In this blog we will explore, what are key things that a taxpayer should keep in mind while doing the payment of tax. We will discuss that how orders of tax hold-over are issued by CIR in case of disputes that put the determination of appeal or objection on pending and discussing different types of hold-over.

In the case of court of first instance it was discuss that a court:

  • Did not agree with argument of T that the time periods that were considered by Section 70 A (1) of Hong Kong tax law were not ‘mandatory’ but only ‘perspective’.
  • Did not agree that in the phrase ‘arithmetical omission or error’ the word ‘omission’ means any omission and not ‘arithmetical omission’ only. The phrase is defined in Section 70 A (1) of Hong Kong tax law.
  • Assumed that Section 70 A (1) of Hong Kong tax law was not planned to discuss a general correction of assessment, a right to seek on taxpayer setting up an office in Hong Kong and also must have planned to have a narrow coverage.

Dominant Practice 

An assessment in a return or assessment cannot be responded for an omission or error where that assessment or return in accordance with Section 70A proviso was made in accordance with the succeeding practice.

Now we discuss an example to understand the situation, it was thought before the Hang Seng Bank case that, no division of profits was possible in an offshore/onshore profit case. The division of profit was allowed by Hang Seng Bank. It was accepted by Inland Revenue department in the revised DIPN 21 ‘Locality of profits’ the 50:50 allocations in case of some certain manufacturing businesses. However, it was stated in the DIPN that, it will not accept to entertain any omission or error claim to division the profits on the basis of prevailing practices.

Refusal to Correct

If under Section 70 A of Hong Kong tax law, an assessor refuses to correct the assessment, a written notice of refusal must be given by him to the claimant and such notice will be considered as NOA. Hence in accordance with Section 70 A (2) of Hong Kong tax law, the appeal and objection can be made as if the notice of refusal is a NOA.

Section 70 A Cases     

In D 142/01 it was observed that, tax returns were submitted by firm of solicitor without making any allowance for bad debt. Eventually, it was wished by firm to claim the allowance for bad debt. It was then ruled by board of review that, ‘change of mind of taxpayer should be made up with how many part of the accounts’ cannot be considered as an omission or error in relation to previously submitted accounts. When a taxpayer setting up an office in Hong Kong wishes to challenge the accuracy of the audited accounts, strong proofs should be given. The reference for this statement was taken from Chinachem Investment Co Ltd.    

An intentional act in the sense of diligent choice of one out of two or more courses of action that eventually turns out to be less than dominant or which does not give the effect as hoped previously cannot be considered as an error within Section 70A of Hong Kong tax law. In a case Extramoney Ltd. it was observed that, a change of mind of the directors or a change of opinion of the accountant or auditor should be made up with how many part of the accounts cannot consist of ‘error’ for the purpose of Section 70A of Hong Kong tax law.

It was observed in the case of Moulin Global Eyecare Trading Limited (in liquidation) that majority of judges in the court of first appeal held that on Section 70A of Hong Kong tax law the liquidators could not rely on due to the reason that T, knowing that the return was not true had not made an omission or error but instead had told a lie deliberately by filling the return. On the issue of attribution Tang PJ diverged and held that Section 70A was applicable. It was stated by Tang PJ that, if this could be prove by liquidators that profits had been inflated indeed, and more tax was paid by T than that which was chargeable properly, common sense and justice should not allow knowledge of corrupt directors be attributed to T.

Payment of Tax     

For the purpose of part XII (recovery and payment of tax) tax includes any fines, surcharges, fees, penalties and interest that is payable upon settlement of appeal or objection. According to Section 82A of Hong Kong tax law, additional tax is thus included as being a penalty for evasion of tax.

According to Section 71 (1) of Hong Kong tax law, the tax must be paid before or after the due date that was fixed by the CIR. If a tax is not paid by the due date of then it shall be considered to be in default and a surcharge of 5 % shall be included in it. The reference for this statement is taken from Section 71 (5) of Hong Kong tax law. If any part of surcharge and tax remains in default state for further 6 months or more, a further surcharge on unpaid amount of worth 10 % shall be added into it. The reference for this statement is taken from Section 71 5 (A).

In a case of Tai Kin Chung it was observed that, the court of appeal dismissed the appeal of T and held that:

  • Any action that is taken by government to recover the tax, that is given an extended meaning to include surcharge by Section 72 of Inland Revenue ordinance, is prevented from becoming anti-trust by virtue of Section 37 of Hong Kong tax law of the Limitation Ordinance.
  • The surcharge on imposing tax under Section 71 (5) and (6) of the Inland Revenue ordinance was a penalty thus not provable in bankruptcy, so discharge of T from bankruptcy did not release him from the responsibility of payment of the surcharge.

