A Bill
to


Amend the Inland Revenue Ordinance. Enacted by the Provisional Legislative Council.1. Short title This Ordinance may be cited as the Inland Revenue (Amendment) (No. 2) Ordinance 1998.2. Application This Ordinance applies in relation to the year of assessment commencing on 1 April 1998 and to all subsequent years of assessment. 3.Interpretation Section 2(1) of the Inland Revenue Ordinance (Cap. 112) is amended by adding-- ""arrangement" (安排) includes--

  1. any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable or intended to be enforceable, by legal proceedings; and

  2. any scheme, plan, proposal, action or course of action or course of conduct;


"conditional sale agreement" (有條件售賣協議) means an agreement for the sale of goods under which the purchase price or part of the purchase price is payable by instalments, and the property in the goods remains in the seller (notwithstanding that the buyer is to be in possession of the goods) until such conditions as to the payment of instalments or otherwise as may be specified in the agreement are fulfilled;

"hire-purchase agreement" (租購協議) means an agreement for the bailment of goods under which the bailee may buy the goods, or under which the property in the goods will or may pass to the bailee;

"lease" (租約), in relation to any machinery or plant, includes--

  1. any arrangement under which a right to use the machinery or plant is granted by the owner of the machinery or plant to another person; and

  2. any arrangement under which a right to use the machinery or plant, being a right derived directly or indirectly from a right referred to in paragraph (a), is granted by a person to another person,


but does not include a hire-purchase agreement or a conditional sale agreement unless, in the opinion of the Commissioner, the right under the agreement to purchase or obtain the property in the goods would reasonably be expected not to be exercised;". 4. Qualifying debt instruments
    Section 14A(2) and (3) is repealed.
5. Section added
    The following is added--

    "14B. Qualifying reinsurance business

      (1) For the purposes of this Part, the assessable profits of a corporation, to the extent that they are the assessable profits of the corporation derived from the business of reinsurance of offshore risks as a professional reinsurer within the meaning of section 23A(2) are, subject to subsection (2), chargeable to tax under this Part at one-half of the rate specified in Schedule 8.

      (2) (a) Subsection (1) shall only apply to a corporation where the corporation has elected in writing that the subsection shall so apply to it.

      (b) An election under paragraph (a), once made, is irrevocable.".
    6. Ascertainment of chargeable profits
      Section 16(1)(ga) is amended by repealing "and 16E" and substituting ", 16E, 16F and 16G".
    7. Expenditure on scientific research

    Section 16B is amended--
  1. in subsections (1), (2), (3), (5), (6) and (7), by repealing "trade or business" wherever it appears and substituting "trade, profession or business";

  2. by adding--

      "(3A)(a)Notwithstanding the exclusion relating to the sale of capital assets contained in section 14, where any rights in, or arising out of, scientific research the expenditure on which has been allowed as a deduction under this section in ascertaining the profits of any person from a trade, profession or business are thereafter sold by him--

    1. subject to subparagraph (ii), the proceeds of sale;

    2. if the deduction has been allowed in accordance with subsection (2), such part of the proceeds of sale as is proportionate to the extent to which the expenditure on the scientific research to which the rights relate has been allowed as a deduction in accordance with that subsection,

    shall, in so far as the proceeds of sale or the part of the proceeds of sale, as the case may be, is not otherwise chargeable to tax under this Part, be treated as a trading receipt of the trade, profession or business accruing at the time of the sale or, if the sale occurs on or after the date on which the trade, profession or business is permanently discontinued, accruing immediately before the discontinuance.

    (b) For the purposes of this subsection--

    1. without prejudice to subsection (3), a reference to the proceeds of sale shall be construed as a reference to such part of the proceeds of sale as is not attributable to the sale of plant or machinery;
    2. the reference to the time of the sale, in relation to any rights, shall be construed as a reference to the time of completion of the sale of the rights.";

    (c) in subsection (4)(a), by repealing the definition of "scientific research" and substituting--

      ""scientific research" (科學研究) means--

    1. any activities in the fields of natural or applied science for the extension of knowledge;

    2. any systematic, investigative or experimental activities carried on for the purposes of any feasibility study or in relation to any market, business or management research.";

(d) in subsection (5)--

  1. in paragraph(b)(i)and(ii),by repealing "trades or businesses" and substituting "trades, professions or businesses";

  2. in paragraph (b)(ii), by repealing the full stop and substituting "; and";

  3. by adding-- "(c) a reference to rights shall be construed as including a reference to a share or interest in such rights.".
8. Expenditure on building refurbishment

Section 16F is amended--
  1. in subsection (1), by repealing everything after "year of assessment" and before "may claim" and substituting ", a person who incurs capital expenditure on the renovation or refurbishment of a building or structure other than a domestic building or structure";

  2. in subsection (3)--

    1. by repealing "rebuilding allowance under section 36" and substituting "allowances under Part VI";
    2. by repealing "commercial building or structure used as the hotel" and substituting "building or structure";

  3. in subsection (4)--

    1. by repealing "commercial" wherever it appears;
    2. in paragraph (a), by repealing "not used as a hotel" and substituting "which is used as a domestic building or structure";
    3. in paragraph (b), by repealing ", used as a hotel";

  4. by repealing subsection (5) and substituting--

    "(5)In this section--

    "domestic building or structure"(住用建築物或
    構築物) means any building or structure or any part of a building or structure constructed or intended to be used for habitation, but does not include any building or structure or any part of a building or structure used as a hotel or guesthouse, or any part of a hotel or guesthouse;
    "hotel" and "guesthouse" (旅館) have the same meaning as in the Hotel and Guesthouse Accommodation Ordinance (Cap. 349).".
    9. Section added
      The following is added--
    "16G. Capital expenditure on the provision of a prescribed fixed asset

    (1) Notwithstanding anything in section 17, in ascertaining the profits of a person from any trade, profession or business in respect of which the person is chargeable to tax under this Part for any year of assessment, there shall, subject to subsections (2) and (3), be deducted any specified capital expenditure incurred by the person during the basis period for that year of assessment.

