III Enhancing tax certainty for onshore gains from disposal of equity interests
Eligibility criteria for the tax certainty enhancement scheme
Members enquired about: (a) the number of cases assessed by the Inland Revenue Department (“IRD”) using the “badges of trade” approach in the past few years, as well as the proportion of cases that were assessed to be taxable, and whether such cases were generally subject to the corporate profits tax rate; the expected number of cases that would continue to be assessed under the “badges of trade” approach upon the implementation of the enhancement scheme; and (c) whether IRD would use the point in time of the increase or decrease in equity interests to determine if an investor entity could meet the basic conditions of the enhancement scheme.
The Administration pointed out that the “badges of trade” approach was not only applicable to taxation on gains on transfer of interests, but also applicable in assessing whether any gains derived from transfer of assets were capital in nature. As such disposal gains were very common, IRD did not keep statistics on such cases. The Administration advised that it was discussing with the industry the formulation of the basic conditions of the enhancement scheme and the preliminary proposal was to use the point in time of disposal of equity interests (i.e. an investor entity must have held at least 15% of the total equity interest in the investee entity for a continuous period of at least 24 months ending on the date immediately prior to the date of disposal of such interest) to determine if the investor entity could meet the basic conditions.
IV Creation of a permanent Assistant Commissioner post in the Inland Revenue Department
Members enquired:(a) whether the Deputy Commissioner of Inland Revenue (Technical) (“DCIR(T)”) and AC(C) would be responsible for the review of the tax regime; and (b) about the number of international tax forums and meetings IRD had attended over the past few years and whether there had been any occasion on which DCIR(T) was unable to attend such forums/meetings due to other commitments.
The Administration pointed out that DCIR(T) was fully stretched by heavy workload of his duties. In the light of the fast expansion of the various work for achieving the important missions of IRD, it was expected that the continuation of the present operating mode of relying on the direct steer of DCIR(T) was not desirable for the sustainable development of various initiatives relating to domestic taxation and international tax cooperation. Upon the creation of the AC(C) post, three of the four sections currently under the direct purview of DCIR(T), namely the Technical Research, Special Duties, and Tax Treaty Sections, would be placed under the direct purview of AC(C) who would then report to DCIR(T), so that the latter’s heavy management duties could be alleviated. The technical strategic research on tax initiatives and the work to boost tax competitiveness would continue to be mainly undertaken by the Technical Research Section. Meanwhile, the responsibilities of the Tax Treaty Section included attending international tax meetings, the actual number of which was substantial including a total of 16 international meetings and related forums hosted by the Organisation for Economic Co-operation and Development (“OECD”), as well as other regular and irregular meetings. Besides, DCIR(T) had to attend meetings hosted by other international tax-related bodies, including those organized by the Belt and Road Initiative Tax Administration Co-operation Mechanism and the Study Group on Asia-Pacific Tax Administration and Research. DCIR(T) would continue to attend some of the international tax meetings in the future.
Noting that AC(C) would be supported by 88 non-directorate civil service posts (excluding one newly-created Personal Secretary (“PS”) I post), members enquired whether such 88 staff members came from other units of IRD and whether the work of other units would be affected after the deployment of the relevant personnel.
The Administration advised that the 88 staff members came from the three sections of the Commissioner’s Unit to which they originally belonged and hence manpower deployment from other units was not necessary.
V Proposal on establishing a policy holders’ protection scheme
Regarding the three options of compensation limit put forward by the Administration in the public consultation, members asked whether the option which received the majority support during the consultation period would eventually be adopted.
The Administration advised that it would analyse and take into consideration the public views on the three options of compensation limit and other relevant factors before deciding on the final option to be adopted.
Members enquired about the details of the borrowing, including the maximum amount and duration of borrowing that could be made, whether the Government would guarantee the borrowing, and whether the levy rate would need to be adjusted upwards in the light of the interest expense incurred from the borrowing.
The Administration replied that two separate funds, namely the Long Term Fund and General Fund, would be set up under PPS to collect levies from insurers based on the applicable premium income from the protected policies. The levies would be collected from insurers in a progressive manner, starting at 0.07% and stepped up to include an additional levy capped at 1% upon occurrence of an insolvency. The Administration added that the proposed initial levy rate of 0.07% was relatively low, and given the keen competition in the insurance market, it was expected that the impact of the levy on premiums would be minimal. Regarding the borrowing arrangements, the Administration advised that policy holders’ protection schemes in different places had arrangements for borrowing from third parties, and the amount of borrowing would generally be determined by the amount of claims that policy holders could make from insurers in the event of insolvency.
Regarding members’ enquiry about the establishment of an independent tribunal to handle appeals lodged against decisions made by the Policy Holders’ Protection Scheme Board, the Administration advised that members from different sectors of the community would be recruited to serve on the tribunal to ensure its independence.