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Unformatted text preview: Inland Revenue Department Hong Kong DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES NO. 25 SERVICE COMPANY “TYPE I” ARRANGEMENTS SALARIES TAX These notes are issued for the information and guidance of taxpayers and their authorised representatives. They have no binding force and do not affect a person’s right of objection and appeal to the Commissioner, the Board of Review or the Courts. Anthony AU-YEUNG Commissioner of Inland Revenue August 1995 Our web site : http://www.ird.gov.hk DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES No. 25 CONTENT Introduction How the amendments address the situation Scheme of the legislation Prima facie liability The operative provisions Section 9A(1)(i) Section 9A(1)(ii) Section 9A(1)(iii) Specified criteria Section 9A(3)(a) Section 9A(3)(b) Section 9A(3)(c) Section 9A(3)(d) Section 9A(3)(e) Section 9A(3)(f) The commissioner’s discretion : Section 9A(4) Advance rulings Compliance Commencement of the legislation Paragraph 1 5 7 8 11 12 15 17 20 21 22 23 25 27 28 32 39 41 46 Position of the service company Service companies used by professionals Appendices 50 52 ii INTRODUCTION Following the enactment of the Inland Revenue (Amendment) (No. 2) Ordinance 1995, it is considered necessary to explain why section 9A has been added to the main Ordinance and to lay down broad statements on the interpretation and practice to be adopted by the Inland Revenue Department in relation to the section. 2. The Financial Secretary announced in his 1994-95 Budget Speech that steps would be taken to deal with tax avoidance aspects of certain "service company" arrangements. Two types of arrangements were identified as causing particular concern. The first category was referred to as attempts to disguise employer/employee relationships (Type I cases), and the second (Type II cases) as arrangements involving the payment of inflated management fees. 3. Departmental Interpretation & Practice Note No. 24 deals with Type II cases, and seeks to discourage avoidance arrangement by explaining the circumstances under which management fee claims will be challenged. 4. With regard to Type I cases, they have typically involved services rendered by a person under employment-like conditions. Instead of remuneration for the services being paid as salary to the individual concerned, it is paid as a consultancy fee to a company (service company) he or an associate controls. The arrangement is structured with a view to the service company paying little, if any, tax on the fee as a result of deductions claimed for "tax efficient" employee benefits provided to the individual or his associates. Following consultations, the Administration concluded that legislation was required to address avoidance involving such arrangements. This led to the Amendment Ordinance which was enacted on 6 July 1995 (Appendix A Ordinance No. 54 of 1995) and came into operation on 18 August 1995. HOW THE AMENDMENTS ADDRESS THE SITUATION 5. The amendments seek to address avoidance involving disguised employment arrangements by providing, in essence, that where remuneration for services rendered by a person under employment-like conditions is paid not to the person, but to a company he (or an associate) controls, it will nonetheless be treated as employment income of the person. 6. One of the difficulties the Department faced in relation to these cases prior to the introduction of the legislation was the identification of the arrangements. The parties concerned directed their efforts at circumventing formal employer/employee relationships and accordingly did not comply with the notification requirements imposed on employers and employees under the Ordinance. Identification should cease to be a problem under the new legislation. The legislation makes it clear that for the purposes of the Ordinance (unless specified criteria are satisfied) the person for whom the services are rendered and the individual who renders the services are to be respectively treated as employer and employee. As such, the normal notification and compliance requirements imposed by the Ordinance on employers and employees will be applicable. SCHEME OF THE LEGISLATION 7. Briefly, the legislation has three main elements which are contained in new section 9A • The first, in effect, provides that there is a prima facie liability to Salaries Tax where remuneration for services rendered by a 'relevant individual' is paid to a company controlled by the person or his associate. The second narrows the scope of the provisions by taking out cases which satisfy specified criteria, ie where particular indicators or hallmarks of an office or employment of profit are not present under the arrangement. The third element is another "escape clause" for the benefit of taxpayers. It provides the Commissioner with a discretionary power to exclude a case where, even though an indicator of employment might be present, he is satisfied that in carrying out the services under the agreement the relevant individual was not in substance holding an office or employment of profit. • • The three elements are further discussed below, together with related matters. 