    (2) Where a prescribed fixed asset in respect of which any specified capital expenditure is incurred is used partly in the production of profits chargeable to tax under this Part and partly for any other purposes, the deduction allowable under this section shall be such part of the specified capital expenditure as is proportionate to the extent of the use of the asset in the production of the profits so chargeable to tax under this Part.

    (3) (a) Notwithstanding the exclusion relating to the sale of capital assets contained in section 14, where any prescribed fixed asset in respect of which any specified capital expenditure has been allowed as a deduction to any person under this section in ascertaining the profits from a trade, profession or business is thereafter sold by him--
    1. subject to subparagraph (ii), the proceeds of sale;

    2. if the deduction has been allowed in accordance with subsection (2), such part of the proceeds of sale as is proportionate to the extent to which the specified capital expenditure has been allowed as a deduction in respect of that asset in accordance with that subsection,
    shall, in so far as the proceeds of sale or the part of the proceeds of sale, as the case may be, is not otherwise chargeable to tax under this Part, be treated as a trading receipt of the trade, profession or business accruing at the time of the sale or, if the sale occurs on or after the date on which the trade, profession or business is permanently discontinued, accruing immediately before the discontinuance.

    (b) For the purposes of paragraph (a), where any prescribed fixed asset in respect of which any specified capital expenditure has been allowed as a deduction to any person under this section in ascertaining the profits from a trade, profession or business is thereafter destroyed, the asset shall be treated as if it had been sold immediately before the destruction thereof, and any insurance moneys or other compensation of any description received by the person in respect of the destruction and any moneys received by him in respect of the remains of the asset shall be treated as if they were proceeds of that sale.

    (c) Where, in relation to the sale of a prescribed fixed asset, which is referred to in paragraph (a)--

    1. the buyer is a person over whom the seller has control;

    2. the seller is a person over whom the buyer has control;

    3. both the seller and the buyer are persons over both of whom some other person has control; or

    4. the sale is between a husband and his wife, not being a wife living apart from her husband,

      the Commissioner shall, if he is of the opinion that the sale price of the asset does not represent its true market value at the time of the sale, determine such true market value, and the amount so determined shall, for the purposes of this subsection, be deemed to be the proceeds of sale of the asset.
    (d) For the purposes of this subsection, the reference to the time of the sale, in relation to a prescribed fixed asset, shall be construed as a reference to the time of completion of the sale of the asset, or the time when possession of the asset is given, whichever is earlier.

    (4) (a) Where, immediately prior to the commencement of this section, a person owned and had in use any machinery or plant which is a prescribed fixed asset, that person shall, for the purposes of this section, be deemed to have incurred, at the time of the commencement of this section, specified capital expenditure in relation to that machinery or plant.

    (b) The specified capital expenditure deemed to have been incurred by a person in relation to any machinery or plant under paragraph (a) shall be the capital expenditure incurred on the provision of that machinery or plant, as reduced by the aggregate of--
    1. the amount of the initial allowances, if any, under sections 37(1), 37A(1) or 39B(1); and

    2. the amount of the annual allowances, if any, under sections 37(2), 37A(3) or 39B(2),
    made to the person in respect of the capital expenditure in all prior years of assessment.

    (5) For the purposes of this section, any specified capital expenditure incurred for the purposes of a trade, profession or business by a person about to carry on such trade, profession or business shall be treated as if it had been incurred by that person on the first day on which he does carry on such trade, profession or business.

    (6) In this section--

    "excluded fixed asset" (例外固定資產) means a fixed asset in which any person holds rights as a lessee under a lease;

    "prescribed fixed asset" (訂明固定資產) means--
    1. such of the machinery or plant specified in items 16, 20, 24, 26, 28, 29, 31, 33 and 35 of the First Part of the Table annexed to rule 2 of the Inland Revenue Rules (Cap. 112 sub. leg.) as is used specifically and directly for any manufacturing process;

    2. computer hardware, other than that which is an integral part of any machinery or plant;

    3. computer software and computer systems,
    but does not include an excluded fixed asset;

    "specified capital expenditure" (指明資本開支), in relation to a person, means any capital expenditure incurred by the person on the provision of a prescribed fixed asset, but does not include--
    1. capital expenditure that may be deducted under any other section in this Part;

    2. capital expenditure incurred under a hire-purchase agreement.".
    10. Treatment of losses
      Section 19(1) is amended by repealing "Subject to the provisions of subsection (3) where" and substituting "Where".
    11. Treatment of losses after 1 April 1975

    Section 19C is amended--
    1. in subsections (1), (2), (4) and (5), by repealing "Where" and substituting "Subject to section 19CB, where";

    2. in subsection (3), by repealing "Where" and substituting "Subject to subsection (3A), where";

    3. by adding--

      "(3A) For the purposes of Part VII, where the loss or the share of the loss referred to in subsection (3) includes an unabsorbed loss calculated in accordance with section 19CA(2)(b) or (3)(b), the amount of the unabsorbed loss shall be deemed to be the amount arrived at by dividing the amount of the unabsorbed loss by the adjustment factor within the meaning of section 19CA.".
    12. Sections added
      The following are added--
    "19CA. Treatment of losses: concessionary trading receipts

    (1) This section shall apply to any person who derives concessionary trading receipts and normal trading receipts for any year of assessment.

