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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.
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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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