Provisional Legislative Council
PLC Paper No. CB(2) 1490
(These minutes have been
seen by the Administration)
Ref : CB2/BC/14/97
Bills Committee on
Stamp Duty (Amendment) (No. 2) Bill 1998
Minutes of the meeting held on Monday, 23 March 1998 at 8:30 am in Conference Room A of the Legislative Council Building
Members Present :
Hon Eric LI Ka-cheung, JP (Chairman)
Hon WONG Siu-yee
Hon Henry WU
Dr Hon Mrs TSO WONG Man-yin
Hon Ambrose LAU Hon-chuen, JP
Hon NGAN Kam-chuen
Members Absent :
Hon Ronald ARCULLI, JP
Public Officers Attending :
- Mr Martin GLASS
- Deputy Secretary for the Treasury
- Mr WONG Ho-sang
- Commissioner of Inland Revenue
- Mrs Rebecca LAI
- Deputy Secretary for Financial Services
- Mrs Agnes SIN
- Deputy Commissioner of Inland Revenue (Technical)
- Mr Alan SIU
- Principal Assistant Secretary (Treasury)(Revenue)
- Mr CHU Yam-yuen
- Chief Assessor, Inland Revenue Department
- Ms Sherman CHAN
- Senior Assistant Law Draftsman, Department of Justice
- Miss Vivian SUM
- Assistant Secretary (treasury) (Revenue)
Clerk in Attendance :
- Mrs Percy MA
- Clerk to Bills Committee
Staff in Attendance :
- Mr Arthur CHEUNG
- Assistant Legal Adviser 5
- Miss Flora TAI
- Senior Assistant Secretary (2) 3
I. Submissions on the Bill
(PLC Paper Nos CB(2)1241, CB(2)1259 and CB(2)1294)
The Chairman informed members that the Hong Kong Society of Accountants and the Joint Liaison Committee on Taxation would not have any submission on the Bill.
2. Mr Henry WU informed members that he had written to the following organizations, seeking their comments on the Bill -
- Stock Exchange of Hong Kong;
- Hong Kong Futures Exchange Limited;
- Hong Kong Securities Clearing Company Limited;
- Hong Kong Stockbrokers Association Limited;
- Institute of Securities Dealers Limited; and
- Hong Kong Securities Professional Association.
3. Members noted that the Hong Kong Securities Clearing Company Limited had written separately to the Administration and Hon Henry WU on 17 March 1998, indicating its support to the proposal in respect of stock borrowing and lending in the Bill. The letters were issued to members vide PLC Paper Nos. CB(2)1241 and CB(2)1259 respectively. Mr Henry WU drew members' attention to the letter dated 20 March 1998 from the Hong Kong Securities Professional Association (Chinese version) and the letter dated 20 March 1998 from the Hong Kong Stockbrokers Association Limited (Chinese version), which were tabled at the meeting and subsequently issued vide PLC Paper Nos. CB(2)1294(01) and CB(2)1294(02) respectively. These two associations had reservation about the timing for implementing the proposals in respect of derivative trading and called on the Administration to reinforce monitoring and regulation of derivatives. Members also noted the letter dated 21 March 1998 from the Secretary for the Treasury, attaching a letter of the same date from the Stock Exchange of Hong Kong, indicating its support to the Bill. The letter was tabled at the meeting and subsequently issued vide PLC Paper No. CB(2)1294(03).
II. Meeting with the Administration
4. In response to the Chairman, Deputy Secretary for Financial Services (DS(FS)) said that the Budgetary proposals in the Bill would encourage the securities industry to continue to develop new products to meet different market needs. As the Financial Secretary had proposed in the 1997-98 Budget to encourage derivative trading by way of tax remission, transactions in regional derivative warrants and convertible bonds had been exempted from stamp duty since April 1997. The Bill merely provided for a specific exemption in place of the less direct remission arrangements previously made by the Secretary for the Treasury under the Stamp Duty Ordinance (Cap. 117) (The Ordinance). She pointed out that apart from facilitating the development of new products, the Budgetary proposals would also improve Hong Kong's competitiveness over other international or regional exchanges which offered similar products and maintained Hong Kong's position as a world class international financial market.
5. DS(FS) stressed that the Budgetary proposals would not have any direct impact on the local stock market because the exemption was only applicable to regional derivatives with their underlying stocks being listed on either one of the fifteen regional stock exchanges approved by the Stock Exchange of Hong Kong. In a broader perspective, the development of Hong Kong into a regional centre for derivative trading would contribute to the stability of the local securities market.
6. As regards the proposal to extend the exemption to transactions in regional derivative warrants have no more than 40% weighting by value in Hong Kong stock, DS(FS) said that it was reasonable that these regional derivative warrants should include some stocks listed in Hong Kong which was the second largest stock market in Asia. She added that the Administration had taken into account the view of the Stock Exchange of Hong Kong in determining the maximum weighting of local stocks in a regional derivative basket warrant for it to be entitled to the stamp duty exemption and had accepted 40% was a reasonable threshold that appeared to strike the right balace. DS(FS) further informed members that not more than 50% of the basket regional derivative warrants approved since April 1997 had 40% weighting in value in Hong Kong stock.
