For discussion
on 3 October 1997

FCR(97-98)38

ITEM FOR FINANCE COMMITTEE

HEAD 76 - INLAND REVENUE DEPARTMENT
Subhead 189 Interest on tax reserve certificates

Members are invited to approve supplementary provision of $30.1 million under Subhead 189 Interest on tax reserve certificates.

PROBLEM

The approved provision of $28.1 million for the payment of interest on Tax Reserve Certificates (TRCs) is insufficient to meet increased expenditure in 1997-98.

PROPOSAL

2.The Commissioner of Inland Revenue (CIR) proposes a supplementary provision of $30.1 million under Subhead 189 Interest on tax reserve certificates.

JUSTIFICATION

3. Subhead 189 is for the payment of interest on TRCs by CIR under the Tax Reserve Certificates Ordinance (Cap. 289). A taxpayer will normally buy TRCs under the following circumstances -

1. to meet future payment of tax; and
   
   
   
2. to meet CIR's requirement that where a taxpayer has objected to an assessment, he should buy TRCs under section 71(2) of the Inland Revenue Ordinance (Cap. 112) as security for the payment of tax held over in dispute.

4. Regarding paragraph 3(a), interest is payable when the taxpayer redeems the TRCs to pay tax, subject to a maximum interest earning period of 36 months. Regarding paragraph 3(b), according to section 71(2) of the Inland Revenue Ordinance, where the final decision in respect of the objection or appeal case is in favour of the taxpayer, interest will be payable on the TRCs refunded to the taxpayer without any limit on the interest earning period. On the other hand, where the decision is against the taxpayer or where the taxpayer withdraws the objection or appeal, no interest will be payable.

5. On the basis of the actual expenditure for the period from 1 April to 15 September 1997, CIR estimates that expenditure in the current financial year will exceed the approved provision by $30.1 million, calculated as follows -

	$ million
	(a) Expenditure from 1 April to 15 September 1997	25.2
	(b) Estimated expenditure from 16 September 1997 to 31 March 1998	33.0 _______
	(c) Estimated total expenditure for 1997-98 [(a) + (b)]	58.2
Less	(d) Approved provision	28.1 _______
	(e) Shortfall [(c) - (d)]	30.1 _______

6. The anticipated additional expenditure is due to the following factors -

1. the payment of interest for five objection or appeal cases involving TRCs with substantial values. We expect that these cases would be settled before March 1998 and, according to present indications, the outcome is likely to be in favour of the taxpayers concerned. We estimate that total interest payments of $11.4 million will be required for these cases;
   
   
2. an increase in the payment of interest as a result of a higher than expected amount of TRCs purchased in other objection or appeal cases. In the light of the actual payments made in 1996-97 and in the past five months, we estimate that an additional $13.7 million interest payment will be required for these cases; and
   
   
3. an increase in the payment of interest for TRCs purchased by taxpayers voluntarily, partly as a result of three exceptionally large cases involving TRCs with a total value of $87.3 million and partly attributable to the increase in the sale of TRCs under the Pay-As-You-Earn Scheme. We estimate that an additional $5 million will be required for this purpose.

FINANCIAL IMPLICATIONS

7. If Members approve the proposal, we shall offset the supplementary provision of $30.1 million by deleting an equivalent amount under Head 106 Miscellaneous Services Subhead 251 Additional commitments.

Finance Bureau
September 1997