HEATH BRIAN ZARIN v. THE COMMISSIONER OF INLAND REVENUE

HCIA 4/2019

[2020] HKCFI 330

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2019

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J U D G M E N T

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Introduction

1.  By my Judgment dated 19 December 2019 [2019] HKCFI 3101 (“Leave Judgment”), the appellant (“Taxpayer”) was granted leave to appeal from the decision D11/19 (“Decision”) of the Inland Revenue Board of Review (“Board”) dated 23 August 2019.

2.  A full factual background is set out in the Leave Judgment, and reference can be made to that.  For the purposes of this appeal, the following matters can be rehearsed.

3.  The Taxpayer was employed by HSBC Markets (Asia) Ltd (“Company”) as Managing Director, Head of Direct Principal Investments Asia, by a letter dated 27 May 2010 and countersigned on 31 May 2010 (“Employment Contract”).  By letter dated 21 January 2013, the Company terminated the Taxpayer’s employment on the grounds of redundancy.  Amongst other things, the letter stated that the Taxpayer would assist the Company and any group company in relation to certain litigation (“Litigation”) regarding the Company’s investment in a particular company, including attendance at court or arbitration hearings outside Hong Kong.

4.  The Taxpayer did not accept those terms offered and made alternate suggestions.  There then followed negotiations between solicitors appointed on behalf of the Company and the Taxpayer.  Ultimately, by letter dated 20 June 2013 from the Company’s solicitors, signed by the Taxpayer on 21 June 2013, revised terms and conditions regarding the taxpayer’s termination of employment were agreed (“Termination Agreement”).  The terms of the Termination Agreement included that subject to the Taxpayer providing reasonable assistance, as set out in the Termination Agreement, in respect of the Litigation, he would be compensated for the time he spent, calculated at the rate of $12,692 per day, including four days of time spent between 22 January and 20 June 2013, as well as certain other expenses and reimbursements.

5.  The specific terms were in clauses 1.2 and 2.1 of the Termination Agreement. Clause 1.2 provided that:

“Subject to [the Taxpayer] providing reasonable assistance as set out in paragraph 2 below in respect of the [Litigation], the Company agrees to:

(a) compensate [the Taxpayer] for the time he spends in relation to the [Litigation] from 21 January 2013 onwards, including time spent addressing any enquiries raised by or request from the Company’s legal advisers (such as time spent (i) meeting with the Company and/or the Company’s legal advisers; (ii) drafting, reviewing and finalising witness statement; and/or (iii) commenting on any other documents) as well as time spent on travel in relation to the [Litigation], in each case as reasonably requested by the Company and/or the Company’s legal advisers. Such compensation will be calculated at the rate of HK$12,692 per day. For the purposes of this clause, the Parties agree that for the period between 22 January 2013 and the date of this agreement, [the Taxpayer] will be compensated for 4 days of his time spent on this matter, which has as requested by your client, been checked with the legal advisers ... acting on such litigation. Likewise, the Company also reserves the right to have any further time claimed by [the Taxpayer] to have been spent on the [Litigation] to be checked by the legal advisers;

(b) pay reasonable and pre-approved travel and accommodation expenses [the Taxpayer] incurs in providing the assistance in relation to the [Litigation] pursuant to HSBC Group travel policy as at 21 January 2013 (as if [the Taxpayer] was still as an employee based in Hong Kong of the title held by him as at that date, save that if [the Taxpayer] relocates outside Hong Kong, any travel shall be from his primary city of residence rather than from Hong Kong;

(c) provide your client with reasonable security support, which will be managed through the Company’s in-house security team in the relevant location of the litigation ...; and

(d) reimburse reasonable and pre-approved legal expenses for advice obtained by [the Taxpayer] directly connected to defending any retaliatory proceedings commenced against [the Taxpayer] brought by the defendant(s) in the [Litigation], subject to his co-operation with the Company’s reasonable requests in the selection of appropriate legal counsel and for prompt access to advice obtained.”

6.  Clause 2.1 was headed “Obligations after termination of employment”, which by the introduction were owed “in consideration of the Company agreeing to the matters above”.  Clause 2.1(a) provided that the Taxpayer:

“... will provide the company and the Group with such reasonable assistance in relation to any claim or threatened claim, investigation, administrative or regulatory proceeding as the Company or the Group may reasonably require in relation to any matter with which [the Taxpayer] was dealing during his employment and/or any matter which arises after the termination of [the Taxpayer’s] employment with the Company but in relation to which [the Taxpayer] has relevant knowledge.”