7. Responding to some members' query as to whether it was opportune to implement the proposals, DS(FS) reiterated that the policy to exempt transactions in regional derivatives had been implemented since last year. The review on the financial market during the financial turmoil had so far not indicated that regional derivatives had any direct bearing on the volatilities of the market during that period.
8. Referring to the letters form the Hong Kong Secruities Professional Assoiciation and Hong Kong Stockbrokers Association Limited, DS(FS) said that the Administration appreciated their concerns, which as they understood were mainly related to problems arising from the issue of local derivative options and warrants. Members noted that the Stock Exchange of Hong Kong had completed a review on the general issues of derivative warrants which had been submitted to the Financial Services Bureau by the Securities and Futures Commission. DS(FS) confirmed that the Administration would incorporate that review, together with its own views, into the report on the financial market review. She however clarified for the purpose of the discussion that nothing in the report concerning the review on local derivative warrants would have any direct bearing on the Budgetary proposals in the Bill. In response to, the Chairman's further enquiry, DS(FS) said that although there had been no formal public consultation exercise for the review report, the Administration had taken into account the views from the public, member of the PLC as well as the industry. In response to the Chairman's further enquiry, DS(FS) informed members that on the subject of derivatives, the review report would include such issues as qualification requirements for an issuer of derivative warrants, exercise dates of derivative warrant, enhanced transparency and risk management by the issuers, etc. She assured members that the Administration and the Securities and Futures Commission would closely monitor the development of the regional derivative market after implementation of the Budgetary proposals.
9. To address concerns of members and the industry about monitoring and regulation of derivatives, members asked and DS(FS) agreed that the Administration would give an undertaking on the following when the Bill resumed Second Reading debate on 7-8 April 1998 -
- to continue to monitor the development of the regional derivative market; and
- to brief the first SAR Legislative Council on development of the regional derivative market after the implementation of the proposals relating to regional derivatives in this Bill.
DS(FS) also noted members' views that the Administration should include industry associations in future consultation relating to the development of the regional derivative market.
Postponement in payment of stamp duty pending an appeal to court on the stamp duty assessment
10. Responding to Mrs TSO WONG man-yin, Commissioner of Inland Revenue (the Commissioner) advised that specific provisions allowing postponement in payment of stamp duty pending an appeal to court on the stamp duty assessment were proposed because of a court case last year. It was the view of the judge concerned that provisions requiring a person who was liable for stamp duty payment to settle the payment before lodging any appeal to the court against the stamp duty assessment were inconsistent with the Hong Kong Bill of Rights Ordinance (Cap. 383). He explained that similar provisions as proposed in the Bill were included in the Estate Duty Ordinance (Cap. 111) and the Inland Revenue Ordinance (Cap. 112). The proposed amendments would not have an adverse effect on revenue because the court might require the appellant to give security for postponement in payment of stamp duty. The Commissioner also clarified that a person would appeal to the court against stamp duty assessment only if that person could not come to a settlement with the Collector. As the number of cases was unlikely to be large, it was therefore not expected that the proposed amendments would have any significant implication on the workload of the court.
Plugging potential loophole in respect of duty evasion
11. Assistant Legal Adviser 5 informed members that the kind of transactions referred to in the proposed new section 19(1E)(a) would be deemed to be a sale and purchase of Hong Kong stock and that he had sought clarification from the Administration on whether such a deeming provision had the effect of triggering section 19(1), thus requiring contract notes to be executed for such transactions. The Administration had confirmed that if a transaction was deemed to be a sale and purchase of Hong Kong stock under the proposed section 19(1E)(a), the relevant contract notes would have to be made and executed as required by section 19(1).
III. Clause-by-clause examination of the Bill
(PLC Paper No. CB(2)1294(03))
12. After having discussed the broad principles of the Bill, the Bills Committee proceeded to study the clauses of the Bill, together with the Committee stage amendments (CSAs) to be moved by the Administration. The full set of the CSAs were attached to the letter dated 21 March 1998 from the Secretary for the Treasury (PLC Paper No. CB(2)1294(03)).
Clause 3 Appeal against assessment
13. Deputy Secretary for Treasury explained that in response to Assistant Legal Adviser 5's query concerning the giving of security for the payment of stamp duty, the Administration had agreed to introduce an amendment to the proposed new section 14(1B)(b) to replace "then been due for payment" with "to be paid before the appeal can be brought under subsection (1)" to improve the clarity of the provision.
Clause 6 Contract notes, etc. in respect of sale and purchase of Hong Kong stock
14. Members noted that in response to views of the industry, the Administration would move amendments to clause 6(b) of the Bill to make clear that the provision should not apply to transactions which would otherwise be exempted from stamp duty under section 27(5) of the Ordinance.
IV. Legislative timetable
15. Members agreed that the Second Reading debate on the Bill be resumed at the Council meeting on 7-8 April 1998. The Chairman informed members that as the deadline for giving notice of resumption of Second Reading debate was 21 March 1998, the Administration had already given notice of resumption to the Clerk to the Provisional Legislative Council. In this regard, members noted that the deadline for giving notice of amendments was 27 March 1998 and the Bills Committee would report to the House Committee on the same day.
16. There being no other business, the meeting ended at 9:30 am.
Provisional Legislative Council Secretariat
4 May 1998