COMMISSIONER OF INLAND REVENUE v. MR. GEORGE ANDREW GOEPFERT

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Inland Revenue Appeal 5 of 1986

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BETWEEN

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JUDGMENT

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1. The respondent who is an American citizen, was assessed by the Commissioner of Inland Revenue ("the Commissioner") for salaries tax in respect of his entire salary for the period of twelve months ended 31st March 1982. During that period he had rendered 41 days of his services outside Hong Kong and, apart from some overseas leave, had rendered the remainder of his services in Hong Kong. He successfully appealed against that assessment to the Board of Revenue ("the Board") and the Commissioner now appeals by way of case stated under section 69 of the Inland Revenue Ordinance Cap. 112 ("the Ordinance") against the Board's decision.

2. Mr. Feenstra, Senior Crown Counsel, who argued this appeal on behalf of the Commissioner, readily conceded at the outset that he was bound by the Board's findings of fact. He submitted, however, that they had erred in law.

3. Mr. Flesch, who represented the respondent, claimed the case was argued by the Commissioner before the Board on an entirely different basis from that on which Mr. Feenstra argued it before this court. Although Mr. Feenstra, who did not appear at the Board hearing, was reluctant to say positively whether the matter had been approached differently by the Commissioner on that occasion, he conceded that such might well have been so.

4. Notwithstanding that the Board have not set out in the case stated the argument advanced on behalf of the Commissioner, it is tolerably clear from an examination of the entire case that Mr. Flesch is right. It appears that, having unsuccessfully fought the case on a factual basis before the Board, the Commissioner now seeks to succeed on a matter of statutory interpretation.

5. It hardly needs stating that there is nothing to prevent the Commissioner from adopting this approach. The point Mr. Flesch sought to make, however, is that the legal hasis on which the Commissioner proceeded before the Board was correct and that it reflects the approach he was hitherto adopted in the assessment of salaries tax in cases similar to that of the respondent.

6. On the evidence before them the Board made a number of findings of fact which I summarise for convenience as follows :-

7. In the light of these findings the Board found as a matter of fact that the source of the respondent's income was New York, not Hong Kong.

8. The questions of law posed for this court on the stated case are :-

9. The relevant part of section 8 of the Ordinance under which the charge for salaries tax arises is as follows :-

10. I interpolate here that both parties are agreed that there is no distinction between the words "arising in" and the words "derived from" in section 8(1).

11. While accepting that there can be no dispute that the respondent is liable to pay salaries tax on that part of his income derived from services in Hong Kong, Mr. Flesch contended that, on a proper interpretation of section 8, the respondent is not liable for tax on that portion of his salary attributable to the services he rendered outside Hong Kong. I shall turn to a fuller consideration of Mr. Flesch's argument in due course, but since this is the Commissioner's appeal, I propose first to outline the submissions made on his behalf.

12. I think that they can fairly be summarised as follows :-

13. In short, there is a double test under section 8(1). First, if the salary earner has a Hong Kong employer, he is liable to pay salaries tax on the whole of his salary unless he can claim exemption by virtue of some other provision in section 8. Second, if the salary earner does not have a Hong Kong employer but substantially derives his income from services rendered in Hong Kong, he is also liable to pay salaries tax on his salary, and, because there is no specific statutory provision that allows for apportionment of tax on a "days in days out" basis, the tax is payable on his entire salary.

14. According to Mr. Feenstra it is not helpful to speak of a "totality of facts" test or, as it is sometimes referred to, an "all factors test", nor is it permissible to weigh elements which relate to the situs of the employment against those which relate to the situs of the services.

15. In support of this contention he cited Case No. BR 14/75 of Inland Board of Review Decisions and referred in particular to the following passage at page 209 of the report :

16. I have quoted at length from this decision because it is an example of an instance where the Board, not being bound by other decisions of other differently constituted Boards, rejected the source of income test and applied its own concept of a "totality of factors" test.