2 PRIMA FACIE LIABILITY 8. The opening words to section 9A(1) set the scene by specifying the circumstances under which the new provisions can have application to remuneration paid under an (service company) agreement. In this regard, an arrangement will come within the scope of the section where (i) there is an agreement; (ii) a person ("relevant person")carrying on, or deemed under the Ordinance to be carrying on, a trade, profession or business, or prescribed activity, is a party to the agreement; (iii) services have been carried out under the agreement by an individual ("relevant individual"), on or after the day the Amendment Ordinance came into operation(the "appointed day"), for the relevant person or any other person; and (iv) remuneration for the services has been paid or credited on or after the appointed day to a corporation or trustee as specified in section 9A(1)(a), (b) or (c). 9. In considering whether the circumstances referred to above are present in relation to a particular arrangement, the following points should be kept in mind: As regards (i), the agreement need not be in writing and can have been entered into before, on or after the appointed day. With regard to(ii), generally section 9A(1) will only have application where the relevant person is carrying on, or is deemed to be carrying on, a trade, profession or business. It is expected, based on experience prior to the introduction of the Amendment Ordinance, that this will cover the vast majority of disguised employment arrangements. However, if it is discovered that other relevant persons are entering into such arrangements, section 9A(6) provides the Commissioner with the power to bring the persons concerned within the ambit of the legislation by prescribing, by notice in the Gazette, an activity for the purposes of section 9A. Such a notice will involve 3 subsidiary legislation and will be subject to the scrutiny of the Legislative Council under section 34 of the Interpretation and General Clauses Ordinance (Cap. 1). In relation to (iii), although section 9A(1) can only apply to a particular relevant individual where he has carried out services under an agreement, it does not require that the agreement itself must contain any specific reference to the relevant individual or to the service company. In other words, it cannot be claimed that section 9A does not apply to a particular arrangement simply because the relevant individual is not mentioned in the agreement. Also, the application of the new legislation is not restricted to the situation where the services are carried out by the relevant individual for the relevant person. To ensure that arrangements involving third parties are catered for (eg where the services are carried out for a subsidiary of the relevant person), the subsection refers to services carried out "for the relevant person or any other person". As regards (iv), where a disguised employment arrangement is used, the remuneration under the agreement will clearly not be paid directly by the relevant person to the relevant individual. Typically, payment is made to a company controlled by the relevant individual. However, to restrict opportunities for circumvention of the provisions, section 9A(1) caters not only for this type of situation, but also for arrangements under which payment is made to a company controlled by an associate of the relevant individual or to a trust under which the relevant individual or an associate is a beneficiary. However, in this context, for the sake of brevity the term "service company" is used. 10. The new provisions encompass arrangements which involve one or more than one associate, together with or without the relevant individual. Relevant terms, such as "associate", "beneficiary", "control", "principal officer" and "relative" are defined in section 9A(8) and are along similar lines to those contained in sections 16E, 21A and 39E of the Ordinance. It should be noted, however, that the definition of "associate" used in section 9A(8) has been worded so that where more than one relevant individual carries out services under a single agreement, each will be an associate of the other. 4 The Operative Provisions 11. Where the circumstances referred to above are present, a service company arrangement is subject to what may be called the operative provisions of section 9A(1), contained in paragraphs (i), (ii) and (iii), unless it falls outside their application by virtue of the escape clauses provided in subsections (3) and (4). In essence, as indicated earlier, the effect of the operative provisions is to treat the relevant individual and the relevant person as employee and employer respectively, and the remuneration for the services carried out by the relevant individual as his income from an employment of profit, and therefore chargeable to Salaries Tax. Section 9A(1)(i) 12. This paragraph provides that the relevant individual is to be treated as having an employment of profit with the relevant person. Subparagraphs (A)(I) and (A)(II) set down the rules for determining the date of commencement of the employment. Where the relevant person is carrying on a trade, profession or business, the date of commencement is taken to be the day the relevant individual commenced to carry out services under the agreement or on the appointed day, whichever is the later [(A)(I)]. Accordingly, for disguised employment arrangements which commenced prior to the introduction of the legislation, the date of commencement is taken to be the appointed day. 13. If the relevant person is carrying on a prescribed activity, rather than a trade, profession or business, the date of commencement is taken to be the day the Commissioner prescribed the activity by notice in the Gazette under section 9A(6) or, if it is later, the day the relevant individual commenced to carry out services under the agreement [(A)(II)]. 