    (2) Where, for any year of assessment, there is an unabsorbed loss in respect of the concessionary trading receipts of a person to whom this section applies, and the person has chargeable normal trading receipts for that year of assessment, the unabsorbed loss shall be treated in accordance with the following provisions--
    1. where the amount of the unabsorbed loss does not exceed the amount of the chargeable normal trading receipts as multiplied by the adjustment factor, the amount of the chargeable normal trading receipts shall, for the purpose of ascertaining the assessable profits of the person, be deemed to be reduced by an amount arrived at by dividing the amount of the unabsorbed loss by the adjustment factor, and the amount of the unabsorbed loss shall, for any other purposes, be deemed to be nil;

    2. in any other case, the amount of the unabsorbed loss shall, for the purpose of ascertaining the loss sustained by the person, be deemed to be reduced by an amount arrived at by multiplying the amount of the chargeable normal trading receipts by the adjustment factor, and the balance of the unabsorbed loss so reduced shall be dealt with in accordance with sections 19C and 19CB, and the amount of the chargeable normal trading receipts shall, for any other purposes, be deemed to be nil.
    (3) Where, for any year of assessment, there is an unabsorbed loss in respect of the normal trading receipts of a person to whom this section applies, and the person has chargeable concessionary trading receipts for that year of assessment, the unabsorbed loss shall be treated in accordance with the following provisions--
    1. where the amount of the unabsorbed loss does not exceed the amount of the chargeable concessionary trading receipts as divided by the adjustment factor, the amount of the chargeable concessionary trading receipts shall, for the purpose of ascertaining the assessable profits of the person, be deemed to be reduced by an amount arrived at by multiplying the amount of the unabsorbed loss by the adjustment factor, and the amount of the unabsorbed loss shall, for any other purposes, be deemed to be nil;

    2. in any other case, the amount of the unabsorbed loss shall, for the purpose of ascertaining the loss sustained by the person, be deemed to be reduced by an amount arrived at by dividing the amount of the chargeable concessionary trading receipts by the adjustment factor, and the balance of the unabsorbed loss so reduced shall be dealt with in accordance with sections 19C and 19CB, and the amount of the chargeable concessionary trading receipts shall, for any other purposes, be deemed to be nil.

    (4)In this section, "adjustment factor" (�整分數), in relation to any year of assessment, means the factor ascertained in accordance with the following formula:

    A
    ----
    B

    where: A means the rate specified in Schedule 1 or 8, as the case may be, for that year of assessment; and

    where: B,in relation to any concessionary trading receipts, means the rate specified in section 14A or 14B, as the case may be, for that year of assessment.

    (5) In this section--

    "chargeable concessionary trading receipts" (應課稅的獲特惠的營業收入), in relation to any person for any year of assessment, means--
    1. where the concessionary trading receipts are of a kind in respect of which assessable profits are chargeable to tax at the rate specified in section 14A, the amount of such concessionary trading receipts as--

      1. reduced by the aggregate of--

          (A) the amount of any outgoings and expenses deductible under this Part to the extent to which they are incurred during the basis period for that year of assessment by the person in the production of the concessionary trading receipts; and

          (B) the amount of any allowances made under Part VI for that year of assessment to the person to the extent to which the relevant assets are used during the basis period for that year of assessment in the production of the concessionary trading receipts; and

      2. increased by the amount of any balancing charge directed to be made on that person under Part VI for that year of assessment to the extent to which the relevant assets are used in the production of the concessionary trading receipts;

    2. where the concessionary trading receipts are of a kind in respect of which assessable profits are chargeable to tax at the rate specified in section 14B, the amount of the assessable profits ascertained in accordance with section 23A(2);

      "chargeable normal trading receipts" (應課稅的一般營
      業收入), in relation to any person for any year of assessment, means the amount of the normal trading receipts as--

      1. reduced by the aggregate of--

        1. the amount of any outgoings and expenses deductible under this Part to the extent to which they are incurred during the basis period for that year of assessment by the person in the production of the normal trading receipts; and

        2. the amount of any allowances made under Part VI for that year of assessment to the person to the extent to which the relevant assets are used during the basis period for that year of assessment in the production of the normal trading receipts; and

      2. increased by the amount of any balancing charge directed to be made on that person under Part VI for that year of assessment to the extent to which the relevant assets are used in the production of the normal trading receipts;

      "concessionary trading receipts" (獲特惠的營業收入) means the trading receipts and other sums in respect of which assessable profits are chargeable to tax at the rate specified in section 14A or 14B;

      "normal trading receipts" (一般營業收入) means the trading receipts and other sums in respect of which assessable profits are chargeable to tax at the rate specified in Schedule 1 or 8;

      "unabsorbed loss in respect of the concessionary trading receipts" (關乎獲特惠的營業收入的未吸納虧損), in relation to any person for any year of assessment, means--

      1. where the concessionary trading receipts are of a kind in respect of which assessable profits are chargeable to tax at the rate specified in section 14A, the loss ascertained by--

        1. adding to the amount of the concessionary trading receipts the amount of any balancing charge directed to be made on that person under Part VI for that year of assessment to the extent to which the relevant assets are used in the production of the concessionary trading receipts; and
        2. reducing from the resulting amount the aggregate of--

          (A)the amount of any outgoings and expenses deductible under this Part to the extent to which they are incurred during the basis period for that year of assessment by the person in the production of the concessionary trading receipts; and

          (B)the amount of any allowances made under Part VI for that year of assessment to the person to the extent to which the relevant assets are used during the basis period for that year of assessment in the production of the concessionary trading receipts;
      2. where the concessionary trading receipts are of a kind in respect of which assessable profits are chargeable to tax at the rate specified in section 14B, the loss arrived at in accordance with sections 23A(2) and 19D;