17. It follows from what I have just said that I do not agree that this passage gives Mr. Feenstra the support he claims it does. Not only did the Board both approve of and apply a "totality of facts" test, but it seems to me that in saying that they did not think that the situs of employment and the situs of services are totally irrelevant to the enquiry under section 8(1), it does not follow that they took the view that where a person substantially rendered his services in Hong Kong he is, ipso facto, chargeable to salaries tax under that subsection.

18. For his contention that salaries tax is chargeable on the respondent's entire income from his salary, Mr. Feenstra sought to gain assistance from Hong Kong Board of Review Decisions BR 11/82.

19. Very briefly the facts of that case were that the taxpayer had been employed outside Hong Kong by an overseas company which assigned him to Hong Kong as manager of a wholly owned subsidiary incorporated in Hong Kong. Of his salary of US$3000 per month US$2,795 was payable in Hong Kong and the US$205 balance was paid into an overseas account. Certain living and accommodation allowances were also paid into the overseas account.

20. The taxpayer argued that the portion of his salary paid into the overseas account was in respect of duties that he performed outside Hong Kong and that therefore he was entitled to exemption from salaries tax on that sum.

21. The Board considered two decisions of the Full Court of Hong Kong relating to profits tax in which there were contracts which had both Hong Kong and offshore elements. In deciding on which side of the boundary the profits arose, the Court in each case looked to the locality where they arose as being determined by considerations which fastened upon the acts more immediately responsible for the receipt of profits.

22. The Board then went on to say :-

        "We think that the same approach is appropriate in the case of Salaries Tax with the difference that one is generally dealing with one indivisible contract with the result that where the Hong Kong factors override the offshore factors the entire remuneration is liable to Salaries Tax. This has in the past often been referred to as the "situs of employment" test, a term which we regard as possibly misleading as it tends to obscure the basic test in section 8(1) which is source in income.

        The question of apportionment was raised by Mr. Flux on behalf of the Taxpayer. In this connection it was not disputed that the Taxpayer spent 128 days out of the Colony on business in 1977/78 and 104 days on business out of the Colony on business in 1978/79. However, since our finding is that the Taxpayer's income is derived from a single contract assigning him to duties to be undertaken substantially from a base in Hong Kong we can find no legal basis for dividing up his services and apportioning his remuneration. We regard his income as a single indivisible sum that was derived from a single contract and accordingly we consider that apportionment is not permitted. Mr. Flux pointed out that apportionment on a "time in time out" basis was common under section 8(1A)(a). This we accept. However, this paragraph seems to us to apply in the situation where the circumstances giving rise to the employment income are essentially offshore with the result that in the absence of that paragraph Salaries Tax would not be payable in respect of any services rendered in Hong Kong. In summary therefore it seems to us that the matter might be put in these terms. Where income from an employment stems mainly from Hong Kong based activities all the remuneration will be assessable to Salaries Tax without any right to apportionment. Where, however, income from employment stems mainly from offshore based activities all the income would escape Salaries Tax were it not for section 8(1A)(a) which by implication authorises an apportionment on a "time in time out" or other appropriate basis in order to separate out the taxable proportion of total remuneration received for rendering services in Hong Kong.

        We hold that in this case all the Taxpayer's income is derived from the Colony from an employment of profit and therefore falls within section 8(1)(a) without any apportionment for services rendered outside Hong Kong."

23. It is immediately apparent that the factual basis of that case is entirely different from that of the case before this court. There the taxpayer was employed by the Hong Kong company and was its managing director. Furthermore, more than 90% of his salary had been paid in Hong Kong.

24. Another case from which Mr. Feenstra sought to derive assistance is Hong Kong Inland Revenue Board of Review Decision BR 11/84.

25. The summary of facts in that case is a little obscure but I am satisfied that the essential features were that the taxpayer alleged that a Cayman Company called Barrick, with an address in Australia, relocated him to Hong Kong as a representative of four entities, one of which was a Hong Kong company, and that his major role was to "locate and complete the sale of [the Hong Kong Company's] assets to investors in [the areas of Australia, South East Asia and Japan]". His salary was paid by the Hong Kong company.

