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Richard Paul Forlee, M. A. v Commissioner Of Inland Revenue

Judgment Cited authorities 9 Cited in Precedent Map Related
Vincent
Judgment Date27 May 2020
Neutral Citation[2020] HKCFI 868
Judgement NumberHCIA1/2019
Subject MatterInland Revenue Appeal
CourtCourt of First Instance (Hong Kong)
HCIA1/2019 RICHARD PAUL FORLEE, M. A. v. COMMISSIONER OF INLAND REVENUE

HCIA 1/2019

[2020] HKCFI 868

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 1 OF 2019

________________________

BETWEEN

RICHARD PAUL FORLEE, M. A. Applicant
and
COMMISSIONER OF INLAND REVENUE Respondent

________________________

Before: Deputy High Court Judge Dawes SC in Chambers (Open to Public)
Dates of Hearing: 23 April 2020
Date of Judgment: 27 May 2020

________________________

J U D G M E N T

________________________

A. Introduction

1. By summons dated 31st May 2019, the Applicant seeks leave to appeal against decision D2/19 of the Inland Revenue Board of Review (the “Board”) dated 3 May 2019 (the “Decision”).

2. In the Decision, the Board dismissed the Applicant’s appeal against the determination of the Deputy Commissioner of Inland Revenue dated 9 July 2018 raising salaries tax on the Applicant for the years 2015/16 and 2016/17 on certain share awards and dividends received on those shares under section 8 of the Inland Revenue Ordinance (Cap. 112) (the “Ordinance”).

3. Section 8(1) of the Ordinance provides that:

“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…”.

4. Section 8(1) is supplemented by section 11B, which provides that “[t]he assessable income of a person in any year of assessment shall be the aggregate amount of income accruing to him from all sources in that year of assessment.”

5. Section 11D(b) provides that, for the purposes of section 11B, “income accrues to a person when he becomes entitled to claim payment thereof”.

B. Background

6. The following background is taken from the Agreed Facts submitted by the Applicant and the Commissioner to the Board.

7. The Applicant had been employed by Investec Bank Plc from 2002 until 30 June 2014 outside Hong Kong. From 1 July 2014 onwards he was employed by Investec Capital Markets Ltd in Hong Kong. Both employers were companies within the Investec Group (the “Group”).

8. On each of 29 May 2012, 4 June 2013 and 27 May 2014 (the “Award Dates”), the Applicant was awarded forfeitable shares (the “EVA Shares”) under the Group’s share incentive plan (the “Plan”). Each award provided that the relevant shares were to be transferred to and held by Investec Plc Jersey 1 Trust (the “Nominee”), and were to be released to the Applicant in yearly tranches between 29 May 2012 and 27 May 2017 (the “Release Dates”).

9. Rule 4.1 of the Plan provided that the Applicant had “all the rights of a shareholder in respect of the EVA Shares from the Award Dates, subject to the provisions of the Plan”. In particular, he had the right to demand payment of all dividends declared on the EVA Shares and the right to direct the Nominee as to how to vote in relation to the EVA Shares.

10. Rule 4.2 provided that the Applicant could not transfer, assign or dispose of the EVA Shares or any rights in respect of them prior to the Release Dates, except on his death or with permission of the Committee (as defined in Rule 1.1 of the Plan).

11. Rule 5.1 to 5.3 provided that the Applicant would immediately forfeit the EVA Shares if he ceased to be an employee for any reason before the Release Dates, except in the case of disability or death or with permission of the Committee.

12. Appendix 1 of each of the award letters stated that each tranche of the EVA Shares would cease to be subject to forfeiture on their respective Release Dates, but the EVA Shares would then be retained by the Nominee for a further specified period of time (the “Retention Period”). The Applicant was not entitled to transfer or dispose of the released tranches of EVA Shares before the expiry of the relevant Retention Periods.

13. Appendix 2 of each of the award letters stated that the EVA Shares were subject to clawback or performance adjustment, and that Investec Bank Plc had the right to reduce the value of the awards before the Release Dates in certain specified circumstances.