      "unabsorbed loss in respect of the normal trading receipts" (關乎一般營業收入的未吸納虧損), in relation to any person for any year of assessment, means the loss ascertained by--
      1. adding to the amount of the normal trading receipts the amount of any balancing charge directed to be made on that person under Part VI for that year of assessment to the extent to which the relevant assets are used in the production of the normal trading receipts; and

      2. reducing from the resulting amount the aggregate of--
        1. the amount of any outgoings and expenses deductible under this Part to the extent to which they are incurred during the basis period for that year of assessment by the person in the production of the normal trading receipts; and

        2. the amount of any allowances made under Part VI for that year of assessment to the person to the extent to which the relevant assets are used during the basis period for that year of assessment in the production of the normal trading receipts.
    19CB. Set off: concessionary trading receipts

    (1)Where, in accordance with section 19C(1),(2),(4)or(5),a loss is to be set off against assessable profits for any year of assessment, this section shall apply for the purpose of ascertaining the amount of the loss set off and the resulting reduction in the assessable profits.

    (2) Where the loss is in respect of concessionary trading receipts and it is to be set off against the assessable profits in respect of normal trading receipts--
    1. where the amount of the loss does not exceed the amount of the assessable profits in respect of normal trading receipts as multiplied by the adjustment factor, the amount of the assessable profits in respect of normal trading receipts shall, for the purpose of ascertaining the assessable profits of the person, be deemed to be reduced by the amount arrived at by dividing the amount of the loss by the adjustment factor, and the loss shall, for any other purposes, be deemed to have been fully set off;

    2. in any other case, the loss shall, for the purpose of the set off, be deemed to have been set off to the extent of the amount arrived at by multiplying the amount of the assessable profits in respect of normal trading receipts by the adjustment factor, and the amount of the assessable profits in respect of normal trading receipts shall, for any other purposes, be deemed to be nil.
    (3) Where the loss is in respect of normal trading receipts and it is to be set off against the assessable profits in respect of concessionary trading receipts--
    1. where the amount of the loss does not exceed the amount of the assessable profits in respect of concessionary trading receipts as divided by the adjustment factor, the amount of the assessable profits in respect of concessionary trading receipts shall, for the purpose of ascertaining the assessable profits of the person, be deemed to be reduced by the amount arrived at by multiplying the amount of the loss by the adjustment factor, and the loss shall, for any other purposes, be deemed to have been fully set off;

    2. in any other case, the loss shall, for the purpose of the set off, be deemed to have been set off to the extent of the amount arrived at by dividing the amount of the assessable profits in respect of concessionary trading receipts by the adjustment factor, and the amount of the assessable profits in respect of concessionary trading receipts shall, for any other purposes, be deemed to be nil.
    (4) In this section--

    "adjustment factor" (�整分數), "concessionary trading receipts" (獲特惠的營業收入) and "normal trading receipts" (一般營業收入) have the meanings respectively assigned to them in section 19CA(4) and (5);

    "loss" (虧損) includes part of a loss.".

    13. Persons not treated as agents

    Section 20AA is amended--
    1. by repealing subsection (3)(a);

    2. in subsection (6), by repealing the definitions of "foreign exchange", "futures contract" and "securities".
    14. Ascertainment of assessable profits of insurance corporations other than life insurance corporations

    Section 23A is amended--
    1. in subsection (1)--

      1. by repealing "從該在香港保險業務所得" and substituting "得自該香港保險業務";

      2. in the proviso, by repealing "從在香港保險
        業務所得" and substituting "得自香港保險業
        務";

    2. by repealing subsection (2) and substituting--

      "(2)Where a corporation to which subsection (1) applies carries on the business of reinsurance of offshore risks as a professional reinsurer, the assessable profits of the corporation derived from the business of reinsurance of offshore risks as a professional reinsurer for a year of assessment shall be ascertained in accordance with the following formula:

      B
      A = -- x D
      C

      where: A means such assessable profits;

      B means the assessable profits of that corporation during the basis period for that year of assessment as calculated in accordance with subsection (1);

      C means the aggregate of the total income earned by or accrued to that corporation during that basis period for that year of assessment; and

      D means the aggregate of offshore reinsurance income earned by or accrued to that corporation during that basis period for that year of assessment.

      (3) For the purposes of this section--

      "additional amount for unexpired risks" (未過期風險的
      額外款額), "claims outstanding" (未決申索), "fund"
      (基金) and "unearned premiums" (未滿期保費) have
      the meanings respectively assigned to them in paragraph
      1(1) of Part 1 of the Third Schedule to the Insurance Companies Ordinance (Cap. 41);

      "gains or profits from offshore reinsurance investments" (得自離岸再保險投資的收益或利潤) means any sums derived from, attributable to, or in respect of gains or profits arising from the sale or other disposal of, or on the redemption on maturity or presentment of, and any interest received on--

      1. investments made with premiums from reinsurance of offshore risks;

      2. investments representing the whole or any part of the technical reserves of a professional reinsurer referable to premiums from reinsurance of offshore risks;

      "offshore reinsurance income" (離岸再保險入息) means any sums derived from, attributable to, or in respect of--

      1. premiums from reinsurance of offshore risks;

      2. gains or profits from offshore reinsurance investments;

      "permanent establishment" (永久機構) means a branch, management or other place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of his principal;

      "premiums from insurance business in Hong Kong" (得自香港保險業務的保費) includes--

      1. all premiums in respect of contracts of insurance, other than life insurance, made in Hong Kong; and

      2. all premiums on contracts of insurance, other than life insurance, the proposals for which were made to a corporation in Hong Kong;

      "premiums from reinsurance of offshore risks" (得自離岸風險的再保險的保費) means premiums received by a professional reinsurer in respect of the reinsurance of any risk outside Hong Kong or in transit in Hong Kong, and--