26. On the evidence before them, the Board refused to accept the submission that the taxpayer's real employer was Barrick, and found as a fact that he was employed and remunerated by the Hong Kong company. Not surprisingly therefore, they held that his salary was income arising in or derived from Hong Kong.

27. Having accepted the Commissioner's submission that "sec. 8(1) is not intended to be circumscribed by section 8(1A)" the Board said :

"With regard to Mr. Barlow's suggestion that the Taxpayer's salary should be apportioned on a time-in, time-out basis, it is our view that such an approach is only possible where we are satisfied that the Taxpayer's remuneration neither arose nor was derived from a source in Hong Kong and hence not caught by section 8(1) (as for example if we had concluded that Barrick was indeed the employer and the salary arose in Australia) but that the Taxpayer performed services here in consequence of which all income derived therefrom would be subject to tax under section 8(1A). Having reached the conclusion that the Taxpayer's salary is caught by section 8(1) it follows that in our opinion the case for apportionment (which in any event is an extra-legislative approach of convenience) does not arise."

28. In my view this case is clearly distinguishable on the facts from the present case. Moreover, the Board's acceptance of the Commissioner's contention that "section 8(1) is not intended to be circumscribed by section 8(1A)" does not appear to me to support any argument advanced by Mr. Feenstra. Indeed, the respondent's basic contention in the present case is that section 8(1A)(a) extends the liability to salaries tax.

29. I shall now deal briefly with the remaining two decisions of the Board of Review cited by Mr. Feenstra, BR 20/69 and BR 6/72.

30. In BR 20/69, which was decided before section 8(1A) was enacted, the appellant taxpayer was employed by a Hong Kong company under an agreement which did not specify the place where he was to perform his work. In fact he was posted to Japan where he rendered his services for the benefit of his Hong Kong employers.

31. Having stated that the question they had to decide was whether a person residing abroad but employed by a local company is liable to salaries tax for services rendered in a foreign company, the Board said at page 4 :-

        "On our reading of [section 8(1)] we are unable to conclude that only where services are rendered in the Colony is income from employment taxable. As the word "income" is defined, one can, for practical purposes, substitute the word "salary", "wages" or "remuneration' in its place, so that if the remuneration arises in or derives from Hong Kong it is taxable. The expression "income arising in or derived from the Colony" is referable to the locality of the source of income; in other words not the place where the duties of the employee are performed but the place where the payment for the employment is made. The section does not say : "income arising in or derived from services rendered in the Colony"."

and at page 5 :-

        "In our view, therefore, a person employed by a Hong Kong company and who is paid by the Hong Kong company from money originating in Hong Kong to perform services elsewhere, is liable to salaries tax because his income arises in or is derived from the Colony."

32. Mr. Flesch contended that this decision fully supports his contention that, in construing section 8(1) for the purpose of determining the basic liability to salaries tax, the proper consideration is not the place where the duties of the employee are performed but the place where the source of income, the employment, is located.

33. Mr. Feenstra on the other hand submitted that the enactment of sec. 8(1A) now makes it clear that section 8(1) includes income from services rendered in Hong Kong. It seems to me, however, that as section 8(1A) does not alter the wording of section 8(1), Mr. Feenstra's submission has little force. As the Board pointed out, "The section does not say : income arising in or derived from services rendered in the Colony.". In other words, the essential question posed under section 8(1) remains the same as that answered by the Board in BR 20/69.

34. Finally, in BR 6/ 72 an overseas company employed the tax payer, a Hong Kong architect, with the object of establishing a Far East operation of which Hong Kong was to be the principal base. Shortly thereafter the overseas company set up and incorporated a company in Hong Kong, and the appellant was made responsible for its management. The evidence clearly disclosed that he was employed by the Hong Kong company as a director. Although the Board accepted that the appellant's salary was paid into an overseas bank account, and that the value to the Hong Kong company lay in his professional capacities as an architect, which was the basis of his employment, they found that his salary "entails and includes such duties as he must discharge or are expected of a director."

