Provisional Legislative Council
PLC Paper No. CB(1) 1319
(These minutes have been
seen by the Administration)
Ref : CB1/BC/11/97
Bills Committee on
Inland Revenue (Amendment) (No. 2) Bill 1998
Minutes of meeting held on Wednesday, 18 March 1998, at 10:45 am in Conference Room B of the Legislative Council Building
Members present :
Hon Eric LI Ka-cheung, JP (Chairman)
Hon WONG Siu-yee
Hon James TIEN Pei-chun, JP
Hon Henry WU
Hon CHAN Kam-lam
Hon Kennedy WONG Ying-ho
Hon NGAN Kam-chuen
Members absent :
Hon MA Fung-kwok
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon Bruce LIU Sing-lee
Public officers attending :
- Mr Martin GLASS
- Deputy Secretary for the Treasury
- Mr WONG Ho-sang
- Commissioner of Inland Revenue
- Mrs Agnes SIN
- Deputy Commissionr of Inland Revenue (Technical)
- Mr Alan SIU
- Principal Assistant Secretary for the Treasury (Revenue)
- Mr Austin GRADY
- Senior Assessor, Inland Revenue Department
- Ms Sherman CHAN
- Senior Assistant Law Draftsman, Department of Justice
- Miss Vivian SUM
- Assistant Secretary for the Treasury (Revenue)
Clerk in attendance :
- Ms Estella CHAN
- Chief Assistant Secretary (1)4
Staff in attendance :
- Mr LEE Yu-sung
- Senior Assistant Legal Adviser
- Mr Andy LAU
- Senior Assistant Secretary (1)6
I Election of Chairman
Members agreed that Mr Eric LI Ka-cheung should preside over the election of Chairman. Mr Eric LI Ka-cheung invited nominations for the Chairmanship. Mr Eric LI Ka-cheung was nominated by Mr WONG Siu-yee and seconded by Mr NGAN Kam-chuen. Mr LI accepted the nomination.
2. There being no other nomination, Mr LI was declared Chairman of the Bills Committee.
II Meeting with the Administration
3. At the invitation of the Chairman, the Deputy Secretary for the Treasury and the Commissioner of Inland Revenue (CIR) briefed members that the Inland Revenue (Amendment) (No.2) Bill 1998 (the Bill) mainly sought to implement the proposals arising from the comprehensive profits tax review, including the proposed reduction of corporate profits tax rate from 16.5% to 16% and other proposals as set out in the Provisional Legislative Council Brief on Revenue Proposals for the 1998-99 Budget. The opportunity was also taken to make other related amendments to the Inland Revenue Ordinance and to repeal out-dated provisions.
Clause 7 - Expenditure on scientific research
4. Members noted that this clause would implement the proposal to expand the scope of deductions for capital expenditure on scientific research to cover any systematic, investigative or experimental activities carried on for the purposes of any feasibility study or in relation to any market, business or management research.
5. The Chairman pointed out that under existing provisions, taxpayers could claim deduction on expenditure on scientific research under different provisions of the Inland Revenue Ordinance and their choice of the related provisions would have implications on whether their subsequent proceeds of sale would be subject to tax. For instance, a deduction was available for expenditure on scientific research under the general provision of section 16(1) or under section 16E in respect of purchase and sale of patent rights, etc. In some cases, expenditure on scientific research could also be treated as pre-commencement expenses. These, coupled with the proposed section 16B in respect of expenditure on scientific research, could give rise to ambiguity particularly in the case of disposal of "a right" arising out of a scientific research. He was also concerned that where a deduction was allowed under section 16B, the proceeds of subsequent sale of the assets concerned would be fully taxed as trading receipt although proceeds of capital assets were otherwise not normally taxable.
6. CIR responded that it was a normal practice that if a deduction was allowed in respect of a capital expenditure, the subsequent proceeds of sale attributable to the expenditure was chargeable to tax. As a means to assist the business and industrial development in Hong Kong to cope with the changed circumstances, the Bill proposed to expand the scope of deductions for capital expenditure on research and development to cover the expenditure incurred in market research, feasibility studies and other research activities related to business and management sciences. The Inland Revenue Department would set out the detailed arrangements in Practice Notes upon the enactment of the Bill.
7. On the application of the provisions under the existing Inland Revenue Ordinance in respect of expenditure on scientific research, CIR provided the following information:
- Expenditure incurred on research and development, which was of a minor scale and not related to the survival of a company or its development, was regarded as non-capital expenditure, and hence, a deduction was available under the general provisions in section 16;
- Expenditure incurred in the purchase of a patent right, which usually involved a substantial amount of money, was regarded as capital expenditure and was deductible under section 16E; and
- Expenditure incurred in the registration of a trade mark, design or patent, which was usually very costly, was deductible under section 16(1)(g).
8. The Chairman also expressed concern about the appropriate treatment of research expenditure incurred before or after 1 April 1998, the date the proposed legislation would take effect. CIR responded that the Administration had prepared a Committee stage amendment to address the issue, details of which would be submitted to the Bills Committee for members' consideration.
