Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Anti-avoidance provision --- Section 61A 

Section 61A has been enacted to plug the loophole of Section 61. It applies to transactions that are done chiefly for tax avoidance. Section 61 only empowers the Revenue to disregard such transactions. But Section 61A extend the Revenue's power to make an assessment as if the transaction had not been carried out or in such other manner as the Revenue considers necessary to counter the tax benefit concerned. The tax-avoidance transactions are defined as ones with a sole or dominant purpose of enabling a person to obtain a tax benefit. 

As established form case law, tax mitigation is acceptable, although from the Revenue's perspective, undesirable. Tax avoidance is not acceptable by the Revenue because it seriously undermines the principle of fairness and public's confidence in revenue policy. 

In practice, the distinction between tax mitigation and tax avoidance is not very clear. In the case Ensign Tankers (Leasing) Ltd. v. Stokes 64 TC 617, this was said: 

There is a fundamental difference between tax mitigation and unacceptable tax avoidance. Examples of the former have been given in the speech of my noble and learned friend.  These are cases in which the taxpayer takes advantage of the law to plan his affairs so as to minimise the incidence of tax. Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed.  These structures are designed to achieve an adventitious benefit for the taxpayer, and in truth no more than raids on the public funds at the expense of the general body of taxpayers, and as such are unacceptable.”

Click here to read what the judge said in Yick Fung Estates Ltd v CIR.

In practice, Section 61A applies when all the following questions give a “yes” answer.

(1) Was there a transaction?

(2) Was it done with a sole or dominant purpose of obtaining a tax benefit?

(3) Was a tax benefit obtained?

If the IRD assessor considers that Section 61(A) is applicable, he will submit the case to an Assistant Commissioner for issue of an assessment to counteract the tax benefit.


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