7.  Clauses 2.1(b)-(f) dealt in further detail with the obligations amounting to reasonable assistance, including giving evidence to various regulatory authorities and in attendance at court or arbitration hearings in relevant jurisdictions until the conclusion of all evidence required or five years from the date of the agreement, whichever is earlier; the provision of security and the ability for the Taxpayer to decide not to travel to a country if there is a credible threat to safety; the removal by the Company of legal funding if a conflict or a significant risk of conflict subsequently arises between the Company’s interests and those of the Taxpayer; reimbursement to the Company of legal fees, disbursements and other expenses if recovered by the Taxpayer; and that the Taxpayer would not, without the Company’s prior consent, enter into any compromise or settlement of any relevant litigation.

8.  The Litigation was a dispute that arose from certain Indian investments of the Company, in the management of which the Taxpayer had been involved whilst he was employed, and with respect to which he had first-hand knowledge.  The Taxpayer rendered relevant services, for which his presence was required between 29 July 2013 and 2 August 2013.  As noted in clause 1.2, the Taxpayer had already rendered assistance for 4 days in the period from the termination of his employment up to the making of the Termination Agreement.

9.  The Company later paid the Taxpayer, in Singapore, the total of $50,768 (“Sum D”) as the agreed compensation in relation to the Litigation.  Arithmetically, this amounted to 4 days’ work at the agreed daily rate.  Amongst other additional assessments to salaries tax, the Assessor raised additional assessment to salaries tax on Sum D.

10.  The Taxpayer objected to the additional assessments, but the assessment was upheld in the Determination dated 29 November 2017 made by the Deputy Commissioner of Inland Revenue.  The Taxpayer appealed against the Determination to the Board.  The Board dismissed that appeal by its Decision.

11.  Leave to appeal from the Decision had actually been sought on three grounds of proposed appeal, but I granted leave to appeal only on the third proposed ground, in relation only to Sum D.

12.  The ground of appeal or question identified was whether the Board erred in law in finding that sum was derived from the Taxpayer’s prior employment with the Company or was otherwise a reward for services rendered in employment, notwithstanding that the Taxpayer was, at the time he rendered the services for which Sum D was consideration, not employed by the Company and there was nothing in his Employment Contract requiring him to render such services.  The main point made was that where there was no employment at the time of the provision of services for which Sum D was paid, and no prior agreement in the Employment Contract that the Taxpayer should render those services, the only contractual arrangement governing the provision of services was in the Termination Agreement.

13.  I gave directions that the appeal be dealt with on paper submissions, which were respectively filed on 10, 17 and 24 January 2020.

14.  The representation on the substantive appeal was the same as that before the Board and on the application for leave.  Mr Stefano Mariani, of Deacons, appeared for the Taxpayer, and Mr Wilson Leung, of Counsel, instructed by the Department of Justice, appeared for the CIR.

The Decision

15.  A full description of the Decision can be found in the Leave Judgment.  For the purposes of this appeal, the following matters can be rehearsed.

16.  In the Decision, the Board recited the agreed facts and the documents, and a rehearsal of the evidence given by the Taxpayer at the hearing.  The Board found the Taxpayer’s evidence to be credible, and considered his testimony as part of the body of evidence as a whole.  The Board also rehearsed the submissions made on behalf of the Taxpayer by Mr Mariani, and on behalf of the CIR by Mr Leung.

17.  As to Sum D, the Board considered but rejected on the evidence the Taxpayer’s contention that he was acting as an “expert witness” or an “independent consultant”.  Instead, the Board held that both the Taxpayer and the Company had an “understanding” that he was assisting in the capacity of a former employee.  Some reliance was placed on the basis of calculation of the daily rate by reference to a specific proportion (1/260) of the Taxpayer’s final fixed pay.  Pointing out, on the basis of the authority of Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 (HL) at 388, that a payment would be taxable insofar as it is “made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future”, the Board found Sum D to be “income from employment” chargeable to salaries tax.

