The Commissioner of Inland Revenue v. Nam Tai Group Management Ltd

DCTC 458/2011
DCTC 527/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO.458 OF 2011

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BETWEEN

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO.527 OF 2011

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BETWEEN

Coram : Acting Chief District Judge S. T. Poon in Chambers

Date of Hearing : 6^th September 2011

Date of Handing Down of Decision : 29^th September 2011

DECISION

1.In these two actions, the Commissioner of Inland Revenue (“Plaintiff”) claims against each of the Defendants for profits tax due and payable under Section 75 of the Inland Revenue Ordinance, Cap.112 (“the Ordinance”). One action (DCTC458/2011) is for the years of assessment from 2001 to 2004 totalling HK$6,633,914.00, and the other (DCTC527/2011) is for the year 2002 to 2003 in the amount of HK$262,080.00.

2.The matters before me are the Plaintiff’s striking out applications against the Defendants’ Defences filed in respect of the two actions, on the ground that they disclose no reasonable defence.

3.The defence put forward by the Defendants is basically that:

(i)  Section 71(2) of the Ordinance imposes a duty to the Plaintiff to exercise his discretion properly as to whether to order the payment of tax be held over pending objection;

(ii)  The discharge of such duty is a condition precedent for the liability to pay tax to arise; and

(iii)  The Plaintiff has failed to discharge such duty in that he should not have made the hold over orders conditional upon the purchase of tax certificates by the Defendants, knowing that the Defendants were impecunious.

4.Mr. Shieh S.C., counsel for the Defendants, put it this way in his skeleton argument:

“9. It is submitted that as a matter of statutory interpretation, any liability to pay tax under section 71(2) of IRO is conditional on the CIR first properly exercising his discretion whether to order a holdover of payment of tax. As a matter of common sense where statute confers a discretion it must be implicit that the discretion be exercised properly to avoid injustice or absurdity. Further, the discretion to order a holdover is an important part of the tax regime in Hong Kong to militate against the potential unfairness that might result under the “pay first, argue later” regime under Hong Kong law. As H.H. Judge Marlene Ng observed in CIR v. Nam Tai Trading Company Limited [2010] 3 HKC 1 at 64B (§190), the CIR must exercise this discretion properly, reasonably and not capriciously, failing which such administrative act is subject to remedy by way of judicial review. Merely subjecting the exercise of such discretion to the separate public law remedy of judicial review will not cure any potential unfairness caused to the taxpayer if such proper exercise of discretion is not at the same time made a precondition of the liability to pay tax. This is because even if an improper exercise of discretion were amenable to judicial review, the process takes time and unless a stay can be granted in the judicial review proceedings (which is by no means certain, and which itself involves the exercise of discretion), the challenge to the exercise of discretion could be at risk of being rendered completely futile because in a case where (as present) the taxpayer is impecunious and cannot afford to purchase the Tax Reserve Certificates, judgment could be entered against the taxpayer quickly and summarily (and insolvency proceedings pursued against the taxpayer) before the judicial review proceedings (against the CIR’s discretion as to holdover) or the objection to assessment can be determined.

10.  It is therefore at least arguable (and the Defendants need go no further than this) that as a matter of construction, it is a precondition of tax liability that the CIR should have properly exercised his discretion as to whether to order an unconditional holdover.”

5.It is beyond dispute that the Plaintiff has a duty to exercise his discretion under section 71(2) properly.  Mr. Shieh acknowledged that there are relieves available to the aggrieved persons under judicial review should the Plaintiff fail to discharge such duty.    

6.The issue remains, whether, or at least, whether it is arguable that the discharge of such duty is a precondition of the Defendants’ liability to pay tax under the Ordinance. 

7.This so called “Precondition Argument” is not at all easily conceivable.  There is nowhere provided expressly in the Ordinance that such a precondition for liabilities to pay tax exists.

8.Section 71(1) provides that:

“Tax charged under the provisions of this Ordinance shall be paid in the manner directed in the notice of assessment on or before a date specified in such notice. Any tax not so paid shall be deemed to be in default, and the person by whom such tax is payable, or where any tax is payable by more than one person or by a partnership then each of such persons or each partner in the partnership, shall be deemed to be a defaulter for the purposes of this Ordinance.”

