COMMISSIONER OF INLAND REVENUE v. CHAN CHUN CHUEN AND ANOTHER

DCTC 2290/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO.2290 OF 2010

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BETWEEN

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DECISION

Introduction

1.  In this action, the Commissioner of Inland Revenue (“CIR”) sues against Mr Chan Chun Chuen (“1^st Defendant”) for tax due and payable under section 75 of the Inland Revenue Ordinance, Cap.112 (“the Ordinance”).   

2.  This is the CIR’s application for summary judgment against the 1^st Defendant under Order 14 of the Rules of the District Court, Cap.336H.

3.  The 2^nd Defendant was added as a party for the purpose of the CIR’s application for Mareva injunction which is of no relevance to the present Order 14 application.

4.  In the Statement of Claim, the CIR alleges that the 1^st Defendant is in default of payment of 23 property tax assessments and 2 profits tax assessments, totalling HK$347,413,481.00.  By reason of certain sums received by the CIR since the commencement of this action, the amount now in question is reduced to HK$340,852,444.60, representing the unpaid amount of the 2 profits tax assessments for the years of 2005 to 2006 and 2006 to 2007.    

5.  The profits are said to be the money received from the late Mrs. Nina Wang (“Mrs. Wang”) as the 1^st Defendant’s consultation fees on “Fung Shui” matters during the respective periods.

The Defence

6.  In his Defence and affidavit, the 1^st Defendant contended that :

(i) He did not carry on any trade or business in Hong Kong and has not declared any profits arising therefrom;

(ii) The subject 2 profits tax assessments were speculative;

(iii) The money received from Mrs. Wang was in fact a gift;

(iv) The money was paid to a BVI company instead of him;

(v) The money was subject to claims by other parties in 2 other pending legal actions[1];

(vi) The assessments were not made bona fide by the CIR;

(vii) Contrary to section 62(1) of the Ordinance, no notice of the tax assessments has been served on him; and

(viii) Section 75 of the Ordinance, in so far as to curtail or remove the court’s jurisdiction to determine his liability to pay tax, is contrary to Article 35 of the Basic Law and Articles 10 and 22 of the Hong Kong Bill of Rights Ordinance, Cap. 383.

7.  Armed with a long line of legal authorities[2], Mr Stewart Wong S.C., counsel for the CIR, submitted that items (i) to (iv) above amount to challenges on the 1^st Defendant’s liability to pay tax and therefore are expressly prohibited under section 75(4) [3] of the Ordinance.

8.  Mr Wong’s submission is not seriously opposed to by Mr Edward Chan S.C. [4], counsel for the 1^st Defendant.  In fact, Mr Chan did not put forward arguments to suggest that the 1^st Defendant has any valid defence.  On the other hand, he tried to persuade this court that there exists “some other reasons” that this matter should be allowed to go for a full trial.

9.  Mr Chan said the CIR has had full knowledge of the fact that the money was paid to a BVI company named “The Offshore Group Holdings Limited” rather than the 1^st Defendant.  Furthermore, the CIR must also know that the assessments has not been successfully brought to the notice of the 1^st Defendant as it would be impossible for the 1^st Defendant not to lodge any objection should he be made aware of the assessments.

10.  Therefore, Mr Chan submitted, the CIR has not been acting bona fide.  And hence, according to Mr Chan, this matter should be allowed to go for a full trial.

11.  Apart from this “some other reasons” ground, Mr Chan has also indicated that the 1^st Defendant reserves his right to take the points on contravention of the Basic Law and Hong Kong Bill of Rights Ordinance at a higher level of court as he is aware that there are binding authorities to this court saying that section 75 does not contravene any of the laws.

12.  Regarding the complaint on defective service, the 1^st Defendant has raised the same issue in his judicial review proceedings against the CIR on his decision to refuse to entertain the 1^st Defendant’s late lodging of objections to the tax assessments.  By consent, the parties agreed that the outcome of the judicial review proceedings on this issue binds them in the present proceedings.

13.  The issue has been dealt with by various levels of courts and in the end the Court of Final Appeal determined that the CIR has satisfied the statutory requirements on service.