Applicable Principles

18.  Section 8(1)(a) of the IRO materially provides as follows:

“(1) Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources – (a) any office or employment of profit”

19.  Section 9(1)(a) of the IRA materially provides as follows:

“(1) Income from any office or employment includes – (a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others [with certain exceptions not applicable in this case]”

20.  It is common ground between Mr Mariani and Mr Leung that the Board correctly identified the legal principles to be applied.  In its discussion of the relevant law, the Board referred to the main material statutory provision in section 8(1)(a) of the IRO, relating to the chargeability to salaries tax of a sum paid to a taxpayer on or after the termination of employment, and to the judgment of the Court of Final Appeal in Fuchs v CIR (2011) 14 HKCFAR 74, in particular the summary of principles by Ribeiro PJ at §§14-22.

21.  The applicable principles can be broadly summarized, as they were by the Board, as follows:

(a)  The question involves the construction of section 8(1)(a) of the IRO, namely whether payment is income “from” any office or employment of profit.

(b)  Not every payment which an employee receives from his employer is necessarily income “from his employment”.  It is not sufficient to qualify a payment in that way simply because the employee would not have received the sum in question if he had not been an employee.

(c)  Income chargeable under section 8(1) is not confined to income earned in the course of employment, but embraces payments made “in return for acting as or being an employee”, or “as a reward for past services or as an inducement to enter into employment and provide future services”.  If a payment, viewed as a matter of substance and not merely of form and without being “blinded by some formulae which the parties may have used”, is found to be derived from the taxpayer’s employment in the sense mentioned above, it is assessable.  The vital question is what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question.  Thus, even a gratuity would still be chargeable if payment is a reward from the employer (for example for past services), even though the employer was not obliged to pay it and thus the employee has no legal entitlement to it.

(d)  A payment that is concluded as being “for something else” is not assessable, and does not come within the above test.

(e)  Insofar as it is contended that a payment was not made in return for a taxpayer acting as or being an employee, but as consideration for “abrogating” his rights under the contract of employment, the operative test must always be the test identified above, reflecting the statutory language.  The question is always: In the light of the terms on which the taxpayer was employed and the circumstances of the termination, is the sum in substance “income from employment”?  Was it paid in return for his acting as or being an employee?  Was it an entitlement earned as a result of past services or an entitlement accorded to him as an inducement to enter into the employment?  If the answer is “Yes”, the sum is taxable, and it does not matter that it might linguistically be acceptable also to refer to it as “compensation for loss of office” or something similar.  On the other hand, the amount is not taxable if on a proper analysis the answer is “No”.

(f)  The “abrogation” examples may reach the conclusion that a payment is made in consideration of an employee agreeing to surrender or forego his pre-existing contractual rights, but “abrogation of contractual rights” is not itself the test of chargeability in every termination situation.  The test is not whether the employer had acted in breach in terminating the contract.  In every case, the test remains that of the purpose of the payment at the relevant time.

(g)  Hence, in the context of payments made upon termination of employment, the same consideration applies.  What was the substance of the bargain for the payments in question?  What was the purpose of the payment?  Was it a reward for services past, present or future (in which case it was from his employment or office), or was it “for some other reason” (in which case it was not)?  If the employee was entitled to the payment under the contract of employment, then the purpose of the payment was in order for the employer to perform its obligations under the contract, and it follows that the payment was income “from” the employment.  But if the employee was not so entitled, then one must go on to consider the purpose for which the employer made that payment.

22.  Reference was also made to the decision of the Court of Appeal in Poon Cho-ming John v CIR [2018] 5 HKC 233.  Since the Decision, that case has been heard on final appeal – see CIR v Poon Cho-ming John [2019] HKCFA 38 – and the CFA has confirmed that the applicable principles are those set out in Fuchs, and that the Court of Appeal had correctly applied those principles on the particular facts of the Poon case.

23.  Mr Mariani also relied on the passage in Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 (HL) at 391-392, where Lord Radcliffe stated:

“The test to be applied is ... contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise “from” the office or employment. ... I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.”

24.  Further, reliance was placed on the passage in Shilton v Wilmshurst [1991] 1 AC 684 at 689, where Lord Templeman stated:

“[the charge to salaries tax] must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that in an emolument “from employment” means an emolument “from being or becoming an employee”. ... If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received “from employment”.”

25.  Each case ultimately involves applying the statutory language to the facts.  There may be different phrases which have been used by judges in different cases to describe where the source of payment satisfies the statutory language that it is “from” employment, and they may provide some useful guidance, but ultimately it is the statutory words which apply.  It is necessary to look at the substance, not the form nor the formulae or labels which might have been adopted by the parties.  Entitlement to a payment under a contract of employment would indicate the payment is from employment, but even the absence of such an entitlement then requires looking further at the purpose of the payment.  At bottom, the question remains whether the income is “from” the taxpayer’s “employment”.

