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Denise Tsang

Enoch Yiu

The city's top court has ruled in favour of the Inland Revenue Department in a claims case against Hongkong International Terminals (HIT) dating back to 1994 involving more than HK$1 billion in back taxes.
The five judges of the Court of Final Appeal yesterday unanimously allowed the  revenue department's appeal against HIT and confirmed a decision  disallowing the port terminal operator's tax deduction on interest payment for its US$1.73 billion note issuance  to finance its port development project in Shenzhen in 1994.
The judgment means  the terminal operator and its subsidiary HIT Finance will have to accept the  revenue department's assessment of  more than HK$1 billion in taxes due.
'We are naturally disappointed with the conclusion reached by the Court of Final Appeal, but we have fully provided for the tax so this will have no impact on the current year's results,' said a spokesman for Hutchison Whampoa, HIT's substantial shareholder.
A revenue department  spokesman welcomed the judgment.
The ruling should boost the department's confidence to crack down on any tax avoidance attempt, said a tax expert.
He added that the case would set a precedent for future tax treatment of interest payment in similar cases.
Court  documents showed that in 1994, when Hutchison  decided to reorganise its port and terminal business, its 77.5 per cent-owned HIT  tried to raise US$1.73 billion by issuing a note to finance its purchase of a stake in Shenzhen's Yantian International Container Terminals.
Bearish market sentiment at the time allowed HIT  to raise only US$587 million.
Hutchison, however, decided to proceed with  issuing the note in full subject to a term that it would repay immediately two-thirds of the funds raised.
Hutchison then acquired Strategic International Investments, a British Virgin Islands company, to hold two-thirds of the note issue proceeds worth US$1.14 billion.
Its subsidiary HIT Finance  then paid interest on the note and claimed tax deductions on the interest.
The  revenue department disallowed the deductions, claiming the transaction was made with the purpose of enjoying the tax benefit.
The two companies appealed against  the decision and the legal  battle  dragged on for years until  yesterday's ruling.
Lord Hoffmann, one of the five judges,  wrote in his opinion: 'It is impossible to avoid the conclusion that the sole or predominant purpose was to secure the tax benefit by holding the loan notes.'
The offer document of the note had 'made it clear that Hutchison Whampoa was obliged to give two-thirds of the proceeds back. The readers of such documents are not children to be deceived by conjuring tricks,' he  said.
He said the question was whether the series of transactions made through Strategic International  were 'for the sole or dominant purpose of avoiding tax. The evidence from Hutchison Whampoa to suggest some alternative purpose was somewhat sparse.'
The costs will be dealt with by the court on written submissions.
The four other judges who ruled on the case   were Kemal Bokhary, Patrick Chan,  Roberto Ribeiro and Henry Litton.
Ruling confirmed
The case sets a precedent for tax treatment of interests, says an expert
The court decision means HIT will have to pay taxes of more than, in HK$: $1b



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