      1. in relation to facultative general reinsurance, the reinsured is not a person resident in Hong Kong or a permanent establishment maintained in Hong Kong;

      2. in relation to treaty general reinsurance, not less than 75% of the total risk in terms of gross premiums is outside Hong Kong or is in transit in Hong Kong;

      "professional reinsurer" (專業再保險人) means a company authorized to carry on in or from Hong Kong reinsurance business only, under section 8 of the Insurance Companies Ordinance (Cap. 41);

      "technical reserves" (技術性儲備)--

      1. subject to paragraph (b), means reserves for--

        1. additional amounts for unexpired risks;

        2. claims outstanding; and

        3. unearned premiums;

      2. in relation to a class of general business which is accounted for on a fund accounting basis, means the fund.".
    15. Ascertainment of the assessable profits of a ship-owner carrying on business in Hong Kong

    Section 23B is amended--

    1. by adding--

      "(4A) For the purposes of this section, where a person who is deemed to be carrying on a business as an owner of ships in Hong Kong under subsection (2) is resident in any territory outside Hong Kong, he shall be regarded as having a reciprocity status, if the Commissioner is satisfied that any profits earned by or accrued to a person to whom subsection (1) applies from a business carried on in the territory as an owner of ships are, under the laws of that territory, exempt from a tax which is of substantially the same nature as the tax chargeable under this Part.";

    2. in subsections (7)(a) and (b)(i) and (8), by adding "paragraph (a) of" before "the definition";

    3. in subsection (12), by repealing the definition of "exempt sums" and substituting--
      " "exempt sums" (豁免款項)--

    1. means any sums derived from, attributable to, or in respect of--

      1. any relevant carriage shipped aboard a registered ship at any location within the waters of Hong Kong and proceeding to sea from that location or any other location within those waters; or

      2. any towage operation undertaken by a registered ship proceeding to sea from any location within the waters of Hong Kong;


    2. in relation to a person who has a reciprocity status, means any sums derived from, attributable to, or in respect of--

      1. any relevant carriage shipped aboard a ship at any location within the waters of Hong Kong and proceeding to sea from that location or any other location within those waters; or

      2. any towage operation undertaken by a ship proceeding to sea from any location within the waters of Hong Kong;".
    16. Exclusion of certain profits from tax

    Section 26A is amended--

    1. by repealing subsection (1A) and substituting--

      "(1A) (a) For the purposes of this Part, there shall not be included in the profits to which a person is chargeable to tax under this Part any sums received or accrued in respect of a specified investment scheme by or to the person as--

      1. an authorized mutual fund corporation;

      2. a trustee of an authorized unit trust;

      3. a mutual fund corporation established outside Hong Kong where the Commissioner is satisfied that the mutual fund corporation is a bona fide widely held investment corporation which complies with the requirements of a supervisory authority within an acceptable regulatory regime;

      4. a trustee of a unit trust established outside Hong Kong where the Commissioner is satisfied that the unit trust is a bona fide widely held investment unit trust which complies with the requirements of a supervisory authority within an acceptable regulatory regime; or

      5. a person chargeable to tax under this Part in respect of any other similar collective investment scheme where the Commissioner is satisfied that the collective investment scheme is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.


    2. For the purposes of paragraph (a), a specified investment scheme is an investment scheme carried on--

      1. for the purposes for which the investment scheme was stated to be carried on in the constitutive documents approved in respect of the investment scheme by--

        (A) in the case of paragraph (a)(i) or (ii), the Commission;

        (B) in the case of paragraph (a)(iii), (iv) or (v), the supervisory authority within the acceptable regulatory regime; and

      2. in accordance with--

        (A) in the case of paragraph (a)(i) or (ii), the requirements of the Commission;

        (B) in the case of paragraph (a)(iii), (iv) or (v), the requirements of the supervisory authority within the acceptable regulatory regime.";

    3. in subsection (2)--

      1. by repealing the definitions of "foreign exchange", "futures contract" and "securities";

      2. by adding--

        " "Commission" (證監會) means the Securities and Futures Commission established by section 3 of the Securities and Futures Commission Ordinance (Cap. 24);".

    17. Sections added

    The following are added in Part VI--

    "33A. Annual allowances, commercial buildings and structures

    (1) Where any person is, at the end of the basis period for any year of assessment, entitled to an interest in a building or structure which is a commercial building or structure and where that interest is the relevant interest in relation to the capital expenditure incurred on the construction of that building or structure, an allowance for depreciation by wear and tear of that building or structure, to be known as an "annual allowance", equal to one-twenty-fifth of the expenditure shall be made to the person for that year of assessment.

    (2) Where the interest in a building or structure, which is the relevant interest in relation to any expenditure, is sold while the building or structure is a commercial building or structure, the annual allowance, in the years of assessment the basis periods for which end after the time of the sale, shall be computed by reference to the residue of expenditure immediately after the sale and shall be the fraction of that residue of expenditure the numerator of which is 1 and the denominator of which is the number of years of assessment comprised in the period which--

    1. begins with the first year of assessment for which the buyer is entitled to an annual allowance or would be so entitled if the building or structure had at all material times continued to be a commercial building or structure; and

    2. ends with the year of assessment which is--

      1. in the case of a building or structure to which subsection (4) applies, the 25th year after the year of assessment in which this section commences;

      2. in any other case, the 25th year after the year of assessment in which the building or structure was first used,
    and so on for any subsequent sales.

    (3) Notwithstanding anything in the preceding provisions of this section, in no case shall the amount of an annual allowance for any year of assessment in respect of any expenditure exceed such amount as, apart from the writing off falling to be made by reason of the making of that allowance, would be the residue of expenditure at the end of the basis period for that year of assessment.

