HKCFI 3101
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
INLAND REVENUE APPEAL NO. 4 OF 2019
||HEATH BRIAN ZARIN
||THE COMMISSIONER OF INLAND REVENUE
Before: Hon Coleman J in Chambers (Open to Public)
Date of Hearing: 19 December 2019
Date of Judgment: 24 December 2019
J U D G M E N T
1. By summons dated 18 September 2019, the appellant (“Taxpayer”) seeks leave to appeal from the decision D11/19 (“Decision”) of the Inland Revenue Board of Review (“Board”) dated 23 August 2019. The Decision dismissed the appellant’s appeal against a Determination by the respondent Commissioner of Inland Revenue (“CIR”) confirming three additional assessments to salaries tax amounting to an aggregate of $1,752,968 (“Assessments”). The Assessments were raised by the CIR under sections 8 and 9 of the Inland Revenue Ordinance Cap 112 (“IRO”).
2. Section 8(1)(a) of the IRO materially provides as follows:
“(1) Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources – (a) any office or employment of profit;”
3. Section 9(1)(a) of the IRA materially provides as follows:
“(1) Income from any office or employment includes – (a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others [with certain exceptions not applicable in this case]”
4. The representation on the application for leave was the same as that before the Board. Mr Stefano Mariani, of Deacons, appeared for the Taxpayer, and Mr Wilson Leung, of Counsel, instructed by the Department of Justice, appeared for the CIR.
Principles on Leave to Appeal
5. The application for leave is made under section 69 of the IRO. Under that section, leave to appeal must not be granted unless the Court of First Instance is satisfied: (1) that a question of law is involved in the proposed appeal; and (2) that (a) the proposed appeal has a reasonable prospect of success, or (b) there is some other reason in the interest of justice why the proposed appeal should be heard.
6. In this application, no argument has been put forward as to the “some other reason” limb. Therefore, the focus of the argument has been on whether or not a question of law is involved in the proposed appeal, and whether the proposed question has a reasonable prospect of success. There is no dispute that “reasonable prospect of success” in the context of section 69 of the IRO means “reasonably arguable” and nothing more.
7. Further guidance as to applications under section 69 can be found, for example, in the decisions of Chow J in China Mobile Hong Kong Co Ltd v CIR  2 HKLRD 146 at §30, and of G Lam J in CIR v Right Margin Ltd  5 HKLRD 398 at §§12-13. That guidance includes that:
(a) The right to appeal is not unqualified and absolute. Any proposed question of law must be proper and satisfy a qualitative aspect.
(b) A question may superficially appear to be a question of law, but if it is general and vague and does not identify the issues to be argued, it is inadequate.
(c) It is not a proper question of law by turning the ultimate conclusion of the Board into a form of question.
(d) It is also not a proper question of law if the framed question fails to identify precisely the point of law involved or any specific legal error or question.
(e) Whether or not a proposed question is a proper question of law depends on the circumstances of the case.
8. As to challenges made to findings of fact, said to amount to an error of law, guidance can be found for example in Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 at §§31-34, and §37. Such challenges can only be made if (a) the decision was based on a finding of fact or inference from the facts which was perverse or irrational; (b) there was no evidence to support the decision; (c) the decision was made by reference to irrelevant factors; or (d) the decision was made without regard to relevant factors. The appellant court should not disturb the Board’s conclusion unless it regards that conclusion as contrary to the true and only reasonable one.
9. This reflects that appellate courts are reluctant to interfere with findings at first instance, because Judges and tribunals can reasonably differ as to on what side of the line any particular case falls, particularly where there is the assessment of numerous facts.
10. It may also be important to bear in mind that, in an appeal before the Board, the taxpayer bears the burden of proof throughout, and the CIR does not have to prove anything. As a result, in this particular case, the Taxpayer bore the burden of proving to the Board that the various sums assessed as chargeable to tax were not “from” his employment (see below).
11. The Taxpayer was employed by HSBC Markets (Asia) Ltd (“Company”) as Managing Director, Head of Direct Principal Investments Asia, by a letter dated 27 May 2010 and countersigned on 31 May 2010 (“Employment Contract”). Under the Employment Contract, and in addition to a base salary, the Taxpayer was provided with a “guaranteed bonus”, participation in a “Carry Plan”, and participation in a “discretionary bonus scheme”.
12. As part of his guaranteed bonus for the performance year 2010, on 15 March 2011 the Taxpayer was granted a restricted share award of shares in HSBC Holdings plc under the HSBC Share Plan, which shares were defined in the Decision as the “2011 Shares”. The total shares granted were to vest as to 33%, 33% and 34% in March 2012, 2013 and 2014 respectively. As part of his discretionary bonus for the performance year 2011, on 12 March 2012 the Taxpayer was granted another restricted share award of shares in HSBC Holdings plc under the HSBC Share Plan 2011, which shares were defined in the Decision as the “2012 Shares”. Those shares were to vest as to 33%, 33% and 34% in March 2013, 2014 and 2015 respectively.
13. Amongst the terms of the two share plans (“Plans”) were terms that: (a) participation in the Plans was governed by the rules of the plans and did not form part of the Employment Contract; (b) the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the ‘good leaver’ provisions set out in the Plans; (c) awards might be amended, reduced or cancelled by a relevant remuneration committee at any time before the award vested, and the committee had the discretion to impose additional conditions on the awards; (d) if the participant left the Group before the vesting date(s) as a good leaver, then subject to the approval of the committee and the policy of the Company, the awards would vest in full on the vesting date(s) subject to the committee’s authority already mentioned; (e) good leaver reasons included, amongst other things, redundancy; and (f) where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement.
14. By letter dated 21 January 2013, the Company terminated the Taxpayer’s employment on the grounds of redundancy. Amongst other things, the letter stated that the payment in lieu of three months’ notice would be made, together with an enhanced severance payment of $467,500; that the terms of the letter would be in full and final settlement of the termination of employment, and the Taxpayer would not bring any claims against the Company or other group companies; that the Taxpayer would be treated as a good leaver, and the vesting of any un-vested shares would be conditional on his compliance with the terms in the letter; and that the Taxpayer would assist the Company and any group company in relation to certain litigation (“Litigation”) regarding the Company’s investment in a particular company, including attendance at court or arbitration hearings outside Hong Kong.
15. The Taxpayer did not accept those terms offered and made alternate suggestions. There then followed negotiations between solicitors appointed on behalf of the Company and the Taxpayer. Ultimately, by letter dated 20 June 2013 from the Company’s solicitors, signed by the Taxpayer on 21 June 2013, revised terms and conditions regarding the taxpayer’s termination of employment were agreed (“Termination Agreement”). In passing, I would note that I have adopted the definition used by the Board in the Decision, but Mr Mariani suggests that a proper description of that agreement might better have been the “Settlement Agreement”. Of course, he also acknowledges that more turns on the content then on any particular label given to it.
16. The terms of the Termination Agreement included:
(a) because the Taxpayer’s employment was terminated by reason of redundancy, he would be treated as a good leaver for the purposes of the Plans, so that all remaining restricted shares previously awarded to the Taxpayer would vest on the same terms as stated in the letters awarding them to the Taxpayer;
(b) any release of the 2012 Shares would be conditional on the Taxpayer having not committed a breach of any of the terms of the Termination Agreement, including the one that he should not claim against the Company in connection with the employment or the cessation of the employment;
(c) if the Taxpayer committed a breach of any of the terms of the Termination Agreement, any unvested 2012...