'Artificial tax plan will fail in court'
SOPHISTICATED and complex tax planning in a bid to create an artificial loss and pay less tax is likely to fail when challenged in court, according to a consultant with a leading law firm, Professor Peter Willoughby.
Mr Willoughby yesterday said problems would emerge when the law had been too technically looked at when planning schemes and the human factor had been ignored.
'Elaborate tax planning which exploits a literal interpretation of anti-avoidance or other tax legislation, uses offshore haven companies which do not have genuine independent directors and which are puppets of Hong Kong taxpayers and their advisers, is provocative and even if linked to some commercial reasons is likely to fail if challenged under sections 61 or 61A [of the anti-avoidance legislation],' he said.
Mr Willoughby said: 'Contrived tax planning is unacceptable. Judges here and in other places do not like it and they say this is artificial.' He warned that one would be asking for trouble if the scheme was too 'technically right'.
But Mr Willoughby indicated that such schemes were not uncommon in Hong Kong and were especially used by the bigger firms and service companies.
Government officials had earlier this year estimated that they would be able to recover $860 million in dues this financial year by finalising 1,200 cases where illegal methods had been devised to avoid taxes.
They have also reported that there might be more than 4,000 cases of service companies being used to avoid tax, with the amount involved between $400 million and $500 million a year.
In his speech at yesterday's Asian Law and Practice seminar, Mr Willoughby also highlighted a British judicial comment: 'Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed'.
Mr Willoughby said tax planning in the context of the territory probably meant the arranging affairs so as to minimise tax without giving legislation an artificial or contrived interpretation.
He said until the late 1970s, it had not been the practice here to employ professionals to devise elaborate tax schemes.
'The Hong Kong tax system has not been designed to cope with this,' he said.
But the Government has gradually introduced more and more complicated legislation to counter the effects of tax planning as schemes became more complex.