Raymond Yeung Tax Consultant * former IRD Assessor

飛鴻稅務顧問 * 前稅務局評稅主任楊輝洪

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Anti-avoidance provision --- Section 61  

Section 61 of Inland Revenue Ordinance: The Revenue may disregard certain transactions which are artificial or fictitious or not given effect thereto and then, to assess the taxpayer as if there had been no such transactions. Of course, it concerns only those transactions which have reduced tax. Click here for details.

In the case Rico Internationale Limited v. CIR (1965) I HKTC 229 , certain payments of commissions were held to be artificial and fictitious. This was because no work had been done for the so-called transactions. In other words, transactions would be a sham and could therefore be disregarded if they were not carried out.  

In the case Kum Hing Land Investment Company Limited v. CIR (1967) 1 HKTC 301, the company claimed a deduction of commission which was paid to a related company. CIR disallowed the deduction by Section 61. It was held that “transaction” included the whole of any particular transaction, and not merely part of it. CIR, therefore, lost the case.  The court said that  “transaction” was not just the payment and receipt of the commission but also covered the process from the inception of the idea to pay commission up to the final completion of the service. This implies that for a tax efficient scheme to withstand the challenge of Section 61, all the steps within the scheme must be genuine, of commercial substance and carried out. Otherwise, it is vulnerable to be disregarded by the court upon IRD's challenge. In that case, the undesirable consequences, such as the legal wrangle and cost, or even penalty, can outweigh the anticipated tax benefit. 

In Mangin v Inland Revenue Commissioners [1971] AC 739, it was held that if there were more than one way to structure his affairs, the taxpayer had the right to choose the more tax efficient way. The court said: " if a bona fide business transaction can be carried through in two ways, one involving less liability to tax than the other, their Lordships do not think that (an anti-avoidance legislation) can properly be invoked to declare the transaction wholly or partly void merely because the way involving less tax is chosen."

Click here to read the Board's comments in the case D85/02

Click here to read the Board's comments in the case D68/90


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