland Revenue Ordinance, which states,??
profits tax shall be charged for each year of assessment ? on every person carrying on a trade, profession
or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that
year from such trade, profession or business ? ?
It lays down three conditions for a charge to tax, namely: 1
(1) the taxpayer must carry on a trade, profession or business in Hong Kong;
The Fundamentals 1.
Any person holding himself out as an expert witness should acquaint himself with the duties and
responsibilities of expert witnesses:-
1. Expert evidence presented to the Court should be, and should be seen to be, the independent product
of the expert uninfluenced as to form or content by the exigencies of litigation. 2
2. An expert witness should provide independent assistance to the court by way of objective, unbiased
opinion in relation to matters within his expertise. 3 An expert witness in the High Court should never
Expert evidence plays an important role in modern US litigation. Under Rule 702 Testimony by Expert
Witnesses:
"A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify
in the form of an opinion or otherwise if:
(a) the expert?s scientific, technical, or other specialized knowledge will help the trier of fact to understand
the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
When the IRD's assessors did not accept a taxpayer?s profts tax returns. They may estimate the
taxpayer?s liability to profits tax in the relevant years under IRO s.59(2) and issued assessments
accordingly. Those estimated assessments may sometimes be characterised as ?protective
assessments?. Despite the informal term occasionally used to describe them, these assessments are
genuine and valid in the sense that, under IRO s.59(2), it is binding on a taxpayer, subject only to the latter
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