14. By virtue of paragraph(i)(B), the employment of profit is treated as continuing until the agreement terminates "without the relevant individual continuing to carry out any of these services as an employee of the relevant person". In other words, if the relevant individual continues to serve as an employee of the relevant person after the agreement terminates, the situation will not be viewed as involving a cessation of employment. 5 Section 9A(1)(ii) 15. This paragraph unequivocally states that whilst the relevant individual is treated, under paragraph (i), as having an employment of profit with the relevant person (a) "the relevant individual shall be treated as an employee of the relevant person"; and (b) "the relevant person shall be treated as the employer of the relevant individual". 16. It is pertinent in this regard that the closing words of section 9A(1) provide in effect that where the operative provisions are applicable "the other provisions of this Ordinance (including section 52) shall be construed accordingly". It follows that if an arrangement comes within the scope of the operative provisions the relevant person concerned is subject to the compliance requirements imposed on employers, and in particular those under section 52 concerning notification of commencement and cessation of employment etc. Persons who fail to comply with the requirements in question may be liable under the offence provisions contained in Part XIV of the Ordinance. Section 9A(1)(iii) 17. This paragraph ensures that the remuneration referred to in subsection (1) (ie the remuneration which is paid or credited on or after the appointed day to the service company for services carried out under the agreement by the relevant individual on or after that day) is treated as employment income of the relevant individual. To cover the timing aspect for the purposes of section 11B, the paragraph also provides that the remuneration should be treated as being "received by and accrued to the relevant individual at the time that it is paid or credited to the corporation or trust concerned". 18. Situations may arise where remuneration is paid or credited after the appointed day in respect of services which are carried out by the relevant individual partly before and partly after that day. In such cases the Department accepts that only the remuneration which is reasonably attributable to the services carried out on or after the appointed day comes within the scope of 6 section 9A. The Department will generally allow apportionment on a time basis, although no hard and fast rules are laid down. Whatever basis is used it should be clearly explained in the Salaries Tax Return of the relevant individual. As to the taxation treatment of the remuneration attributable to the services carried out prior to the appointed day, see para 48 below. 19. It is also possible that a single service company agreement may provide for services to be carried out by more than one relevant individual and/or for payments to be made for purposes other than remuneration for such services. Where such an arrangement is used it is in the interests of the parties concerned to clearly specify, in the agreement or otherwise, exactly what each payment is for, including the amount of remuneration for the services carried out by each relevant individual. Section 9A(2) is relevant in this regard. This subsection provides, in essence, that where an agreement does not specify the remuneration of a particular relevant individual, any sum paid or credited under the agreement to the service company will be treated as remuneration for services carried out by that individual unless it is established to the satisfaction of the Commissioner by the relevant individual concerned or the relevant person that all or part of the sum should be excluded on the ground that it was paid for some other purpose. In other words, unless the relevant particulars are provided, each relevant individual will be potentially liable to Salaries Tax in respect of the full amount paid or credited to the service company on or after the appointed day. SPECIFIED CRITERIA 20. The operative provisions discussed above do not apply in relation to remuneration under an agreement where all of the specified criteria laid down in section 9A(3) are satisfied. The criteria in question represent some of the factors which may indicate that the services carried out under an agreement do not in substance amount to holding an office or employment of profit. Passing or failing any particular criterion is not necessarily conclusive either way. For example, a person may be paid on a periodic basis which does not satisfy section 9A(3)(d), yet still be able to satisfy the Commissioner that he does not in substance hold an office or employment of profit. The Department accepts, however, that if the criteria are all satisfied an office or employment of profit is not involved. Each is briefly discussed in turn below. 