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Commissioner Of Inland Revenue v Indosuez W I Carr Securities Ltd

Judgment Cited authorities 4 Cited in Precedent Map Related
Vincent
Judgment Date30 January 2002
Year2002
Citation[2002] 1 HKLRD 308
Judgement NumberHCIA4/2001
Subject MatterInland Revenue Appeal
CourtHigh Court (Hong Kong)
HCIA000004A/2001 COMMISSIONER OF INLAND REVENUE v. INDOSUEZ W I CARR SECURITIES LTD.

HCIA000004A/2001

HCIA 5/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 5 OF 2001

____________

BETWEEN
COMMISSIONER OF INLAND REVENUE Appellant
AND
INDOSUEZ W I CARR SECURITIES LTD Respondent

____________

AND

HCIA 4/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2001

____________

BETWEEN
COMMISSIONER OF INLAND REVENUE Respondent
AND
INDOSUEZ W I CARR SECURITIES LTD Appellant

____________

Coram: Deputy High Court Judge Longley in Court

Date of Hearing: 17-20 December 2001

Date of Judgment: 30 January 2002

_______________

J U D G M E N T

_______________

1. This is an appeal by way of case stated from the Decision of a Board of Review dated 28 August 2001 pursuant to S.29 of the Inland Revenue Ordinance Cap. 112.

2. At the hearing before the Board of Review (the "Board") held on the 4 and 5 January 2000, Indosuez W I Carr Securities Ltd (the "Taxpayer") had appealed against a Determination of the Commissioner of Inland Revenue (the "Commissioner") dated 2 July 1999 in respect of the Taxpayer's additional profits tax assessments for the year of assessments 1992/93 and 1993/94 and the profits tax assessment for the year of assessment 1994/95 (the "Assessments").

3. By Notices of Appeal against the Commissioner's Determination dated 30 July 1999, the Taxpayer had challenged the Commissioner's Determination contending that the reduced Additional Assessable Profits for each of the said 3 years of assessment, i.e. 1992/93, 1993/94 and 1994/95 ("the relevant years of assessment") were profits which neither arose in nor were derived from Hong Kong and were therefore outside the scope of the charge to profits tax imposed by S.14 of the Inland Revenue Ordinance.

4. The appeal before the Board therefore raised the question of source of profits.

5. The Assessments were made in respect of "commissions and brokerage" and "interest" received by the Taxpayer in the respective years and also in respect of placement fees (underwriting commission) received in 1994/95. The Assessor contended that the said sums were chargeable to profits tax under section 14(1) of the Inland Revenue Ordinance ("IRO") on the basis that they were assessable profits arising in or deriving from Hong Kong from a trade or business carried on by the Taxpayer in Hong Kong.

6. From the facts which the parties had agreed the Board of Review found inter alia the following facts proved:

(a) The Taxpayer was incorporated as a private company in Hong Kong on 7 October 1986 and commenced to carry on business as a stockbroker in Hong Kong on 1 May 1987.

(b) The Taxpayer is and was at the material time a member of an international stockbroking group. During the relevant years of assessment, the group maintained subsidiaries and offices at various places including New York, London, Singapore, Indonesia, Taiwan, Thailand and Japan.

(c) The ultimate holding company of the Taxpayer at the time was Compagnie de Suez incorporated in France.

(d) The Taxpayer's office in Hong Kong served as the centre or headquarters of the group for the Asia pacific region.

(e) At the material time, the Taxpayer's offices in Hong Kong occupied five floors (although not the entire five floors) of One Exchange Square.

(f) It also incurred substantial expenses for salaries and allowances during each of the relevant years of assessment. By the end of 1995, there were over 200 staff working in the Hong Kong office.

(g) The Taxpayer derived income from brokerage commission both in respect of the Hong Kong market and overseas markets. Overseas markets would appear to cover stock markets in Thailand, Singapore, Indonesia, India, Korea and Taiwan. Brokerage commission generated from the Hong Kong market had always been offered for assessment. For the years of assessment 1987/88 - 1991/92, the Assessor had accepted the Taxpayer's claim that its profits or loss from its brokerage business in respect of overseas markets were offshore.