Clause 8 - Expenditure on building refurbishment
9. In response to the Chairman and Mr James TIEN, CIR advised that the proposed extension of the hotel refurbishment concession to all other business sectors was intended to encourage them to maintain and upgrade the standards and quality of premises regularly. Capital expenditure on refurbishment and redecoration on all non-domestic buildings occupied for business purpose might be amortized over a period of five years. However, given the said policy intent, the concession did not apply to:
- capital expenditure incurred for the purpose of initial construction, decoration or fitting out of buildings; and
- capital expenditure incurred by a person to enable a building or structure to be used for a purpose different from that for which it was used immediately before the capital expenditure was incurred.
For these kinds of capital expenditure, the existing provision that deduction would spread out across a longer span of time would apply. In this connection, members noted another proposal in the Bill that the annual allowance for expenditure incurred in the construction of commercial buildings would be increased from 2% to 4% to align it with that for industrial buildings.
10. Noting that some domestic buildings might also be partly occupied for business purposes, the Chairman enquired whether the provision, as presently drafted, would exclude taxpayers who carried out their business in domestic buildings from enjoying the building refurbishment allowance. CIR responded that for the purpose of establishing the eligibility for the allowance, the main consideration was whether or not the relevant part of the building was actually used for the purpose of business but not the type of the building it appeared to be. The Administration would flexibly apply the provision as appropriate.
Clause 9 - Capital expenditure on the provision of a prescribed fixed asset
11. Noting the proposed provision to allow an immediate 100 percent write-off for new expenditure on plant and machinery specifically related to manufacturing, and on computer hardware and software, which were owned by end users, Mr James TIEN enquired about the types of plant and machinery which would be allowed for the purpose of the related provision. CIR advised that the specific items were provided for in the Inland Revenue Rules. In brief, the plant and machinery should be used specifically and directly for manufacturing processes. As an example, the expenses incurred in the provision of a cargo lift for the movement of goods was considered not directly related to a manufacturing process, and hence would not qualify for the concession.
12. Regarding the deduction arrangement for existing plant and machinery and computer hardware and software in hand, CIR advised that the provision provided that the residual value of which could also be written off immediately.
13. Members went through the Bill clause by clause and noted that a set of working examples in respect of the application of the newly added section 19CA on "Treatment of losses : concessionary trading receipts" and section 19CB on "Set off: concessionary trading receipts" was tabled for members' reference.
Clause 4 - Qualifying debt instruments
14. Members noted that the repeal of section 14A(2) and (3) was a consequential amendment due to the introduction of the newly added section 19CA and CB which provided for the adjustment of losses between assessable profits chargeable to tax at normal and concessionary rates of tax.
Clause 5 - Qualifying reinsurance business &
Clause 14 - Ascertainment of assessable profits of insurance corporations
other than life insurance corporations
15. Members noted that the clauses were related to the proposal to apply a concessionary tax rate at 50% of the standard rate to corporations in favour of professional reinsurers in respect of profits derived from the business of reinsurance of offshore risks.
Clause 16 - Exclusion of certain profits from tax
16. Members noted that the present restrictive listing of the types of income derived by beneficiaries from fund management which qualified for tax exemption would be replaced by a general definition which could keep pace with the fast-changing developments in fund management. The general rule was that so long as the new products were accepted by the Hong Kong Securities and Futures Commission or other supervisory authority within an acceptable regulatory regime, they would be qualified for tax exemption.
Clause 28 - Relief in respect of Commonwealth income tax
17. Noting that Hong Kong was no longer a Commonwealth territory, hence the relief in respect of Commonwealth income tax had already ceased to apply, the Chairman expressed concern about the matter of double taxation and urged the Administration to speed up the negotiation of double taxation relief arrangements with countries concerned.
Clauses 30 & 32 Advance rulings
18. Members noted that the proposal for advance rulings was put forward by practitioners during the comprehensive profits tax review conducted last year. In order to help taxpayers ascertain the taxation implications of arrangements, the legislation provided for CIR to issue, in response to an application made in accordance with the legislation, an advance ruling on how any provision of the Inland Revenue Ordinance applied in respect of the applicant or to an arrangement. However, in view of the anticipated number of applications, particularly in respect of source issues (i.e. whether the profits of a particular trade, profession would be treated as arising in or derived from Hong Kong and hence chargeable to profits tax), it was considered appropriate that the service should come with a charge which would be calculated on the basis of cost recovery.
Clause 31 - Rate of profits tax in respect of a corporation
19. Members supported the proposed provision to reduce the standard rate of profits tax in respect of a corporation from 16.5% to 16%.
20. In concluding the discussion, the Chairman advised that whilst the Hong Kong Society of Accountants was still examining the detailed provisions of the Bill, he had already relayed some of their concerns at the meeting for the Administration's consideration. Members agreed to hold another meeting on 23 March 1998 at 4:30 pm to listen to views of deputations and to discuss further with the Administration.
21. Since members had no major objection to the policy intent of the Bill and having regard to the fact that the deadline for giving notice to resume Second Reading debate on the Bill on 7 April 1998 was 21 March 1998, members agreed that the Administration should give the notice before the Bills Committee completed its deliberations. Meanwhile, the Bills Committee would continue to sort out the remaining issues with the Administration.
III Any other business
22. There being no other business, the meeting ended at 12:20 p.m.
Provisional Legislative Council Secretariat
26 May 1998