14.  In his submission, Mr Chan also asked this court not to award an interest rate as high as the judgment rate (8%) should this court be minded to enter judgment against the 1^st Defendant.  He also urged this court to stay any judgment entered, pending outcome of the CIR’s review of the amount of tax due in respect of the 2006/7 assessment.

Discussion

Whether to enter judgment

15.  I have no difficulties in accepting Mr Wong’s submission that items (i) to (iv) of the 1^st Defendant’s purported defences fall within section 75(4) of the Ordinance and hence this court should not entertain such pleas.

16.  In deciding whether to enter summary judgment against the 1^st Defendant, the only remaining issue is whether there are “some other reasons” that this court ought to allow this matter to go for trial.

17.  Mr Chan submitted that the decided cases had not gone as far as saying that the court shall not entertain any defence on the ground that the assessment was not made bona fide.  However, he admitted that there is no concrete evidence to support that the CIR has acted mala fide in the present case.

18.  I am not persuaded by Mr Chan that there exists such “some other reasons”.  As admitted, no evidence is put forward before us to prove any lack of bona fide on the part of the CIR.  Even if there is such evidence, it can still lead us to nowhere without also proving that such lack of bona fide has made the assessments inaccurate or unreliable.  But this is not allowed under section 75(4). 

19.  Section 75(3) of the Ordinance 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.  The certificate has been signed and produced in the present case.

20.  In my judgment, the CIR has produced sufficient evidence to prove that the 1^st Defendant is in default of payment of the subject profits tax and the 1^st Defendant has advanced no valid defence.

21.  There is no other reason to go for trial and judgment should be entered against the 1^st Defendant. 

Interest rate

22.  Mr Chan submitted that an award of interest at judgment rate from the date of writ is unusual and against established principles.  He viewed that this court should adopt an interest rate which is sufficient in compensating the CIR for the 1^st Defendant’s delay of payment.   The basic consideration is to compensate the CIR for being kept out of the money. 

23.  Besides, Mr Chan asked this court to take into account the fact that 5% surcharge has been levied on top of the tax assessed for late payment.  He further submitted that in reality the Hong Kong Government did not have to borrow and so the assumption that the creditor would have to borrow the amount kept out does not apply and hence no interest should be awarded.  Even if interest is to be awarded, in his submission, the interest rate should not be more than the best lending rate as the Government could always borrow at or below this rate.

24.  On the other hand, Mr Wong referred to 12 previous tax cases where interest has been awarded at judgment rate counting from the date of issuance of the writ.  However, in those cases, no issue has been taken as to what the appropriate rate should be for this kind of cases.

25.  As submitted by Mr Chan, the fact that judgment rate has been consistently adopted by the court does not necessarily mean that the same rate is to be adopted in each and every tax case.  It is in the end a discretionary matter for the court to decide, taking into account the circumstances of individual cases.

26.  Mr Wong drew to my attention section 71(11) of the Ordinance which provides that for the purposes of sections 71(9)(e)(ii) and 71(10), the specified interest rate shall be the judgment rate.

27.  Although section 71 does not prescribe the applicable interest rate to be awarded under a judgment for payment of tax, it is in my view highly relevant for the court’s consideration of the appropriate interest rate, having regard to the statutory scheme on deferral of payment of tax pending objection.

28.  As submitted by Mr Wong, the statutory scheme of the Ordinance is a “pay first, argue later” one.  Tax-payers are required to pay the assessed amount of tax first notwithstanding any query or objection to the assessment that may be raised by them. 

29.  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.”

30.  In order to alleviate the strictness of the scheme, the Ordinance vested with the CIR the power to allow a “holding over” of payment, subject to conditions that may be imposed in accordance with the Ordinance.

31.  Section 71(9)(e)(ii) provides that:

“Where the Commissioner exercises his powers under the proviso to subsection (2) and a person is required to furnish a banker’s undertaking under paragraph (b) of that proviso, the undertaking shall –

(a) ---

-

-

(e) be expressed to be an undertaking to pay –

(i) an amount equal to the tax or any part thereof the payment of which is held over; and

(ii)  interest on that amount, from the date for the payment of the tax specified in the notice of assessment to the date of withdrawal or final determination of the objection or appeal, at the rate specified in subsection (11)”

32.  Section 71(10) provides that:

“Where the Commissioner makes an order under subsection (2) but does not exercise his powers under the proviso thereto, interest shall be payable on so much of the amount of the tax or any part thereof the payment of which is held over as becomes payable or is found to become payable upon the withdrawal or final determination of the objection or appeal, from the date for the payment of the tax specified in the notice of assessment or the date of the order, whichever is the later, to the date of withdrawal or final determination of the objection or appeal, at the rate specified in subsection (11).”