They went on to say at page 92 :-

        "The salary the Appellant receives is credited to his bank account in the United States. If his emoluments "arise in or are derived from the Colony" the fact that his income is credited to his account abroad would not exempt him from liability. The notion that an employee is not assessable to tax for the period during which he renders services outside the Colony is also a common misconception. For the purpose of determining liability all the facts must be looked at. On the facts of this case we would say that his income arises in and is derived from Hong Kong. We do not see how it could be otherwise. Here we have a Hong Kong company. The Appellant, who is an architect in Hong Kong, is appointed a director of the company. The company carries on business in Hong Kong. The Appellant serves the company. He also manages the company. He is remunerated by the company. Frequently he may have to travel abroad as part of the services he performs for the company. When a combination of all the facts are considered, we are unable to say that his income is not derived from Hong Kong notwithstanding that from time to time or ever so often he may be required to attend to the business interests of the Company outside Hong Kong. Even if the bulk of the Appellant's work relates to projects in other places, this feature in itself would not exclude chargeability to tax, but is merely a factor to be considered together with all the other circumstances of the case in deciding whether his income is derived from Hong Kong. That the Appellant's income is so derived having regard to the facts of this case, we have no doubt and, accordingly, this assessment is confirmed subject to such allowances as the Appellant may be entitled to claim under the Ordinance."

35. Mr. Feenstra relied particularly on that part of the above passage e in which the Board referred to what they considered to be a common misconception. Again, I do not think that these words lend any support to Mr. Feenstra's submission. It seems to me that the Board were there simply saying that where, as in that case, the income falls within the basic charge to tax under section 8(1), it is a common misconception that it is not assessable to tax for the period during which the employee renders services outside Hong Kong. They were not saying that where, as in the present case, the income does not fall within the basic charge to tax under section 8(1) but is caught by section 8(1A), there can be no apportionment of tax. Moreover, the factual situation in BR 6/72 is clearly distinguishable from that in the present case.

36. Mr. Flesch submitted that it is plain as a matter of statutory interpretation that paragraph (a) of section 8(1A) is an extension of the basic charge to tax that arises under section 8(1). In other words, if the income does not fall within the basic charge under section 8(1), the question then arises as to whether it is caught by the extended liability to tax under section 8(1A)(a).

37. He contended that, in determining for the purpose of section 8(1) whether income arises in or is derived from Hong Kong from any employment, regard is had to where the source of income, the employment, is located, not to the locality where the services of the employee are actually rendered.

38. In support of his basic submission he relied on three English cases, Pickles v Foulsham⁽¹⁾, Bennet v Marshall ⁽²⁾ and Bray v Colenbrander and Harvey v Breyfogle⁽³⁾ . They were decided in 1925, 1937 and 1953 respectively, the first and last having been decided by the House of Lords and the second by the Court of Appeal.

39. Mr. Flesch readily conceded that the relevant legislation on which the English decisions were based is different from section 8(1) and that therefore these decisions are not binding on this court. He submitted, however, that if this court should conclude that the proper test to apply is the "totality of facts" test in the sense that the Board in BR 14/75 understood it, the respondent must still succeed.

40. In examining these decisions it is not necessary to be drawn into an analysis of the labyrinthine provisions of the United Kingdom legislation. Suffice it to say that where in these three cases their Lordships refer to a "possession" they have in mind an "employment".

41. The precise question to which the House of Lords and the Court of Appeal addressed themselves was clearly stated by Sir Wilfrid Greene MR in Bennet v Marshall at page 85 : -

    "..... the question which falls to be decided in any particular case appears to me to be this : is the source of the income which it is sought to charge a source out of the United Kingdom or is it not?"

42. The question which is posed under section 8(1) is this: Is the income derived from Hong Kong from a source of employment or is it not?