Hold-Over upon Appeal or Objection

Tax shall be paid before or on the due date in spite of any appeal or objection in accordance with Section 71 (2) of Hong Kong tax law. The hold-over of tax may be ordered by CIR in dispute pending the resolution of appeal or objection. There are 2 types of hold-over.

  • Conditional hold-over
  • Unconditional hold-over

No-hold over will be present if:

  • The objection has a very little merit or is considered to be of a light-hearted nature; or
  • According to DIPN 6 (Revised) there are troubles in collecting any tax ultimately found to be due.

Conditional Hold-Over

As a condition for holding over it is required by taxpayer having Hong Kong business formation to provide security for the tax. The security is either in the form of:

  • Undertaking of banker under Section 71 (2) of Hong Kong tax law.
  • Tax reserve certificate or TRC.

If upon the settlement of appeal or objection a tax reserve certificate is purchased, then the tax reserve certificate should be used to pay the tax which has been held-over and which has become payable now. No interest shall be given on the portion of tax reserve certificate that is used for such purposes. According to Section 71 (7) of Hong Kong tax law, any part of tax return certificate which is not required for settling the tax responsibility will be refundable by the Inland Revenue department and will earn interest.

It is responsibility of an undertaking of banker to must cover the tax in dispute plus the interest from original due date to the settlement date. The reference for this statement is taken from Section 71 (7) of Hong Kong tax law.

In 2004 and 2005, on the judicial review there were 3 unsuccessful challenges to conditional hold-over orders of CIR. The reference for this statement is taken from a case of Interasia Bag Manufacturers Ltd and Chai Tai Conti-Hong Kong Ltd. In those cases, hold-over of tax under objection to the condition was granted by CIR that the certain amount of tax reserve certificate was purchased by taxpayer. It was claimed by taxpayer who has establish company in Hong Kong to be granted with full conditional hold-over but they were not successful. The key thing to note here is that, in DIPN 6 the policy of granting hold-over is laid down by CIR. In that practice note, if it is appeared that taxpayer have some merits then provision of undertaking of banker or purchase of tax reserve certificate would be required by the CIR but also the balance of probability based on true facts need to be exist at the date of objection. This whole scenario does not hold definitely in the favor of taxpayer.

In a case Kinco Investment Holding it was held that application of taxpayer was dismissed by court of first instance. The application was dismissed to cancel the decision of court of first instance in which it ordered that, the tax could be held over on the condition that, a tax return certificate be purchased. It was the approach of court that, the financial circumstances of taxpayer have already been considered by CIR and in judicial review the court will never with the merits of objection of taxpayer having Hong Kong business formation.

Failure of Taxpayer to Hold-Over Orders    

In a case of Geneharbor Technologies Ltd with the due date on 22 April 2014 the assessment was issued on T. The assistant commissioner on objection of T, granted the conditional hold-over subject to payment of tax reserve certificate by notices also dated 22 April 2014.  

Under Section 75 of Hong Kong tax law, the recovery action was issued by Inland Revenue department in the district court. As T was unable to purchase the tax reserve certificate within the specified time. It was contended by T that:

  • The due date of 22 April 2014 is no longer applicable as the tax has been held over; and
  • The assessments were under objection (‘the objection plea’).

The objection of plea was rejected. It was submitted by T regarding the no profits tax due plea that:

  • The due date of April was not applicable, as any fresh orders cancelling the hold-over orders pursuant to Section 71 (3) of Hong Kong tax law are not issued by Inland Revenue department.
  • By the hold-over orders the assessment have been overridden.

It was held by judge that, as T was unable to purchase the tax reserve certificate, so the hold-over orders were nullified and it was not mandatory for inland revenue department the issuance of fresh order pursuant to Section 71 (3) of Hong Kong tax law hence the judgement was given in the favor of the CIR.

Unconditional Hold-Over

Pending determination of the appeal or objection the tax is being hold-over. If upon settlement or determination of appeal or objection, CIR have authority to charge if any part of the tax that is to be held over becomes payable. The reference for this statement is taken from Section 71 (10) of Hong Kong tax law.

Tax is calculated from date of holding over of order or original due date whichever is later, to the date of final determination or withdrawal of the appeal or objection. The reference for this statement is taken from Section 71 (10) of Hong Kong tax law.

In case if appeal or objection is won by taxpayer having incorporate HK company, he/she is not responsible to recover the interest from CIR except where a tax reserve certificate is purchased by him under an order of conditional hold-over. The reference for this statement is taken from Weason Investment Ltd. 

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