The Inland Revenue Department (IRD) issues two sets of assessments to taxpayers for the same amount of income under different tax provisions but on a mutually exclusive alternative basis. Can taxpayers purchase and legally use TRCs as security for both assessments?

The Court of Appeal dismissed the IRD’s appeal in September 2020 and taxpayers can purchase and legally use TRCs for appeal purposes.


Dairyfarm Establishment & The Dairy Farm Company

The Dairy Farm Company is one of the few local suppliers of dairy products in Hong Kong and is a well-known brand in Hong Kong. Taxpayer has designed a corporate group structure to minimize tax liability. Taxpayer has incorporated a subsidiary in the Principality of Liechtenstein and the subsidiary in the Principality of Liechtenstein holds various trademarks of the Group. The trademarks were licensed to the group’s Hong Kong-based companies at a substantial annual royalty. The taxpayer argues that the above royalties are chargeable to profits tax under sections 15(1)(b), 20B and 21A of the IRO. However, the Inland Revenue Department (IRD) does not share this view.

The IRD has made two mutually exclusive assessments. The IRD has assessed the Liechtenstein subsidiary for profits tax under section 14 of the Inland Revenue Ordinance on the basis that the company allegedly has dealings or carries on business in Hong Kong. Another assessment is the imposition of profits tax royalty under section 15(1)(b) of the IRO on the use of the IPRs or the right to use the IPRs in Hong Kong, and the imposition of withholding tax on the payer of such royalty under section 21A of the IRO. In addition, IRD does not allow taxpayers to claim tax deductions for the relevant royalty expenses. The IRD also refused to grant a concession to its subsidiary under the Hong Kong-Liechtenstein Double Taxation Agreement to pay withholding tax on royalties at a lower rate.

The above profits tax assessments under sections 14 and 21A of the Inland Revenue Ordinance have a common basis for assessing the same amount of money. A taxpayer should be entitled to profits tax under only one of the two Ordinances, instead of being subject to double taxation under both Ordinances. The taxpayer is subject to a withholding tax liability under section 21A of the Inland Revenue Ordinance by virtue of its role as the payer of the relevant royalty.

The Inland Revenue Department (“IRD”) of Hong Kong has for many years adopted the “pay-and-answer” approach in dealing with local tax disputes. The IRD therefore demanded the taxpayer in this case to pay the amount of profits tax due and payable under section 14 and section 21A of the IRO.

The taxpayer has made the payment as requested by the IRD. Therefore, even if the taxpayer lost the appeal, it would not be liable for both assessments in the end and it subsequently requested the IRD to refund the overpaid tax. However, IRD not only rejected the taxpayer’s request, but also continued to raise additional protective assessments. The IRD again requested the taxpayer to pay further tax on the grounds of section 14 and section 21A of the IRO. The taxpayer failed to reach an agreement with the Commissioner and instituted judicial review proceedings.

The Dispute

The main issue in dispute is whether IRD has committed an error of law by refusing to withdraw one of the two assessments levied at the same time. IRD argued that once a valid assessment is issued, IRD generally does not have the discretion to withdraw or revise the assessment and therefore can only require the taxpayer to pay at least part of the tax levied.

The Court’s Ruling

The Court of First Instance held that under section 64(2) of the IRO, IRD should have the power to cancel either of the two assessments. IRD could also issue a new bill of assessment to replace the cancelled assessment.

The Court also pointed out that under section 46 of the Interpretation and General Clauses Ordinance, if a person is empowered to give a notice, he is also empowered to amend or revoke the notice. It therefore ruled against IRD.

IRD had to appeal to the Court of Appeal which, in September 2020, dismissed IRD’s appeal.


It is not uncommon for IRD to issue more than one assessment on an alternative basis to protect its rights when there is a tax dispute. Although a taxpayer may not ultimately be required to pay tax based on all the alternative assessments, IRD has the power to order the taxpayer to purchase TRCs for all the alternative assessments before the tax dispute is resolved. This may put unbearable pressure on the taxpayer’s cash flow position.

In this case, the IRD had taken a strong stance in rejecting the taxpayer’s proposal, but this would not result in the IRD suffering any financial loss. The Court clarified that it would be wrong in law for IRD to reject such offers. It is therefore in the interest of taxpayers to bring the tax disputes concerned to the Court for resolution where appropriate. If you are in any doubt, please consult a tax or legal professional.

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