26.  Chargeability under section 8(1)(a) is not confined to sums earned or received during the period of the taxpayer’s formal employment: see Fuchs at §17 and Shilton at 698 (quoted above).  Hence, the fact that a service was rendered after the formal end of the taxpayer’s employment does not necessarily preclude a finding that the payment for that service was received “from” his employment.

27.  I accept Mr Leung’s submission that this makes commercial sense.  As he put it, the state of “employment” is not an all-or-nothing proposition.  Mr Mariani described that as a “startling submission”, because the existence of an employment relationship is a binary proposition; either there is a contractual relationship of master and servant, or there is not.  As he said, there is no such thing as “semi-employment”.  But I think the point made by Mr Leung is a slightly different one; he recognises that the strict employment might have ceased, but identifies circumstances in which a (now former) employee might derive income which can be said to be “from” his employment.  There are frequently obligations which arise post-termination with which the employer and/or the employee must comply (though such obligations are rarely separately compensated).  Further, it is not uncommon for an ex-employee to be requested to return to perform some follow-up work (and that work might be separately compensated).  But again, it seems to me that each case must be considered on its particular facts, focusing on the ultimate statutory question.

28.  It is also important that, in an appeal before the Board, the taxpayer bears the burden of proof throughout, and the CIR does not have to prove anything.  It is possible for an appeal to be disposed of simply on the basis of burden of proof, if the taxpayer fails to discharge his burden.

29.  Hence, if a taxpayer wishes to argue (as the Taxpayer did before the Board) that a sum is not chargeable to tax under section 8(1)(a) of the IRO, he bears the burden of explaining and proving to the Board that the sum does not fall within the relevant formula as arising “from” employment, and that it was instead paid for “something else”.  As a result, in this particular case, the Taxpayer bore the burden of proving to the Board that the Sum D assessed as chargeable to tax was not “from” his employment.

30.  As to challenges made to findings of fact, said to amount to an error of law, guidance can be found in, for example, Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 at §§31-34, and §37.  Such challenges can only be made if (a) the decision was based on a finding of fact or inference from the facts which was perverse or irrational; (b) there was no evidence to support the decision; (c) the decision was made by reference to irrelevant factors; or (d) the decision was made without regard to relevant factors.  The appellant court should not disturb the Board’s conclusion unless it regards that conclusion as contrary to the true and only reasonable one.

31.  This reflects that appellate courts are reluctant to interfere with findings at first instance, because Judges and tribunals can reasonably differ as to on what side of the line any particular case falls, particularly where there is the assessment of numerous facts.

The Appeal – Sum D

32.  Some of the arguments relating to Sum D were of course canvassed on the application for leave to appeal, and are considered by me in the Leave Judgment.  Nevertheless, in their written submissions for the appeal, both Mr Mariani and Mr Leung have traversed the ground on a wider basis, even if some good part of it re-treads that traversed on the application for leave.

33.  Mr Mariani relied on the following facts to underpin his argument that Sum D was not income from employment within the meaning of section 8(1)(a) of the IRO:

(a)  The Taxpayer was not employed by the Company at the time he rendered the services in consideration of which the Company paid him Sum D, and neither the CIR nor the Board suggested that he was employed (or re-employed) at that time.

(b)  The Taxpayer was not obliged under the Employment Contract to render any such services following the termination of his employment.

(c)  The Taxpayer’s contractual obligation to assist the Company with respect to the Litigation arose from clause 1.2 of the Termination Agreement.

(d)  Sum D was computed on the per diem basis by reference to the Taxpayer’s final salary as an employee of the Company.

34.  In his submissions on the application for leave to appeal, Mr Mariani described the Board’s reasoning as “with respect, incoherent”.  In his submissions on appeal, Mr Mariani described the Board’s analysis as “logically untenable”.  Even if there was evidence (which Mr Mariani does not accept) to support a finding of the “understanding” between the Taxpayer and HSBC that the former would help the latter in the Litigation, Mr Mariani said there is no provision in the IRO to charge to salaries tax any sums paid by a former employer to a former employee with respect to services not contemplated in the former employee’s contract of employment and rendered after the relevant employment had ceased.