7 Section 9A(3)(a) 21. This criterion will be satisfied if neither the agreement nor any related undertaking provides for remuneration for the services carried out by the relevant individual to include or to be the provision of any of the specified (or similar) employment-type benefits or any benefit (including money) in lieu thereof. It should be noted that in considering whether or not the criterion has been satisfied, the key question is not whether the relevant individual has directly received a benefit as compensation, but whether the agreement (or related undertaking) provides for the remuneration to include such a benefit or compensation (ie the identity of the recipient need not be taken into account). Section 9A(3)(b) 22. This criterion reflects the view that it is far more usual for an employment relationship to require that services be performed personally by a particular individual than it would be in the case of an independent contractor. In the latter situation it is not unusual to allow the engagement of sub-contractors. However, it is recognized that an independent contractor may be engaged on terms which require a certain individual to carry out services required (eg a particular architect may be nominated to prepare the plans for a building). Accordingly, the general position under this provision is that the criterion will not be satisfied where the agreement (or any related undertaking) requires that the services be performed personally by the relevant individual. However, to cater for a genuine contractor who has more than one client, it will be satisfied where the relevant individual also carries out the same or similar services for persons other than the person for whom they are carried out under the agreement. Section 9A(3)(c) 23. This provision is concerned with the question of whether the relevant individual in performing the services under the agreement is subject to control or supervision of a kind which is usual under an employment relationship. In this regard, the criterion will be satisfied if there is not any control or supervision "which may be commonly exercised by an employer in relation to the performance of his employee's duties". It would be unusual for a relevant person to exercise such control or supervision in respect of an individual 8 carrying out duties on behalf of an independent contractor. Whereas an employer normally (although there can be exceptions) has the right to direct the manner in which work is performed by an employee, a contractor usually has freedom as to the way in which tasks are carried out, subject to compliance with job specifications as detailed in the relevant contract. Accordingly, where supervision or control of the kind specified is present, it will generally provide a strong indication of employment. 24. In considering the position of a relevant individual in relation to this criterion, section 9A(3)(c)(ii) has the effect of providing that any control or supervision exercised by the service company concerned may be disregarded. As a matter of practice the Department will also not take into account any supervision or control which can be directly attributed to statutory requirements and is not dependent on the existence of an employer/employee relationship. Section 9A(3)(d) 25. The focus of this provision is the basis on which the remuneration is paid or credited. The criterion will be satisfied if the remuneration "is not paid or credited periodically and calculated on a basis commonly used in relation to the payment or crediting and calculation of remuneration under a contract of employment". As such, regard must be had not only to the question of whether payments are made periodically, but also to the basis for calculating the payments for the work performed. 26. It should as a rule be a relatively straightforward matter to distinguish payments of a kind made to contractors, even if made by instalments or as progress payments, from those made on a basis used under employment contracts. For contractor situations the payments will generally be in relation to an agreed sum for specified work under a contract, whereas for employment cases payments are usually in respect of the time worked or position occupied and made on a regular basis (eg weekly, fortnightly or monthly). Section 9A(3)(e) 27. This criterion is concerned with the provisions under the agreement relating to the termination of the arrangement between the parties. It will be 9 satisfied if the relevant person does not have the right to cause any of the services under the agreement "to cease to be carried out in a manner, or for a reason, commonly provided for in relation to the dismissal of an employee under a contract of employment". In this regard, the services of an employee can generally be terminated by providing the relevant notice and/or meeting other requirements under an award or statute. By way of contrast, under a relationship involving an independent contractor, the contract will usually be discharged by performance, but may also specify other circumstances, such as default situations, under which it can be terminated. Section 9A(3)(f) 28. As is stated in the provision, this criterion will be satisfied where "the relevant individual is not held out to the public to be an officer or employee of the relevant person". The term "held out to the public" is not defined in the Ordinance and should therefore