In 2018, the IRD conducted tax audits and investigations on taxpayers and levied profits tax on them. The taxpayers objected to the tax years 2012/2013 to 2016/2017, arguing that they should not pay any profits tax for each year of assessment. In response to the taxpayer’s objection, the Inland Revenue Department (“IRD”) suspended the payment of tax assessed for the relevant year of assessment in accordance with section 71(2) of the Inland Revenue Ordinance (“IRO”) if the taxpayer purchased the corresponding amount of TRCs. The taxpayer eventually purchased TRCs of the equivalent value of HK$107,500,000.
The Court of First Instance handed down a judgment on the tax case, holding that the IRD’s refusal to refund the excessive amount of TRCs and the accrued interest incurred was lawful but unreasonable. Therefore, the Court ordered the IRD to refund the above amount to the taxpayer in this case.
Besins Healthcare (Hong Kong) Ltd v Commissioner Of Inland Revenue
The taxpayer in this case is a limited company incorporated in Hong Kong. It is part of a group of companies whose principal business is the manufacture and distribution of pharmaceutical products. Although the taxpayer has an office in Hong Kong, it claims that since its establishment, its substantive business operations have been carried out overseas by third party manufacturers and agents. Therefore, its profits are essentially offshore and are not subject to profits tax in Hong Kong under section 14 of the IRO.
In 2022, the Inland Revenue Department eventually decides to require taxpayers to pay HK$101,500,000 in tax. As a result, the taxpayer’s TRCs are HK$6,000,000 more than the tax payable.
The taxpayer appealed the IRD’s decision to the Tax Appeal Board and also requested the IRD to refund the excess TRCs and the accrued interest incurred. The IRD refused to refund the excess TRCs on the grounds that the appeal was not yet finalized. The IRB will hear the taxpayer’s appeal in May 2023.
The taxpayer filed a judicial review of the dispute. The IRS then filed a final offer motion, agreeing to refund the excess TRCs but not the accrued interest that had accrued. The taxpayer declined and continued with the judicial review.
The main issues of the judicial review were
Does the IRD have the right to refund or repurchase TRCs under section 71(7)(d) of the IRO before the substantive determination of the tax appeal?
Is it reasonable for IRD to retain the excess TRCs without a basis in principle?
The Court of First Instance’s ruling
On 28 September 2022, the Court of First Instance handed down its judgment on the judicial review of this tax case. The Court of First Instance held that the IRD’s refusal to refund the excess TRCs and the accrued interest incurred was lawful but unreasonable.
A “final decision on objection or appeal” is the single endpoint of the process, including objections and appeals filed under the IRO. If an appeal is filed, a decision regarding only the objection is not a “final decision. In this case, the taxpayer appealed the IRS’s decision to the Board of Tax Appeals. In the event that the appeal is not withdrawn, resolved or determined, it is not unlawful or contrary to section 71(7)(d) of the IRS Ordinance for the IRD to refuse to refund the excess amount.
IRD’s decision in 2022 reflects its view that the excess amount of HK$6,000,000 is not taxable at all. Therefore, it is unreasonable for IRD to retain the excess amount because IRD has admitted that it should not own the funds. It is also obviously unreasonable that IRD did not also pay interest. Moreover, section 46 of the Interpretation and General Clauses Ordinance allows the Commissioner to make the necessary changes.
Accordingly, the Court of First Instance ordered the IRD to refund HK$6,000,000 of TRCs and accrued interest to the taxpayer in this case within 21 days.
The Court of First Instance has made it clear that the Commissioner of Inland Revenue has the power to vary or modify the terms of his previous extension orders under section 46 of the Interpretation and General Clauses Ordinance, even if a final decision has not been reached. It should be noted, however, that this power of the Commissioner is discretionary and it is not contrary to law not to exercise it.
In this case, the Court of First Instance based its decision on the specific facts of the case. If you have any questions, please consult with a tax or legal professional.