(h) In 1993, the Assessor commenced a review of the Taxpayer's offshore claim. Pending the outcome of the review, the Assessor issued to the Taxpayer profits tax assessments for the years of assessment 1992/93 and 1993/94 in accordance with the Taxpayer's returns for these 2 years.

(i) Subsequently the Assessor issued to the Taxpayer additional assessments on the basis inter alia that its profits derived from commissions arising from execution of transactions on overseas stock exchanges were profits arising in or derived from Hong Kong and were accordingly taxable by virtue of S.14 of the Inland Revenue Ordinance Cap.112.

7. At the hearing before the Board of Review, the Board was concerned not only with these profits from commission income, but also with certain interest income and corporate finance income of the Taxpayer. The Board made certain findings in relation to interest income and corporate finance income, but these findings are not the subject of the case stated before this court. This court is solely concerned with the Taxpayer's profits from commission arising from the execution of orders placed on overseas stock exchanges.

8. Two witnesses were called by the Taxpayer before the Board of Review Mr Jean-Luc Eymery, the Chief Financial Officer, and Mr Keith Craig, the Group Head of Sales. The Board accepted their evidence as to the primary facts and in paragraph 8 of the case stated set out its findings on the basis of the evidence of these witnesses. I do not propose to set out those findings in full but shall refer to them in so far as they are relevant to the issues before the court.

9. Initially during the hearing before the Board of Review, no distinction was drawn in respect of orders placed on overseas markets between orders placed in Hong Kong by Hong Kong customers and orders placed outside Hong Kong by overseas customers. Counsel for the Taxpayers argued that all the commission profits in question were offshore whereas counsel for the Commissioner argued that the Taxpayer had not proved its case. It was only during the course of the hearing that it appeared to the Board that a distinction might be drawn between the two.

10. Ultimately the Board of Review did draw a distinction in its conclusions.

THE BOARD'S CONCLUSIONS

Overseas customers

11. In so far as commission earned from the execution of orders in the overseas markets from clients outside Hong Kong is concerned, the Board came to the conclusion that the source of commission generated from overseas clients was substantially offshore and therefore not liable to taxation. It is significant that it did not do so on the basis that the execution of the orders on overseas markets was done by brokers acting as the agents of the Taxpayer thereby making the acts of the brokers acts of the Taxpayer performed overseas. Indeed it specifically found that it could not infer that the brokers were the Taxpayer's agents and consequently it would not be right to regard the actual execution of the order at the markets as the acts of the Taxpayer. The Board did so on the basis that the Taxpayer engaged the overseas offices of its group as its agents to perform the tasks of liaising with clients, processing, handling and managing the orders and providing primary research material. As a result of so doing the Board found that the profits generated from overseas clients arose substantially from an offshore source.

Hong Kong customers

12. In so far as commission earned from the execution of orders in overseas markets for clients in Hong Kong is concerned, the Board came to the conclusion that the profits could be said to be derived from operations carried on both within and outside Hong Kong. The greater element, which derived from the operations within Hong Kong, was a result of the Taxpayer's efforts in building up and maintaining the relationship with the clients, providing quality research and offering advice to the clients, providing an effective and reliable service to the clients and in projecting and maintaining an image of repute and reliability to the clients. Again the Board proceeded on the basis that the actual execution of the orders on the overseas markets was not the act of the Taxpayer. If it had been permitted to do so the Board would have apportioned the profits derived from commission earned from Hong Kong clients to be 60% onshore and 40% offshore. It took the view however that it was bound by authority, which held that apportionment was not possible and that it had to look to the predominant source of the profit which was Hong Kong.

13. There are 5 questions posed by the Board of Review in its case stated.

Questions 1 and 3

14. Two of those questions Question 1 and Question 3 were posed at the instance of the Commissioner of Inland Revenue in order to challenge the Board's finding that the profits from commission from orders from overseas clients arose substantially outside Hong Kong and were not chargeable to tax. The questions are these:

(1) Whether upon the evidence before the Board of Review and in all the circumstances of the case, the Board of Review erred in law in drawing an inference that the taxpayer engaged overseas offices as its agent in performing various tasks such as the maintenance of the relationship with the client, the processing, handling and management of the orders and the provision of the primary research materials.

(3) Whether on the facts found by the Board of Review, the Board of Review erred in law in concluding that the profits generated...

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