be given its ordinary meaning. As such, if either the relevant individual or relevant person acts in a manner or does something that is intended to lead members of the public to believe that the relevant individual is an officer or employee of the relevant person, the criterion will not have been satisfied. This could occur, for example, through material included in trade or professional directories, journals or other publications, the issue of name cards, statements made at public functions, information contained in press releases etc. 29. It is appreciated that there may be cases where "independent" agents working in, for example, the real estate and insurance fields will be unable to satisfy this criterion. However, if the persons concerned are held out to the public to be employees of the organizations they represent, then their cases will in any event warrant close examination before it is accepted that employment is not involved 30. Where all of the specified criteria are satisfied, a relevant individual will not have any liability to Salaries Tax by virtue of section 9A. Likewise, the section will not have the effect of imposing on the relevant person the compliance requirements applicable to employers under section 52. 31. Where a relevant individual is unable to meet one or more of the specified criteria, it does not necessarily follow that the operative provisions 10 shall apply to remuneration under the agreement. Section 9A(4) provides another avenue of escape for those cases where the relevant individual establishes to the satisfaction of the Commissioner that at all relevant times the carrying out of the services under the agreement "was not in substance the holding by him of an office or employment of profit with the relevant person". THE COMMISSIONER’S DISCRETION : SECTION 9A(4) 32. Section 9A(3) may be viewed as a somewhat mechanical means of ascertaining whether the operative provisions can be disregarded. However, the approach has been taken on the footing that where none of the indicators of employment covered by the specified criteria is present, it may be safely concluded, without examining the case in greater detail, that in substance employment is not involved. In short, it is intended to be a pragmatic approach for the convenience of taxpayers and the Revenue alike. 33. The situation is clearly quite different where one of the specified criteria is not satisfied. In such a case there will at least be an indication of an employment relationship. Careful consideration of all of the circumstances of the arrangement will be required before it can be concluded whether or not in substance one exists. 34. In considering cases under subsection(4) the Commissioner will of course have regard to the substantial body of case law concerning the distinction between a contract of service (ie one of employment) and a contract for services (ie independent contractor). The test originally considered to be decisive in this area focused on the issue of control : "a servant is a person subject to the command of his master as to the manner in which he shall do his work" [Yewens v. Noakes (1880) 1 TC 260, CA] . 35. Although in many cases the control test can still be simply applied to determine the matter, there are situations where it proves to be inadequate. For example,it is not now unusual for professional or highly skilled individuals to perform their tasks on the basis of their own judgement when engaged as employees. It is therefore not surprising that a further test, known as the integration test, was recognized alongside the control test. This was introduced by Lord Denning in Bank voor Handel en Scheepvaart NV v. Administrator of Hungarian Property [1954] 35 TC 311, HL where he said - 11 "In this connection I would observe the test of being a servant does not nowadays rest on submission to orders. It depends on whether the person is part and parcel of the organization." 36. A further test, the economic reality test, was applied in Market Investigations Ltd. v. Minister of Social Security, [1969] 2 QB 173. This test has regard to matters such as whether the individual is involved in the management of the work and is placed at financial risk, whether he can employ others to assist and whether he provides major equipment. However, in 1984 the Court of Appeal, in Nethermere (St. Neots) Ltd. v. Gardiner 1CR 612, rejected the view that the economic reality test was "the fundamental test" and regarded it as "no more than a useful test". 37. What has become clear from the cases, as Nolan J stated in the Court of Appeal in Hall v. Lorimer [1993] STC 23 (at 28), is that "In cases of this sort there is no single path to a correct decision. An approach which suits the facts and arguments of one case may be unhelpful in another." He went on to cite with approval (at 29) the views expressed by Mummery J earlier in the case in the High Court, where he said – "The process involves painting a picture in each individual case. As Vinelott J said in Walls v. Sinnett (Inspector of Taxes) [1986] STC 236 at 245 : "It is, in my judgement, impossible in a field where a very large number of factors have to be weighed to gain any real assistance by looking at the facts of another case and comparing them one by one to see what facts are common, what are different and what particular weight is given by another tribunal to the common facts. The facts as a whole must be looked at, and a factor which may be compelling in one case in the light of the facts of that case may not be compelling in the context of another case." ". It should therefore be clear that the Commissioner will only be able to form a view for the purposes of section 9A(4) if he is provided with comprehensive details of all the facts surrounding an agreement. 