Provisional Legislative Council

PLC Paper No. CB(2)1305

Paper for the House Committee Meeting
on 27 March 1998

Report of the Bills Committee on
Stamp Duty (Amendment) (No. 2) Bill 1998

Purpose

1. This paper reports on the deliberations of the Bills Committee on Stamp Duty (Amendment) (No. 2) Bill 1998.

The Bill

2. The Bill seeks to give effect to the proposals in the 1998-99 Budget and to introduce other proposals to streamline the operation of the stamp duty scheme.

The Bills Committee

3. At the House Committee meeting on 6 March 1998, a Bills Committee to study the Bill was formed. Hon Eric LI Ka-cheung was elected Chairman. The membership list of the Bills Committee is in Appendix I.

4. The Bills Committee has held two meetings with the Administration and considered written submissions from the Hong Kong Securities Clearing Company Ltd., Stock Exchange of Hong Kong, Hong Kong Securities Professionals Association and Hong Kong Stockbrokers Association Ltd.

Deliberations of the Bills Committee

Budget-related proposals (clauses 6(a) and 12)

5. The Financial Secretary made the following proposals in the 1998-99 Budget -

1. to replace the current stamp duty remission for transactions in regional derivative options and convertible bonds or notes with a specific exemption, so as to simplify the process for granting the concession; and

2. to extend this exemption to cover transactions in regional derivative warrants which have no more than 40% weighting by value in Hong Kong stock.

6. Pointing out that derivative trading might have exacerbated the financial turmoil that occurred last year and pending the release of a report on the review on the subject by the Administration, a few members have asked whether it is opportune to implement the proposals. The Hong Kong Stockbrokers Association holds similar views.

7. Members note that while the Hong Kong Securities Professionals Association supports the proposals and the efforts of the Administration in promoting the development of the derivatives market, it considers that the proposed stamp duty concession should also be extended to cover other products. It also calls for the Administration to reinforce its monitoring and regulation of derivatives. The Stock Exchange of Hong Kong supports the proposals. While it recognises that there is no hard and fast rules for determining the Hong Kong stock value of the regional stocks under which stamp duty should be exempted, it accepts that the 40% threshold proposed is reasonable because it is in line with the proportion of a number of regional indices created by market practitioners for the bench marking of regional markets which has a Hong Kong weighting of about 30-40%.

8. The Administration has explained that transactions in regional derivative options and convertible bonds or notes have been exempted in practice from stamp duty since April 1997. The Bill merely provides for a specific exemption in place of the less direct remission arrangements previously made under the Stamp Duty Ordinance (the Ordinance). The Administration has pointed out that apart from facilitating the development of new products, the proposals will also improve Hong Kong’s competitiveness over other international or regional exchanges which offer similar products and maintain Hong Kong’s position as a world class international financial market. As regards the proposal to extend the exemption to transactions in regional derivative warrants having no more than 40% weighting by value in Hong Kong stock, the Administration advises that it has taken into account the view of the Stock Exchange of Hong Kong in this respect and the fact that 40% appears to strike the right balance. While the general issue of derivative warrants would be addressed in the review report on the October 1997 financial turmoil, the Administration is of the view that the report would have no direct bearing on the proposals.

9. In further response to members, the Administration has agreed to give an undertaking on the following when the Bill resumes Second Reading debate on 7-8 April 1998 -

1. to continue the monitoring of the development of the regional derivative market;

2. to note members’ view that the Administration should include industry associations in future consultation relating to market development; and

3. to brief the first Legislative Council on the development of the regional derivative market after the introduction of the proposals in the the Bill.

Non-budgetary proposals

10. The Bill also contains proposals which seek to -

1. make specific provisions to allow for postponement in payment of stamp duty in appropriate circumstances pending an appeal to court on the stamp duty assessment;

2. plug potential loophole in respect of duty evasion; and

3. make other technical changes to improve the operation of the stamp duty scheme.

11. In response to members’ concern that neither the Budget Speech has made reference to, nor the Provisional Legislative Council Brief issued by the Administration has provided any background information on, the non-budgetary proposals, the Administration has explained in detail the effect of these proposals. The Administration’s explanations and the deliberations of the Bills Committee are set out in paragraphs 12 - 22.

Postponement in payment of stamp duty pending an appeal to court on the stamp duty assessment (clause 3)

12. Under clause 3 of the Bill, a person who is liable for stamp duty payment may appeal to the court against the stamp duty assessment. The Bills Committee notes that the Collector of Stamp Revenue may, with security given for the stamp duty payment, allow the payment to be postponed. The court may, provided it is satisfied that it would impose hardship on the person if he is required to pay the stamp duty, allow the payment to be postponed, with or without security given. The court also has the authority to extend the current statutory period of appeal from one month from the date on which the stamp duty assessment is made to such longer period as it may consider appropriate, if it is satisfied that the person subject to stamp duty payment is prevented by illness or absence from Hong Kong or other reasonable cause from bringing an appeal to court within the one-month statutory period.

13. In response to a member, the Administration has advised that similar provisions are included in the Estate Duty Ordinance and the Inland Revenue Ordinance. The proposed amendments are consistent with the human rights provisions in the Basic Law. As the number of cases is unlikely to be large, it is not expected that the proposed amendments will have any significant implication on the workload of the court.