    (4) For the purposes of this section, where immediately prior to the commencement of this section, a person was entitled to an interest in a building or structure which is a commercial building or structure and where that interest is the relevant interest in relation to the capital expenditure incurred on the construction of the building or structure--

    1. the capital expenditure incurred on the construction of the building or structure shall be deemed to have been reduced by the aggregate of the amount of the rebuilding allowances that would have been made to the person under section 36 in respect of that building or structure in all prior years of assessment if at all times during the period of the person's entitlement to the relevant interest it had been used for the purposes of producing profits chargeable to tax under Part IV; and

    2. the year of assessment commencing on 1 April 1998 shall be deemed to be the year of assessment in which the building or structure was first used.
    33B. Balancing allowances and charges, commercial buildings and structures

    (1) Where any capital expenditure has been incurred on the construction of a building or structure and while the building or structure is a commercial building or structure--

    1. the relevant interest in the building or structure is sold;

    2. the relevant interest in the building or structure, being a leasehold interest, comes to an end otherwise than on the person entitled thereto acquiring the interest which is reversionary thereon; or

    3. the building or structure is demolished or destroyed or, without being demolished or destroyed, ceases altogether to be used,
    an allowance, to be known as a "balancing allowance", or a charge, to be known as a "balancing charge", shall, in the circumstances mentioned in this section, be made to or, as the case may be, on the person entitled to the relevant interest immediately before any of the events referred to in paragraphs (a) to (c) occurs for the year of assessment in the basis period in which that event occurs.

    (2) (a) Where--

    1. there are no sale, insurance, salvage or compensation moneys arising in respect of the occurrence of any of the events referred to in subsection (1)(a) to (c); or

    2. the residue of expenditure immediately before the occurrence of any of such events exceeds those moneys,

      a balancing allowance shall be made and the amount thereof shall be the amount of--

      1. in the case of subparagraph (i), the residue of expenditure;

      2. in the case of subparagraph (ii), the excess of the residue of expenditure over the said moneys.
    (b)Notwithstanding anything in this section, no balancing allowance shall be made to any person where the building or structure is demolished for purposes unconnected with or not in the ordinary course of conduct of the trade, profession or business for the purposes of which the building or structure was used in circumstances qualifying for an annual allowance under section 33A.

    (3) (a) If the sale, insurance, salvage or compensation moneys arising in respect of the occurrence of any of the events referred to in subsection (1)(a) to (c) exceed the residue of expenditure, if any, immediately before the occurrence of any of such events, a balancing charge shall be made and the amount on which it is made shall be an amount equal to the excess or, where the residue of expenditure is nil, to the said moneys.

    (b) Notwithstanding anything in paragraph (a), in no case shall the amount on which a balancing charge is made on a person exceed the amount of the annual allowances, if any, made to him under section 33A in respect of the expenditure in question.".

    18. Balancing allowances and charges, industrial buildings and structures Section 35 is amended--

    1. in the proviso to subsection (1), by repealing "trade or business" and substituting "trade, profession or business";

    2. in subsection (4)--

      1. in paragraph (a), by adding "under section 34(1)" after "made to him";

      2. in paragraph (b), by adding "under section 34(2)" after "made to him".
    19. Buildings and structures bought unused Section 35B is amended--

    1. by adding "(whether a commercial building or structure or an industrial building or structure)" before "and, before";

    2. in paragraph (a), by repealing "34" and substituting "33A or 34, as the case may be,".
    20. Rebuilding allowance for a commercial building or structure up to and including the year of assessment commencing on 1 April 1997

    Section 36 is amended--

    1. by renumbering it as section 36(1);

    2. in subsection (1), by repealing "Where" and substituting "Subject to subsection (2), where";

    3. by adding--

      "(2) No allowance shall be made to any person under subsection (1) for a year of assessment if the basis period for that year of assessment is subsequent to the basis period for the year of assessment commencing on 1 April 1997.".
    21. Initial and annual allowances, machinery or plant Section 37 is amended--

    1. in subsection (1), by adding "or 16G" after "16B(1)(b)";

    2. in subsection (2), by repealing paragraph (a) of the proviso;

    3. in subsection (3)--

      1. by repealing "scientific research";

      2. by adding "or 16G" after "16B(1)(b)".


    22. Initial and annual allowances in respect of machinery and plant acquired under hire-purchase agreement

    Section 37A is amended--
    1. in subsection (1), by adding "or 16G" after "16B(1)(b)";

    2. in subsection (4)--

      1. by repealing "scientific research";

      2. by adding "or 16G" after "16B(1)(b)".
23. Initial and annual allowances on machinery or plant under the pooling system

Section 39B is amended--
  1. in subsection (1), by adding "or 16G" after "16B(1)(b)";

  2. in subsection (10)--

    1. by repealing "scientific research";

    2. by adding "or 16G" after "16B(1)(b)".
24. Allowances under this Part in respect of capital expenditure on leased machinery and plant

Section 39E(5) is amended by repealing the definitions of "arrangement", "conditional sale agreement" and "lease".