12 38. A relevant individual who wishes to have the Commissioner exercise his discretion under the subsection may advise the Department either at the time of lodging his or her Salaries Tax Return or by means of a separate application for an advance ruling which can be made at any time. The supporting material and information required is the same in each case and is discussed below. ADANCE RULINGS 39. A request for an advance ruling should be in writing and be addressed to the Commissioner. It must be signed by the relevant individual or his authorized representative. The following material and information should support the request (a) Copies of the agreement and any related undertaking. If an agreement or undertaking has not been reduced to writing, an explanation of why this is the case should be provided together with full details of its terms and conditions. (b) If not otherwise apparent, full details of the remuneration payable under each agreement (or undertaking). (c) Copies of the respective organization charts of the relevant person and the service company. (d) A statement setting out the relevant individual's : (i) duties and obligations in relation to the relevant person and the service company respectively; and (ii) previous employment history, if any, with the relevant person or any associated party. (e) A statement listing, together with supporting details, the specified criteria in subsection (3) which have been satisfied. 13 (f) An explanation of why it is considered that the relevant individual did not in substance hold an office or employment of profit. To facilitate consideration of the application, answers should also be provided to the questions listed on Appendix B. If a particular question is not pertinent to the relevant individual's situation, this should be noted together with a brief explanation of why that is the case. 40. Under normal circumstances, where the information referred to above is provided, it should be sufficient to allow a ruling to be made. In such cases, it will be issued in letter form signed by the Commissioner or an authorised officer, generally within 3 months of the date of application. In some cases, however, it may be necessary for the Department to seek further information from the relevant individual or a third party. Where this occurs it may not be possible to issue the ruling within the 3 months period. It should be noted that rulings will not be provided in respect of hypothetical, contemplated or proposed situations. COMPLIANCE 41. From the perspective of the relevant person, if an agreement has been entered into which comes within section 9A(1) and is not excluded from the scope of the operative provisions by virtue of subsection (3) or (4), there will be an obligation to comply with the notification requirements of section 52 (ie on the basis that the relevant person is the employer of the relevant individual - see paras. 11 to 19 above). On the other hand, if it is clear that subsection (3) or (4) is applicable, the provisions of section 52 will not apply. 42. It is possible, however, that a relevant person may be unsure as to whether the operative provisions apply to a particular arrangement (eg it may not be clear as to whether the relevant individual controls the service company or whether all of the specified criteria in subsection (3) have been satisfied). To cater for such cases, new section 80(1AA) in effect allows a relevant person to presume in certain circumstances that the reporting obligations do not apply. The section provides that it shall be a defence in any proceedings against a person for failure to comply with the requirements of section 52(4), (5), (6) or 14 (7) if he shows that he relied upon a statement in writing by the relevant individual "in the form specified" and it was reasonable for him to rely upon that statement. In this regard, section 80(1AC) provides that the Commissioner may specify the form of statement by notice in the Gazette (see Appendix C). 43. It can be seen from the specified form that a relevant individual should only complete the statement where he is able to say that, to the best of his knowledge and belief, one or more of the following situations is applicable in relation to the agreement (a) the party to which the remuneration is paid or credited is not a corporation or trustee of the kind referred to in section 9A(1) (eg if a corporation, it is not controlled in the manner described); (b) all of the specified criteria are satisfied; (c) the Commissioner has confirmed in writing that he is satisfied that in carrying out services under the agreement he is not in substance holding an office or employment of profit with the relevant person. 