14. The Assessor raised salaries tax assessments for the years of assessment 2015/16 and 2016/17 including in its computation of salaries tax (i) the value of the EVA Shares released to the Applicant during those years and (ii) the dividends paid to the Applicant during those years in respect of the EVA Shares which had been granted but had not yet been released to the Applicant (the “Dividends”).

15. The Applicant objected to the inclusion of the EVA Shares and the Dividends in the assessments and these objections were dismissed by the Deputy Commissioner of Inland Revenue in its Determination. The Applicant appealed to the Board.

16. In the Decision, after referring to the facts and the provisions of the Plan, the Board observed that the EVA Shares were held by the Nominee on behalf of the Applicant subject to the rules of the Plan until the end of the Retention Period, and that it was only on the Release Dates that the EVA Shares ceased to be subject to forfeiture and only at the end of the relevant Retention Period that the respective tranche of the EVA Shares became free of any restrictions under the Plan.

17. The Board considered that those tranches of EVA Shares that ceased to be subject to forfeiture in the years 2015/16 and 2016/17 only became so as a result of the Applicant’s continued employment with a member of the Group in Hong Kong. It found that the EVA Shares only accrued to the Applicant on the respective Release Dates as he only became entitled to their value at that point.

18. The Board noted that while there were restrictions on the disposal and transfer of the EVA Shares during the Retention Period, these were of limited scope and duration so as not to affect their conclusion that the EVA Shares vested on the Release Dates.

19. As for the Dividends, the Board considered that the Applicant’s entitlement to be paid the Dividends arose not only because of the award of the EVA Shares but because the EVA Shares had not been forfeited or reduced in the interim, and that one reason for this was because he continued to be employed by a member of the Group in Hong Kong.

20. As a result, the Board concluded that both the EVA Shares and the Dividends constituted income from the Applicant’s employment and were therefore subject to salaries tax pursuant to section 8 of the Ordinance.

21. The Applicant seeks leave to appeal on two proposed questions, namely:

“Upon the true construction of Part 3 of the Ordinance and in particular sections 8(1), 9 and 11B–11D thereof and in the light of the facts agreed and found by the Board of Review:-

‘(1) Was each of the pre-July 2014 awards to the Taxpayer of EVA Shares and/or the dividends that later accrued upon them, income arising in or derived from the Taxpayer’s employment in Hong Kong during the 2015/16 and 2016/17 years of assessment?

(2) Did the Board err in law in concluding that the EVA Shares only vested with the Taxpayer (and thereby “accrued” to him) on the post-June 2014 dates when they were released from the risk or contingency of possible forfeiture?’”

C. Principles

22. The relevant principles are trite. Appeals against decisions made by the Board are governed by section 69 of the Ordinance. For present purposes, the relevant provision is section 69(3)(e), which provides that leave to appeal must not be granted unless the Court of First Instance is satisfied that a question of law is involved in the proposed appeal, and (i) the proposed appeal has a reasonable prospect of success; or (ii) there is some other reason in the interests of justice why the proposed appeal should be heard.

23. The principles applicable to appeals under section 69 were recently explained by Chow J in China Mobile Hong Kong Co Ltd v Commissioner for Inland Revenue [2018] 2 HKLRD 146 at §30 as follows:

(a) The right of appeal under section 69 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) Phrasing the ultimate conclusion of the Board in the form of a question does not turn it into a proper question of law.

(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.

24. In his written submissions, Mr Barlow SC, who appeared on behalf of the Applicant, submitted that a question is either a question of law or it is not a question of law and suggested that “the concept does not admit of degrees or of qualifying or limiting adjectives (such as “a proper question of law”)”.

25. I do not accept this submission. I agree with Chow J’s analysis in China Mobile that the requirement that an applicant identify and state a proper question of law implicitly remains notwithstanding the change of the appeal regime under section 69 of the Ordinance from a case stated procedure to an ordinary appeal procedure. In any event, while Chow J’s judgment is not strictly binding on me, a judge ought to follow decisions of other judges of co-ordinate jurisdiction unless he is convinced that the other judge was wrong: Kan Fat-tat v Kan Yin-tat [1987] HKLR 516, 527D per Robert Tang QC (as he then was).

26. I further bear in mind that where the issue challenged by the applicant is a finding of fact, it will only amount to an error of law where (a) the decision was based on a finding of...

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