35.  In this case, Mr Mariani submitted, Sum D could not have been a payment for past services because the obligation to pay it came into being months after the termination of the Employment Contract, and arose separately only by virtue of the Termination Agreement.  This was an entirely fresh bargain relating to services that the Taxpayer was under no obligation to render to the Company under the Employment Contract, and absent the agreement to do so and to be paid for it under the Termination Agreement.

36.  In those circumstances, Mr Mariani submitted, such sums simply could not be “from” employment, and the Board’s reliance on the Hochstrasser case was misplaced.  The Board’s conclusion was a non sequitur legally speaking.  Mr Mariani submitted that there is a strict causal test: either the purpose of the payment is to induce a person into employment, or reward that person’s services in employment, or it is not.  If it is not, the sum in question was paid for “something else” and is on that footing not taxable under section 8(1).  Here, the proximate or effective cause of the payment of Sum D was the Termination Agreement.

37.  As regards the Board’s conclusion that the evidence did not show that the Taxpayer was acting as an ‘expert witness’ or ‘independent consultant’, and by implication must necessarily have been acting as an employee, Mr Mariani described that as an “irrelevant observation”.  His submission amounted to saying that the Taxpayer did not have to show on the balance of probabilities that he was an ‘expert’ or ‘consultant’ in any strict sense of those terms (neither of which should be taken as terms of art, but merely convenient ways of describing a contractual relationship with respect to the Litigation falling short of employment); the Taxpayer was merely required to show that Sum D was from “something else”, other than from his employment.  Mr Mariani warned against offending the axiom of revenue law that no tax may be charged by default; either income or gains correspond to the definition of taxable income or gains in a taxing schedule, or they do not.

38.  In response, Mr Leung submitted that the fact that service was rendered after the formal end of the Taxpayer’s employment does not preclude the Board from finding that payment received was “from” his employment, as section 8(1) is not limited or confined to income earned in the course of employment.  He submits that it would be incorrect single-mindedly to focus on whether the taxpayer had any contractual “obligation” to perform the task for which he was paid.  Nor is there anything in the case law, such as Fuchs, which says that a payment can only be taxable if it is made in relation to a task stipulated under the employment contract.  That, said Mr Leung, is not the statutory test.

39.  Further, in recognition that Sum D was paid pursuant to the Termination Agreement, Mr Leung said that it is entirely possible for a sum to be paid pursuant to a termination or settlement agreement, and yet still be “from” the taxpayer’s employment.  From the Leave Decision, it can be seen that I accept that submission of principle. The application of principle will, of course, depend on the particular facts of the case.

40.  Mr Leung’s primary point – and by reference to the burden borne by the Taxpayer before the Board – was that it was the Taxpayer’s case before the Board that he was acting as an ‘expert witness’ or ‘independent consultant’ in providing assistance in the Litigation, but the Board rejected that contention after examining all the facts.  Once the Board had come to that decision, said Mr Leung, it followed that the Taxpayer had failed to discharge his burden of proof in relation to Sum D.

41.  But I agree with Mr Mariani that, notwithstanding where the burden lay before the Board, the question as to the source of income is not a matter which ought to be decided by default.  Indeed, if one focuses merely on whether the Taxpayer can be regarded as an ‘expert witness’ or ‘independent consultant’ in his assistance in the Litigation, it is easy to lose sight of the real question. The only burden which the Taxpayer faced was to identify that Sum D was not “from” his prior employment so that it was “from something else”.  Though in making the relevant assessment it can be helpful to posit and consider from what “something else” the income might have derived, I do not think it was necessary to have identified or to have proved in precise terms the “something else” so as to have satisfied the burden that it was not “from” employment.

42.  In this context, Mr Leung acknowledged as a matter of fairness that there was some evidence which weighed in favour of the Taxpayer’s case.  He noted that the Board quoted from clause 2.1 of the Termination Agreement, and acknowledged that that clause could be argued in support of the Taxpayer’s case as constituting a separate contract for services, discrete and wholly self-contained on the terms of the Termination Agreement, for him to give evidence before an arbitral tribunal after the fashion of an expert witness.  (I have already quoted above Clause 2.1(a) of the Termination Agreement.)