44. It goes without saying that the defence provided for in section 80(1AA) will not apply if a relevant person has reason to doubt that the relevant individual is entitled to make a statement of the kind in question. In such a situation the relevant person should, as a matter of prudence, proceed on the footing that the reporting requirements are applicable. The Department will not, however, take any action in relation to a failure of the employer to comply with the requirements if during the relevant period the relevant individual was awaiting the outcome of an application for a ruling from the Commissioner under section 9A(4). 45. As far as the relevant individual is concerned, if he has any doubt as to whether the service company is of the kind referred to in section 9A(1) or whether all of the specified criteria are satisfied, he should obtain a ruling from the Commissioner before providing the relevant person with a statement in writing. In this regard, it should be kept in mind that new section 80(1AB) provides that a person who knowingly or recklessly makes such a statement 15 which in a material respect is false or misleading shall be guilty of an offence. The sanctions provided for under sections 82 and 82A may also have application where a relevant individual fails to comply with his obligations. COMMENCEMENT OF THE LEGISLATION 46. As provided in the Amendment Ordinance, the new legislation came into operation on the "appointed day" (ie 18 August 1995). The legislation does not apply to any service company agreement entered into before the appointed day where the remuneration was paid or the services were carried out, or both were effected, prior to that date. The legislation will apply in relation to such an agreement where the remuneration is paid or credited and the services are carried out on or after that date. The legislation will, of course, also apply in respect of agreements entered into on or after the appointed day. 47. The "appointed day" serves to place it beyond any doubt that where an arrangement is in existence on or after that date and comes within the scope of the legislation, there is a compliance obligation to provide information to the Department. As far as arrangements which commenced before the appointed day are concerned, the Department will not take any penalty action in respect of failure to comply with section 52 reporting requirements that may have existed before that date. A table setting out the Department's position in relation to the application of sections 9A and 52 is attached as Appendix D. 48. One of the purposes of the legislation is to facilitate the identification of disguised employment arrangements. It stands to reason that where it is established that such an arrangement exists, income derived both before and after the appointed day may be charged to Salaries Tax. The Department's view is that if the provisions of the Ordinance (including sections 61 and 61A) existing prior to the introduction of section 9A had the effect of rendering the earlier income chargeable to Salaries Tax, it is only appropriate to assess the income accordingly. 49. It is pertinent to mention at this point that where an arrangement falls outside the scope of section 9A (ie, even if entered into after the appointed day), it may still, depending on the facts of the case, be charged to Salaries Tax by application of the general anti-avoidance provisions. For example, it might be 16 considered appropriate to apply those provisions if a "relevant person" not carrying on a trade, profession or business or prescribed activity engaged a person to carry out services under a disguised employment agreement. The Department considers that its position in this regard is supported by the decision of the Privy Council in CIR v. Challenge Corporation Limited [1987] 2 WLR 24. This was to the effect that a general anti-avoidance provision can apply notwithstanding the existence of related specific anti-avoidance provisions. POSITION OF THE SERVICE COMPANY 50. To prevent double taxation, section 9A(5) provides that where by virtue of section 9A a relevant individual is chargeable to Salaries Tax on remuneration referred to in subsection (1), the corporation or trustee (ie the service company) to whom that remuneration is paid or credited is not chargeable to tax on the remuneration. Accordingly, no deduction or depreciation allowance will be granted to the service company in respect of related expenditure. 51. Subsection (5) also provides, in effect, that the relevant individual is not chargeable to tax on any remuneration paid or credited to him by the service company as an employee to the extent that the remuneration is attributable to services carried out under the agreement. This exemption will not apply in respect of any remuneration which is not attributable to such services, e.g. services carried out by the relevant individual which are unrelated to the agreement with the relevant person. Service Companies used by Professionals 52. Reflecting the taxation principle that it is not possible for a man to employ himself, section 9A(7) has the effect of providing that the proprietors and partners of unincorporated businesses (eg professional firms) with service companies are excluded from the application of the operative provisions of section 9A. Section 9A(7)(b)(i) covers the situation where a sole proprietorship is involved and section 9A(7)(b)(ii) addresses partnership cases. The Department's treatment of service company arrangements of this kind is detailed in DIPN No. 24. 17 ...
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