25. Interpretation

Section 40(1) is amended--

  1. by repealing the definition of "hire-purchase agreement";

  2. in the definition of "residue of expenditure"--

    1. by renumbering paragraphs (a), (b) and (c) as subparagraphs (i), (ii) and (iii) respectively;

    2. by adding "--" after "餘額)";

    3. by renumbering everything after "餘額)--" as paragraph (b);

    4. in paragraph (b)--

      (A) by adding "in relation to an industrial building or structure," before "means the amount";

      (B) by repealing "in the construction" and substituting "on the construction";

      (C) by repealing "a building or structure" and substituting "the building or structure";

      (D) in subparagraph (i), by adding "under section 34(1)" after "made";

      (E) in subparagraph (ii), by adding "under section 34(2)" after "made";

      (F) in subparagraph (iii), by repealing "granted" and substituting "made under section 35";

      (G) by adding "under section 35" after "balancing charges made";

      (H) by adding "under section 34(1) or (2), as the case may be" after "fell to be made";

      (I) by adding "under section 34(1) or (2), as the case may be," after "fallen to be made";

    5. by adding--

      "(a) in relation to a commercial building or structure, means the amount of the capital expenditure incurred on the construction of the building or structure reduced by--

      1. the amount of any annual allowance made under section 33A;

      2. the amount of any balancing allowance made under section 33B,

        and increased by any balancing charges made under section 33B:

        Provided that in computing the residue of expenditure there shall be written off, in respect of any year in which no annual allowance fell to be made under section 33A, an amount of one-twenty-fifth of the capital expenditure, and for the purposes of this proviso "year" (年) means the period which would have comprised a year of assessment commencing on 1 April 1998 or any subsequent year of assessment in respect of which an annual allowance would have fallen to be made under section 33A if the building or structure had been in use as a commercial building or structure;".
26. Interpretation

Section 40B is amended by adding--

""adjustment factor" (�整分數) has the same meaning as in section 19CA;

"concessionary trading receipts" (獲特惠的營業收入) has the same meaning as in section 19CA;".

27. Calculation of total income

Section 42 is amended--

  1. in subsection (1)(c), by adding "subject to subsection (1A)," before "the assessable profits";

  2. by adding--

    "(1A) For the purposes of subsection (1)(c), any assessable profits in respect of concessionary trading receipts shall be deemed to be the amount arrived at by dividing such assessable profits by the adjustment factor.".

28. Relief in respect of Commonwealth income tax

Section 45 is repealed.

29. Double taxation arrangements

Section 49(3) is repealed.

30. Section added

The following is added--

"88A. Advance rulings

(1) The Commissioner may, on an application made by a person in accordance with Part I of Schedule 10, make a ruling on any of the matters specified in that Part in accordance with that Part.

(2) Part I of Schedule 10 shall apply to and in connection with an application under subsection (1) and any ruling made by the Commissioner under that subsection.

(3) The fees specified in Part II of Schedule 10 shall be payable in respect of any application under subsection (1).

(4) If by reason of section 2 or 3 of Part I of Schedule 10, the Commissioner does not make a ruling under subsection (1), any fees paid under subsection (3) shall be refunded to the applicant.

(5) The Commissioner may in exceptional circumstances at his discretion waive in whole or in part any fees payable by an applicant under subsection (3).

(6) Any fees due and payable under subsection (3) shall be recoverable as a civil debt due to the Government.

(7) The Secretary for the Treasury may by order amend Schedule 10.

(8) In this section and in Schedule 10, "applicant" (申請人) means the person making an application under subsection (1).".

31. Rate of profits tax in respect of a corporation Schedule 8 is amended--

  1. by repealing "For the year of assessment 1994/95 and until superseded" and substituting "For the years of assessment 1994/95 to 1997/98 inclusive";

  2. by adding at the end--

    "For the year of assessment 1998/99 and until superseded16%".


32. Schedule added

The following is added--

"SCHEDULE 10 [s. 88A]
PART I
Advance Rulings

1. On an application made by a person in accordance with this Part, the Commissioner may make a ruling on how any provision of this Ordinance, other than that relating to the imposition or remission of a penalty, the correctness of a return or other information supplied by any person, the prosecution of any person or the recovery of any debt owing by any person, applies to the applicant or to the arrangement described in the application, whether or not reference is made to that provision in the application.

2. The Commissioner may decline to make a ruling if--

  1. the application seeking the ruling would require the Commissioner to determine or establish any question of fact;

  2. the Commissioner considers that the correctness of the ruling would depend on the making of assumptions, whether in respect of a future event or any other matter;

  3. the matter on which the ruling is sought is subject to an objection or appeal, whether in relation to the applicant or any other person; or

  4. the matter on which the ruling is sought is the subject of a return which has been or is due to be lodged under this Ordinance.
3. The Commissioner shall not make a ruling if--

  1. the Commissioner considers that the arrangement in relation to which the ruling is sought is not seriously contemplated by the applicant;

  2. the application is frivolous or vexatious;

  3. the Commissioner is undertaking an audit on how any provision of this Ordinance applies to the applicant and an arrangement similar to the arrangement which is the subject of the application during any period to which the proposed ruling would apply were the ruling to be made;

  4. the Commissioner considers that the applicant has not provided sufficient information in relation to the application; or

  5. the Commissioner considers that it would be unreasonable to make a ruling in view of the resources available to the Commissioner.
4. Where the Commissioner has made a ruling to a person on the application of any provision of this Ordinance in relation to an arrangement and that person implements the arrangement in the way stated in the ruling, the Commissioner shall apply the provision in relation to the person and the arrangement in accordance with the ruling.

5. A ruling shall apply in relation to an arrangement as a ruling on a provision of this Ordinance only if the provision is expressly referred to in the ruling and only for the period specified in the ruling.

6. A ruling shall not apply in relation to an arrangement if--
  1. the arrangement is materially different from the arrangement identified in the ruling;

  2. there was a material omission or misrepresentation in, or in connection with, the application seeking the ruling; or

  3. any assumption of the Commissioner in respect of a future event or any other matter that is stated in the ruling is incorrect.
7. An application for a ruling must--

  1. identify the applicant;

  2. disclose all relevant facts and documents relating to the arrangement in respect of which the ruling is sought;

  3. state the provision of this Ordinance in respect of which the ruling is sought;

  4. state the proposition of law (if any) which is relevant to the issues raised in the application;

  5. provide such other information as the Commissioner may specify in writing from time to time for the purposes of this section; and

  6. be accompanied by a draft ruling.
8. The Commissioner may at any time request further relevant information in respect of an application for a ruling.