9.Section 71(2) provides that:

“Tax shall be paid notwithstanding any notice of objection or appeal, unless the Commissioner orders that payment of tax or any part thereof be held over pending the result of such objection or appeal: Provided that where the Commissioner so orders he may do so conditionally upon the person who or on whose behalf the objection or appeal is made providing security for the payment of the amount of tax or any part thereof the payment of which is held over either –

(a) By purchasing a certificate issued under the Tax Reserve Certificates Ordinance (Cap.289); or

(b) By furnishing a banker’s undertaking,

as the Commissioner may require.”

10.Under section 71(1), a person is deemed to be in default of payment of tax if he or she does not pay the assessed tax on or before the date specified in the notice of assessment.  Under section 75(2), the Commissioner can then recover the same by action in the District Court.  Section 75(3) further provides that a certificate signed by the Commissioner stating the particulars of the defaulter and the tax due shall be sufficient evidence of the amount so due.

11.Therefore, unless the defaulter can put forward a valid defence, the District Court may give judgment against him for the tax in default if the above requirements are met.   Under section 75(4)[1], any plea that the tax is excessive, incorrect, subject to objection or under appeal, shall not be a valid defence.

12.Clearly, on plain reading of the statutory provisions, liability to pay tax can arise without in anyway invoking section 71(2), let alone it being a precondition for the liability to arise.

13.At the hearing, Mr. Shieh brought me to various decisions[2]  concerning section 75(4) where the significance of the existence of the discretion to grant a hold over order under section 71(2) is stressed.  He submitted that the discretion is an essential element under the “pay first, argue later” tax regime in that it militates the unfairness that might be caused to the tax payers in depriving their right to defend their cases.  It is therefore, he said, a precondition for liability to pay tax to arise.

14.With respect, important as it might be to the tax regime, it does not follow that the exercise of such discretion is a precondition as proposed.  It does not say so in the Ordinance.  The discretion under section 71(2) was referred to in the previous cases cited by Mr. Shieh in the context of considering whether there is an infringement of the tax payer’s right to access to court to defend a tax claim under section 75.  It is the view of the courts that the potential unfairness can, to a certain extent, be alleviated or remedied by the availability of such a discretion.  There was however no mention of it being a precondition for liability to pay tax to arise.

15.It is understandable why Mr. Shieh formulated his argument this way.  To raise a defence under section 71(2) is essentially saying that tax shall not be paid pending an objection, which is expressly prohibited under section 75(4).  In order to get round this hurdle, one obvious way is to frame the defence differently by suggesting that the exercise of the discretion is a precondition for the liability to pay tax.  However, attractive as it appears, this argument can simply not fit in anywhere in the express provision of the Ordinance which is in itself by no means ambiguous. 

16.Under section 75(2), whenever any person makes default in payment of tax the Commissioner may recover the same by action in the District Court.  Reading it together with section 71(1), any tax not paid in the manner directed in the notice of assessment shall be deemed to be in default, the liability to pay tax arises at this point. 

17.The purpose of section 71(2) is nothing but to provide a way, in appropriate cases, to relieve hardship that might cause to a tax payer in requiring him to pay tax pending an objection.  It never intended to be a precondition or condition precedent for liability to pay tax to arise. To hold otherwise would result in a situation where, upon an objection being lodged, a defaulter under section 71(1) is required to pay tax only after the Commissioner had notified him that no holding over is ordered and give a reason thereof.  This is in effect a de facto stay of payment upon objection which is directly contradictory to the provisions under sections 71(1), 71(2), 75(2) and 75(4).

18.In my view, the Defence as pleaded by the Defendants does not disclose any reasonable defence.    

19.Accordingly, the Defence filed by the Defendants in these two actions be struck out and Judgment as per paragraph 2 of the Plaintiff’s summonses be entered for the Plaintiff against the Defendants.

20.I make an order nisi that costs of these actions be to the Plaintiff to be taxed if not agreed.  The order nisi will become absolute if no application is made by either party within 14 days.      

Mr. William Liu, Government Counsel of Department of Justice for the Plaintiff.

Mr. Paul Shieh, S.C. leading Mr. Jonathan Chang instructed by Messrs Wilkinson & Grist for the Defendants.