2022-06-16-KPMG_Global-Hong_Kong_–_Apportionment_of_Income_for_Double_Taxation_Relief_4页_264kb

Hong Kong - Apportionment of Income for Double Taxation Relief Summary

Core Content

The Hong Kong Court of Appeal issued a landmark decision on 17 May 2022 in Commissioner of Inland Revenue v Lo Wa Ming Patrick [2022] HKCA 710, providing guidance on how to apportion income for double taxation relief under section 8(1A)(c) of the Inland Revenue Ordinance (IRO). The decision clarifies the appropriate method to determine which portion of a taxpayer's income should be excluded from Salaries Tax in Hong Kong when they have already paid tax on the same income in another jurisdiction.

Main Points of the Decision

• Excluded Income Formula:
  The court endorsed the Commissioner's alternative formula, which is:

  Excluded income = Income × [outside Hong Kong working days + leave days (including rest days and holidays) attributable to services rendered outside Hong Kong] ÷ calendar days
  

  This formula is arithmetically equivalent to a "work-day" approach, where only working days are considered.

• Rejection of Other Approaches:
  The court rejected the DIDO Formula (based on physical presence) and the Board's Formula (based on non-working days in Hong Kong). It emphasized that only income attributable to work outside Hong Kong should be eligible for relief, not income from work in Hong Kong.

• Leave Days Consideration:
  The court acknowledged that paid leave days attributable to services rendered outside Hong Kong can qualify for relief, provided that the other conditions under section 8(1A)(c) are met.

• Numeric Example:
  In a hypothetical case, if a taxpayer had:

  • 200 working days (120 outside Hong Kong, 80 inside),
  • 165 leave days (prorated to 99 days outside Hong Kong),
    Then:

  Excluded income = Annual income × (120 + 99) ÷ 365 = 60% of annual income
  

  This is equivalent to using only working days for apportionment.

• Key Legal Principle:
  The court stressed that the apportionment should be based on the territory where the employment income is subject to tax, not just the physical presence of the taxpayer.

Key Information

• Taxpayer Background:

  • Mr. Lo was employed by a Hong Kong company and seconded to Mainland China.
  • He returned to Hong Kong occasionally for personal reasons and spent leave days in Hong Kong.
  • His income was fully taxed in Mainland China, and he sought full exemption from Hong Kong's Salaries Tax.

• Tax Authority's Position:

  • The Commissioner used the DIDO Formula, which apportions income based on the number of days the taxpayer spent outside Hong Kong, regardless of whether they were working or not.
  • This led to the conclusion that not all income during the secondment period could be exempt.

• Board of Review's Position:

  • The Board used its own formula, which apportioned income based on the number of days the taxpayer did not work in Hong Kong.
  • This was rejected by the court.

• Court's Final Decision:

  • The court accepted the Commissioner's alternative formula.
  • It emphasized that only working days outside Hong Kong and leave days attributable to work outside Hong Kong should be considered for relief.
  • The case was remitted back to the Board for a final determination using the court's formula.

Why This Matters

• This decision changes the approach to double taxation relief in Hong Kong for taxpayers who have no DTA with the jurisdiction where they paid tax.
• Taxpayers are advised to retain detailed records of working days and leave days to support their claims.
• The KPMG Note highlights that the decision is subject to contractual provisions and provides a practical guide for taxpayers to apply the court's approach.

Footnotes and Additional Context

1. "Outside Hong Kong" refers to the territory where the taxpayer renders services and where employment income is subject to tax.
2. From 2018/19, double taxation in DTA jurisdictions can be addressed through foreign tax credits under the DTA and section 50(1) of the IRO.
3. The information was adapted from Hong Kong Tax Alert - Issue 9, June 2022, by the KPMG International member firm in Hong Kong.

Related Resources

• The KPMG Tax Alert provides detailed guidance on the application of the apportionment formula.
• Taxpayers can contact KPMG professionals for further assistance, including:
  • Murray Sarelius: Tel. +852 3927 5671 | Email: Murray.sarelius@kpmg.com
  • David Siew: Tel. +852 2143 8785 | Email: David.siew@kpmg.com

Conclusion

The Court of Appeal's decision offers a clearer framework for determining double taxation relief in Hong Kong, particularly for taxpayers seconded abroad. It emphasizes the importance of accurate records and the relevance of contractual terms. The Commissioner's alternative formula is now the accepted method for apportioning income for double taxation relief.