33.  Reading the above provisions together, if the assessed amount is not paid within the specified time on the notice of assessment, unless the tax-payer purchases a tax certificate, he is required to pay the interest accrued in the end of the appeal or objection at judgment rate, even if he has properly lodged his objection or appeal within time.

34.  If this court is to adopt an interest rate less than the judgment rate for an award of unpaid tax in favour of the CIR after litigation, a tax-payer chose not to apply for a holding over and not to pay tax in time will be in a better position than those who have properly applied for a holding over under the Ordinance, in so far as the amount of interest to be paid is concerned.   

35.  Even more absurd is that, a tax-payer who bothered not lodging any objection and refused to pay tax within time can enjoy a lower interest rate by merely sitting there and waited to be sued.

36.  In exercising its discretion to consider the appropriate interest rate for judgments on unpaid tax, the court should be slow to decide in a way that might jeopardise the existing statutory scheme for the payment of tax.

37.  There might be cases where the circumstances justify the adoption of an interest rate lower than the judgment rate.  But in my view, those cases should be the exceptions rather than the norm.

38.  For the present case, the 1^st Defendant did not properly lodge any objection against the assessments and has not been granted any “holding over” order by the CIR.  Moreover, the defences put forward are utterly unarguable.  I do not see any reason to adopt any interest rate lower than the judgment rate.

Stay of execution

39.  As above mentioned, the statutory scheme for tax payment in Hong Kong is a “pay first, argue later” one.  Any request for a stay of execution on a judgment on unpaid tax is prima facie against such policy.

40.  Mr Chan asked that the judgment be stayed pending outcome of the CIR’s review of the amount of tax due in respect of the 2006/7 assessment.  In his written submission, Mr Chan stated that “the Commissioner had agreed to review to see if the assessment is correct”. However, this is not an accurate statement in respect of the 1^st Defendant’s position as disclosed in his affidavit.  All that was said in the affidavit is that the CIR “rejected my objection to 2005/2006 profits tax but entertained my objection to the 2006/2007 profits tax” and a letter dated 20 March 2013 from the CIR to the 1^st Defendant’s solicitors was referred to.  After reading the said letter, it is apparent that even what was said in the 1^st Defendant’s affidavit is far from accurate.  In the letter, the CIR merely acknowledged that he has refused the 1^st Defendant’s application for correction under section 70A of the Ordinance and that he has received the 1^st Defendant’s objection to the said refusal. 

41.  There is nothing close to any agreement by the CIR to review any of the relevant assessments.

42.  In any event, even if there is such an agreement to review, the 1^st Defendant should still pay the assessed amount of tax first under the “pay first, argue later” scheme.

43.  Mr Chan submitted that the amount in question is a huge sum and there is always a prospect that the CIR may change his mind at some stage. With respect, this is just another invalid point.  The CIR can always refund any excessive amount to the 1^st Defendant should he be of the view that the 1^st Defendant had paid excessively.  

44.  The application for a stay of execution of the judgment is totally without merit.

Order

45.  Judgment be entered for the Plaintiff against the 1^st Defendant for the amount of HK$340,852,444.60 with interest on the sums for the periods stated in the Schedule attached to the Plaintiff’s summons at judgment rate until payment.

46.  The amounts of HK$27,078,843.08 and CAD1,025,000.00 paid into Court on 23 June 2010 and any interest thereon be paid out of Court to the Plaintiff in partial satisfaction of the judgment. 

47.  The amount of HK$199,969,200.00 paid on account by the 1^st Defendant pending the determination of the present action be paid to the Plaintiff in partial satisfaction of the judgment.

48.  I make an order nisi that costs of this action, including this application, be paid by the 1^st Defendant to the Plaintiff, to be taxed if not agreed, and there be no order as to costs as between the Plaintiff and the 2^nd Defendant.  The order nisi will become absolute if no application is made by either party within 14 days.