14. In response to the Bills Committee concerning the giving of security for the payment of stamp duty, the Administration has agreed to introduce an amendment to the proposed new section 14(1B)(b) to replace "then been due for payment" with "to be paid before the appeal can be brought under subsection (1)" to improve the clarity of the provision.

Plugging potential loophole in respect of duty evasion (clause 6(b))

15. The Administration has advised that in the past, most Hong Kong stocks were registered in the names of the investors. A transfer of shares from one party to another, otherwise than by way of sale and purchase, has to be effectuated by executing an instrument of transfer which has to be stamped under head 2(3) in the First Schedule to the Ordinance. With the establishment of the Central Clearing And Settlement System (CCASS) operated by the Hong Kong Securities Clearing Co. Ltd. (HKSCC), most Hong Kong stocks are placed in the central depository, i.e. the CCASS, and are registered in the name of a common nominee, i.e., the HKSCC Nominees Ltd. Instead of holding the stocks in the name of the investors, the stocks are kept in the investors accounts held with the brokers, who in turn keep the stocks in the depository account held with the CCASS. Similar situation also applies to investors who keep their stocks in custodian banks or other investment institutions.

16. Under the above situation, a transfer of stocks or interest in stocks is no longer necessary to be effectuated by executing an instrument of transfer. A transfer can be simply effected by an entry to be made in the books of accounts of the central depository or the brokers or the custodians. This new development makes the stamp duty charging arrangement under head 2(3) in the First Schedule to the Ordinance less effective. Voluntary dispositions of stocks or some hidden sales and purchases of stocks can be effected through such means of transfer without payment of stamp duty.

17. Members accept the Administration’s advice that while there is no indication at present that this arrangement has been widely abused for the evasion of stamp duty payment, it is necessary to plug this potential loophole. The Bill proposes that, in respect of transfer of beneficial interest in Hong Kong stocks -

1. which is not effectuated by way of an instrument of transfer, but through electronic means or by means of an entry in any recording or bookkeeping system or otherwise; and

2. which is effectuated under or through a recognized clearing house or any other person or organisation; the transaction shall be deemed to be a sale and purchase of Hong Kong stock and stamp duty is thus payable. The person maintaining the record of the transaction (with the exception of the HKSCC Ltd. which is a recognized clearing house) shall be deemed to be the agent effecting the sale and purchase and is thus obliged to comply with the requirements in respect of execution of contract notes and payment of stamp duty.

18. The Administration has advised that, in response to views of the industry, it will move amendments to clause 6(b) of the Bill to make clear that the provision shall not apply to transactions which would be exempted from stamp duty under section 27(5) of the Ordinance.

Technical changes to improve the operation of the Ordinance (clauses 6(c) -(e))

19. The Administration has advised that the HKSCC Ltd. is planning to establish an automated and mechanized stock borrowing and lending system with similar clearing facilities as that of the CCASS for the sale and purchase of stocks. Under the proposed system, each matched stock loan transaction in the CCASS between a borrower and a lender of stock will be reported to the Stock Exchange and will be novated in the CCASS and become two market contracts, one between the HKSCC Ltd. and the stock lender and the other between the HKSCC Ltd. and the stock borrower. The system is likely to be put in place in early 1999.

20. The Administration has pointed out that stock borrowing and lending transactions are relieved from the charge of stamp duty liability under section 19(11) of the Ordinance. However, legal advice has confirmed that transactions through the planned system would not qualify for the stamp duty relief because the Rules of the HKSCC Ltd. governing the transactions under the proposed system cannot be construed as a stock borrowing and lending agreement within the statutory meaning between the borrower and lender. Moreover, as the matched contract for borrowing and lending of stocks in the CCASS is immediately novated by two market contracts, the stock return requirement for such a novated contract cannot be fulfilled.

21. To address this problem, the Administration proposes to expand the scope of the defined meanings of "stock borrowing", "stock borrowing and lending agreement" and "stock return" in order to allow stock borrowing and lending transactions on the proposed system to benefit from the stamp duty relief. The Bills Committee notes that this proposal has the support of the HKSCC Ltd. and the Hong Kong Stockbrokers Association Ltd.

Other miscellaneous amendments (clauses 2,4,5,7,9 and 11)

22. Members note that the Administration has taken the opportunity of this exercise to make other miscellaneous amendments to improve the operation of the Ordinance -

1. to strengthen the requirement that all facts and circumstances affecting the liability in respect of an instrument subjects to stamp duty have to be set forth fully and truly in the instrument;

2. to enable an instrument, which is the subject of an appeal and for which assessed stamp duty has not been paid, to be endorsed so that it can be admissible in court or otherwise registered or acted upon; and

3. to provide that any fraction of $1 shall be reckoned as $1 under the Ordinance.

The Administration has assured members that these are minor amendments with no significant policy implications.

Committee stage amendments (CSAs)

23. Other than the CSAs highlighted in the report, the Administration will also move other related technical and consequential amendments. A full set of the CSAs agreed by the Bills Committee and to be moved by the Administration is in Appendix II.

Recommendation

24. The Bills Committee recommends that, subject to the CSAs to be moved by the Administration, the Second Reading debate on the Bill be resumed at the Council meeting on 7-8 April 1998.

Advice sought

25. Members are invited to support the recommendation of the Bills Committee in paragraph 24 above.

Provisional Legislative Council Secretariat
25 March 1998

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Appendix I

Bills Committee on
Stamp Duty (Amendment) (No. 2) Bill 1998