43.  But Mr Leung also pointed to what he said is the abundance of evidence going the other way, namely that the Taxpayer was assisting in the Litigation qua ex-employee of the Company, and not under an entirely fresh bargain relating to services.  Mr Leung relies on the evidence in even the Taxpayer’s first letter to the Company dated 28 January 2013, in which he acknowledged being willing to provide reasonable assistance in relation to legal proceedings (including the Litigation) and acknowledged that it was “customary” for an (ex) employee to do so.  This, said Mr Leung, evidences that the Taxpayer was assisting pursuant to what he regarded and acknowledged as “custom”, and not on the contingent basis of a further agreement being signed or a fee being paid.

44.  But, to my mind, that the Taxpayer was assisting in the litigation qua ex-employee is not inconsistent with his doing so under an entirely fresh bargain.  Of itself, I do not think it answers the underlying statutory question.  One cannot overlook the reality that the Taxpayer was only capable of assisting the Company with the Litigation precisely because he was a former employee, who had been involved in the matters out of which the Litigation arose.  Further, I think there is a danger of reading too much into the early correspondence, not least because the various negotiations continued for some time before the Termination Agreement was made.  Once it is accepted (as I do accept) that Sum D was paid pursuant to the Termination Agreement, ordinary principles of contractual construction would point against reviewing what was intended by the terms of that agreement, using reference to earlier negotiations.  As I noted in the Leave Judgment, whilst it is correct that the Taxpayer’s own letter dated 28 January 2013 acknowledged that after termination he was “willing to provide reasonable assistance” in relation to legal proceedings, that was in circumstances where he had no obligation to do so under the Employment Contract, and it is unlikely that someone of his seniority would do so without monetary compensation.  Even a general willingness to assist might be favourably or unfavourably influenced by other factors, such as (in this case) whether satisfactory arrangements might be made as to bonus payments and vesting of shares.  In any event, even the correct contractual construction would not of itself necessarily answer the underlying statutory question.

45.  Nor do I accept Mr Leung’s submission that the Board’s finding, as a primary fact, that discussions between the Company and the Taxpayer never progressed to the stage where litigation was in prospect between them means that their relations did not deteriorate to such a state that the Taxpayer would have resiled from his acknowledged existing customary duties unless compelled to perform those duties by a new, fee earning contract.  Quite simply, the Termination Agreement was indeed a new, fee-earning contract, at least as regards what became Sum D.  It did not require there to have been any greater breakdown in relations than that the material employment relationship had already ceased, and the Termination Agreement was to agree the terms of cessation and consequential matters.  But the material question remains whether the fee comprising Sum D paid under that contract was income “from” the Taxpayer’s “employment”.

46.  There is more in Mr Leung’s point relating to the agreed per diem rate.  He said this can suggest that the Taxpayer was providing assistance in a way comparable with the situation where an employee’s period of employment is agreed to end on a certain date, but at the last minute the employee is asked to stay on for a few more days for some reason.  As Mr Leung said, in that situation, it would be natural for the employee to be paid pro rata on his old salary, and that (although not conclusive) it would be open to a board of review to rely on that fact to hold that the payment was “from” his “employment”, being referable to his former contract of service as opposed to a new contract for services.  But, I think in such a situation it probably would be conclusive, because that situation likely describes a new or extended agreed end date for the employment, that is the continuation of employment rather than a new arrangement after the cessation of employment.

47.  There is also more in Mr Leung’s point that the Termination Agreement, rather than mentioning acting as a ‘consultant’ or ‘expert’, simply stipulates the Taxpayer’s obligation to assist in litigation, limited to matters with which the Taxpayer was dealing during his employment.  It was not some sort of ‘at large’, general or fresh appointment as a consultant or expert witness.  Further, as Sum D is arithmetically payment for four days’ work at the agreed daily rate, it appears to have been paid in respect of services already rendered before the making of the Termination Agreement.  This can be seen from clause 1.2(a), which I have quoted above.  If so, then Mr Leung is correct that the Taxpayer had already, voluntarily, performed those duties even before he signed the Termination Agreement.  That may give greater force to the idea that, though payment only became due under the Termination Agreement, the work already performed arose “from” the employment. On the other hand, as Mr Mariani pointed out, the payment of any sum under clause 1.2 was conditional on providing the reasonable assistance set out in clause 2, that is contingent on his performance of the Termination Agreement.