9. Without prejudice to section 2, if the Commissioner considers that the correctness of a ruling would depend on the making of assumptions, whether in respect of a future event or any other matter, the Commissioner may, subject to section 10, make any assumption which he considers to be the most appropriate.

10. The Commissioner may not make any assumption in respect of information which the applicant can provide.

11. A ruling made by the Commissioner must state--
  1. the name of the person, the provision of this Ordinance, and the arrangement to which the ruling applies;

  2. the period for which the ruling applies; and

  3. any material assumptions in respect of a future event or any other matter made by the Commissioner.
12. The Commissioner may at any time withdraw a ruling by notifying the person to whom the ruling applies in writing that the ruling has been withdrawn.

13. If the Commissioner withdraws a ruling made in respect of an arrangement--
  1. the ruling shall cease to apply in relation to the arrangement if the arrangement is entered into or effected after the date of the withdrawal;

  2. the ruling shall continue to apply in relation to the arrangement for the remainder of the period specified in the ruling, if the arrangement has been entered into or effected on or before the date of the withdrawal.
14. Where--

  1. a person has obtained a ruling;

  2. the person is required to provide a return under this Ordinance; and

  3. in preparing the return the person is required to take into account the way in which a provision of this Ordinance applies to the arrangement identified in the ruling,

    the person must disclose in the return--

    1. the existence of the ruling;

    2. whether or not the person has relied on the ruling in preparing and providing the return; and

    3. any material changes to the arrangement identified in the ruling.
15. (a) If any provision of this Ordinance that is the subject of or affects a ruling is repealed, the ruling shall cease to apply to the extent of, and from the effective date of, that repeal.

(b) If any provision of this Ordinance that is the subject of a ruling is amended, or repealed in part only, so that the way in which the provision applies is altered, the ruling shall cease to apply to the extent of, and from the effective date of, the amendment or partial repeal.

PART II
Fees

1. The fees specified in respect of an application for a ruling made in accordance with Part I are as follows--

  1. application fee--

      (i)for a ruling on whether profits are to be treated as chargeable to profits tax under section 14 of this Ordinance as arising in or derived from Hong Kong
    		$30,000
      (ii) for a ruling on whether remuneration is to be treated as chargeable to salaries tax by virtue of section
    		$10,000

    9A of this Ordinance
      (iii) for any other ruling
    		$10,000

  2. where the time spent in consideration of the application, including any time spent in consulting with the applicant, exceeds the time specified in section 3 for the type of rulings to which the ruling belongs, an additional fee calculated on the basis of each hour or any part thereof spent by--

    (i)a Deputy Commissioner$1,330
    (ii)an Assistant Commissioner$1,260
    (iii)any other person appointed under this Ordinance$1,000
2. (a) In an application for a ruling made in accordance with Part I, reimbursement shall be made in respect of--

  1. any fees paid by the Commissioner to any person, as a result of the Commissioner requiring any external advice in relation to the ruling; and

  2. any costs and reasonable disbursements incurred by the Commissioner in relation to the ruling.
(b)For the purposes of this Ordinance, the reimbursement required to be made under paragraph (a) shall, in addition to the fees specified in section 1, be regarded as the fees specified in respect of an application for a ruling made in accordance with Part I.

3. The time specified for the purposes of section 1(b) is as follows--

(a) for a ruling on whether profits are to be treated as chargeable to profits tax under section 14 of this Ordinance as arising in or derived from Hong Kong23 hours

(b) for a ruling on whether remuneration is to be treated as chargeable to salaries tax by virtue of section 9A of this Ordinance11 hours
(c) for any other ruling7 hours


4. Where an application for a ruling is withdrawn, the applicant is still liable to pay all the fees specified in this Part and incurred in respect of the application before the Commissioner receives notice of the withdrawal.".

Explanatory Memorandum The purpose of this Bill is to amend the Inland Revenue Ordinance (Cap. 112) to give effect to the proposals in the 1998--99 Budget.

2. The Bill, inter alia, amends the provisions relating to profits tax in Part IV of the principal Ordinance---
  1. to introduce a concessionary tax rate at 50% of the standard rate applicable to corporations in favour of professional reinsurers in respect of profits derived from the business of reinsurance of offshore risks (clauses 5 and 14);

  2. to expand the deduction allowed in respect of expenditure on scientific research by, inter alia, redefining "scientific research" to cover activities carried on for the purposes of any feasibility study or in relation to any market, business or management research (clause 7);

  3. to extend the deduction originally allowed only in respect of expenditure on hotel refurbishment to cover capital expenditure incurred on the refurbishment on all non-domestic buildings (clause 8);

  4. to add a new head for the deduction of expenditure on a "prescribed fixed asset", which expression is defined to cover machinery and plant related to manufacturing processes as well as computer hardware and software, by providing for a 100% immediate write-off in respect of the expenditure (clause 9);

  5. to provide for the adjustment of losses between assessable profits chargeable to tax at normal and concessionary rates of tax (clause 12);

  6. to provide for reciprocal exemption of profits of ship-owners from profits tax (clause 15);

  7. to expand the scope of the exemption allowed in respect of mutual fund corporations, unit trusts and other similar collective investment schemes (clause 16);

  8. to increase the annual allowance for expenditure incurred on the construction of commercial buildings from 2% to 4%, as in the case of industrial buildings (clause 17);

  9. to provide for applications for advance rulings by the Commissioner (clauses 30 and 32);

  10. to reduce the standard rate of profits tax in respect of a corporation from 16.5% to 16% (clause 31).