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Jul 2007
This case concerns an appeal by the taxpayer against the Deputy CIR's determination that disallows his time apportionment claim of employment income in the year of assessment 2000/01.
The facts
- The taxpayer started a new employment in January 2001.
- The taxpayer visited Country H for interview with Company C; the employment contract was negotiated and concluded during his visit to Country H; and the formal employment contract, together with the non-compete and non-disclosure agreements, are all enforceable in Country H.
- The taxpayer's responsibilities are to oversee the finance and operational activities in Asia Pacific. He carries out his responsibilities through emails, phone calls and extensive travel.
- As the taxpayer is a Hong Kong resident, his office is located in Hong Kong.
- The taxpayer's salary is paid to his bank account in Hong Kong through a Hong Kong company, Company E. Company E charges back all the employment costs of the taxpayer to Company C.
The taxpayer's case
The taxpayer claimed that his employment satisfies all the three criteria for time apportionment claim i.e. (1) the employment was negotiated, entered into and enforceable in Country H; (2) the place of residence of his employer is Country H; and (3) Company C in Country H bears all his employment costs. Therefore, his employment would be a non-Hong Kong employment.
The IRD's case
The IRD argued that the taxpayer's employment is a Hong Kong employment based on the following:
- The taxpayer attended several video conferences with Company C in the office of Company E in Hong Kong before his trip to Country H and the employment offer letter was subsequently signed by the taxpayer in Hong Kong.
- The employment offer letter was on a plain paper and the non-compete and non-disclosure agreements were not signed by Company C's representative.
- The taxpayer is paid by Company E in Hong Kong and there is no source document showing that the amounts were charged back to Company C.
- The taxpayer was reported as an employee of Company E on the employer's return filed by the company in Hong Kong.
- The taxpayer was enrolled as employee under the Mandatory Provident Fund Scheme of Company E in Hong Kong.
- The taxpayer's business cards also show him as Financial Director of Company E.
- The taxpayer failed to produce proof of tax payments in Country H in relation to his employment with Company C.
The Board's decision
The Board allowed the taxpayer's appeal and held that his employment is with a non-Hong Kong source. Below is a summary of the Board's findings on the three key factors for determining the source of an employment:
Who was the employer?
- The IRD focused mainly on the superficial appearance of the taxpayer's employment and failed to examine the real locus of it i.e. what exactly the taxpayer was employed to do? The Board was satisfied from the evidence produced that the taxpayer's job duties extend beyond the territorial limit of Hong Kong to the entire Asian region.
- The Board was also convinced that the taxpayer was in fact employed by Company C in Country H as the employment was offered to the taxpayer after his interview in Country H.
- The fact that the two agreements were not signed by Company C's representative alone could not constitute evidence that the taxpayer was not employed by Company C.
- Whether foreign income tax has been paid is never a test to the chargeability to Hong Kong salaries tax.
Where the employment contract was negotiated, concluded and enforceable?
- Although there were video conferences held in Hong Kong, the employment was in fact offered to the taxpayer in Country H.
- Although the employment offer letter was accepted by the taxpayer in Hong Kong, the Board accepted that the employment was in fact agreed upon verbally in Country H at the close of the interview, as indicated in an email from Company C produced by the taxpayer.
- The terms of the two agreements indicate that they are governed by the laws of Country H so the Board is satisfied that the employment is also enforceable under the laws of Country H.
Who bore the taxpayer's remuneration?
- The Board considered that the transaction report, reconciliation report, emails, debit notes and ledger accounts of Company C, etc. (rather than source documents) produced by the taxpayer coupled with the sworn testimony are sufficient to establish the fact of charging back and that the taxpayer's remuneration was ultimately borne and paid by Company C.
In addition to the three questions above, the Board also considered an additional question arising from BOR Case No. 40/90 i.e. whether the control exercised over the taxpayer's work is relevant in determining the locality of the employment? The Board, quoting the decision in that case, is of the view that who can terminate the taxpayer services and at where, instead of to whom the taxpayer reports in practice, is more relevant in determining the place of employment.
While the IRD refused to accept the testimonies given by the three executives of Company C saying that they carried no weight for various reasons (e.g. not substantiated by corroborative evidence), the Board found all these testimonies as sufficient evidence, each in corroboration with the others, showing that the taxpayer was in fact hired by Company C.
Comments
This case is among the few where the taxpayer succeeded in its battle with the IRD on dispute over the source of employment. The recent hot debate on this has been whether one should stick to the "three-factor test" or adopt the "totality of facts test", both of which were established in the CIR v Goepfert case. In the present case, it seems that the Board has focused on the three key factors and looked into substance rather than form. Not surprisingly, the Board has closely scrutinized all facts surrounding the employment and its termination and put much weight on documentary evidence produced such as emails from Company C, the terms in the agreements and report / ledgers in relation to the recharge, etc. in determining the source. After all, the question on source of employment is highly fact-specific and any allegation that an employment is with a non-Hong Kong source has to be supported by sustainable facts in both form and substance. |
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