48.  I have quoted clause 2.1, under which the Taxpayer was to provide reasonable assistance in relation to any claim or threatened claim, investigation, administrative or regulatory proceedings as the Company or the Group may reasonably require in relation to any matter with which the Taxpayer was dealing during his employment and/or any matter which arises after the termination of the Taxpayer’s employment with the Company but in relation to which the Taxpayer has relevant knowledge.

49.  I think that clause identifies that the source of the payment of Sum D was the Termination Agreement.  On that basis, Mr Mariani submitted that, whilst acknowledging the Taxpayer was useful because he had previously been employed, and the Company wished to maintain the benefit of knowledge obtained during employment, the money was actually not paid for providing services which can be said to have come themselves “from” the employment.  The Taxpayer had no compulsion to assist in the way he agreed to, and he agreed to as part of – and only as part of – the Termination Agreement.

50.  I agree.  Further, that the agreement specifically identified that the Taxpayer would provide reasonable assistance even on matters arising after the termination of his employment, and that he might be required to do so for as long as 5 years after the date of the Termination Agreement, itself made nearly 6 months after the end of the employment, seems to me to take the terms of that agreement and the ensuing payment to be made away “from” the employment.  The Termination Agreement also specifically envisaged the possibility of a conflict (or substantial risk of conflict) arising between the Company’s interests and those of the Taxpayer. That point also seems to me to point away from the services as being provided and paid for “from” the former employment.

51.  I would be loathe to construe the terms of the Termination Agreement so that some sums as might be paid to the Taxpayer for his assistance in the Litigation, or in other litigation, might be thought to be “from” his employment, whilst other sums might not.  It seems to me that the terms should be construed so as to cater for the various possibilities which might be envisaged.  Sum D was potentially only a small part of a larger sum which might have been paid for perhaps significant assistance provided on many issues in many places over a number of years.  I do not think the total of such a larger sum would reasonably regarded as arising “from” employment, and I do not think some small element of it should be carved out on a different basis.

52.  I also have in mind that had the services been provided over more days, or over a longer period, on the facts they would almost certainly have been taxable as income in Singapore, or potentially as income chargeable to tax under section 14 of the IRO in Hong Kong.  Those points also seem to me to support the conclusion that Sum D is not properly chargeable to tax under section 8(1)(a).  I do not think the fact that the Taxpayer accepted that he had not paid any tax on Sum D in any jurisdiction somehow makes it chargeable to tax under section 8(1)(a), unless it is otherwise properly chargeable under that provision.

53.  It seems to me that the facts on which the Board placed reliance, and the facts as a whole, identify on the test to be applied that Sum D was not income “from” employment.  But, Mr Leung submitted that the question is not whether I would come to the same conclusion as the Board.  Rather, he said, the question is whether there was sufficient evidence upon which the Board was entitled to reach its conclusion.  On the various matters which he canvassed, and on which I have commented above, Mr Leung said that the Board was clearly entitled to have reached its conclusion, and that it is not one with which the Court should interfere.

54.  Ultimately, said Mr Leung, the question whether a payment is “from” the taxpayer’s “employment” is a question of fact, or at least a question of mixed fact and law (a ‘multi-factorial’ assessment), so that the principles set out in paragraphs 30 and 31 above are applicable.  Of course, Mr Mariani was also correct when he noted that I must have granted leave to appeal on the basis that the ground of appeal engaged a question of law.

55.  Focusing on the statutory test, it is helpful to step back and look at the matter overall.  As Fuchs states, the vital questions remain: what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question, and what was the purpose of the payment?  In my view, the answers to those questions and the statutory test identify that Sum D was not a sum of money received by the Taxpayer “from” his “employment”.

56.  In the end, I think it is open to me to disturb the Board’s conclusion, because I regard the Board’s conclusion as contrary to the true and only reasonable conclusion to make.

Result

57.  I allow the appeal on the ground of appeal relating to Sum D.

Costs

58.  In recognition that I refused leave to appeal on the more financially substantial grounds and only granted leave to appeal on one of relative inconsequence financially, I ordered that the CIR is entitled to 75% of the CIR’s costs of the leave application in any event, to be taxed if not agreed.  The other costs were to be costs in the appeal.

59.  As I have now allowed the appeal, it seems to me that those costs and the costs of the appeal should follow the event and be payable to the Taxpayer by the CIR, to be taxed if not agreed.

60.  In practical terms, there may need to be some accounting set-off in relation to these matters.  It is also to be hoped that matters of costs could be agreed between the parties without the trouble and expense and time for any assessment.