43. To my mind, although their Lordships enquiry focused on whether the income was derived from a source outside the United Kingdom, whereas the enquiry under section 8(1) centres on whether the income is derived from an employment in Hong Kong, each enquiry involves a consideration of the same factors. In essence, the question is the same in both cases.

44. In Bray v Colenbrander Lord Normand, with whom the other members of the House agreed, said at page 156 :-

45. Counsel also referred me to several Australia cases including Federal Commissioner of Taxation v French⁽⁵⁾ and Federal Commissioner of Taxation v Mitchum⁽⁶⁾ , but I do not find them to be of any real assistance in construing subsections (1) and (1A) of section 8.

46. As a matter of statutory interpretation I am unable to escape the conclusion that,although sec. 8(1) must be construed in the light of and in conjunction with section 8(1A), section 8(1A)(a) creates a liability to tax additional to that which arises under section 8(1). It is an extension to the basic charge under section 8(1). If it were otherwise section 8(1A)(a) would be virtually otiose and section 8(1A)(b) completely unnecessary.

47. It follows that the place where the services are rendered is not relevant to the enquiry under section 8(1) as to whether income arises in or is derived from Hong Kong from any employment. It should therefore be completely ignored.

48. That being so, what is the correct approach to the enquiry? The approach that commends itself to me, and which I take to be correct, is that adopted by the English courts in the cases cited by Mr. Flesch.

49. In my view this is an approach that is entirely consistent with a correct interpretation of section 8, for although at first sight it might seem somewhat illogical to ignore the place where the services are rendered, it seems to me that to do so is consistent with an acceptance that section 8(1A)(a) is an extension of the basic charge imposed under section 8(1).

50. In this connexion the Commissioner's own departmental practice is illuminating. Appendix 10 of the Inland Revenue Departmental Interpretation and Practice Note relating to the charge to salaries tax states :-

"If the income from employment does not come within the basic charge, because it does not "arise in" or "derive from" a source in the Colony, then consideration will need to be given as to whether liability arises under the extension to the basic charge by the provisions of Section 8(1A). Sub-section (a) of Section 8(1A) does not in any way limit the charge in Section 8(1); it extends the charge by specifically including as income arising in or derived from the Colony, all income derived from services rendered in the Colony including leave pay attributable to such services. It should be noted that this Sub-section relates only to employments; it does not apply to offices of profit."

51. Specifically, it is necessary to look for the place where the income really comes to the employee, that is to say, where the source of income, the employment, is located. As Sir Wilfrid Greene said, regard must first be had to the contract of employment.

52. This does not mean that the Commissioner may not look behind the appearances to discover the reality. The Commissioner is not bound to accept as conclusive, any claim made by an employee in this connexion. He is entitled to scrutinise all evidence, documentary or otherwise, that is relevant to this matter.

53. If any authority be needed for this basic proposition one needs only to refer to the words of Lord Normand at page 155 of Bray v Colenbrander :-

        "My Lords, in each of these appeals the Respondent entered into a contract of employment with an employer resident abroad. The contract was in each case entered into in the country of the employer's residence and it provided for payment of the employee's remuneration in that country. Parenthetically it should be said that there is no suggestion that the place of payment was nominal or pretended, or that the real or genuine place of payment was not the place specified in the contract. Nothing, therefore of what follows in this opinion in any way touches a case where the designated place of payment is challenged as nominal or pretended and unreal."

54. There can be no doubt therefore that in deciding the crucial issue, the Commissioner may need to look further than the external or superficial features of the employment. Appearances may be deceptive. He may need to examine other factors that point to the real locus of the source of income, the employment.

55. It occurs to me that sometimes when reference is made to the so called "totality of facts" test it may be that what is meant is this very process. If that is what it means then it is not an enquiry of a nature different from that to which the English cases refer, but is descriptive of the process adopted to ascertain the true answer to the question that arises under section 8(1).

56. It is plain that, without specifically referring to the English cases, the Board of Review in BR 20/69 applied the correct test in dismissing the appeal of an appellant taxpayer. Had the converse factual situation existed, that is to say, had the tax payer been employed by an overseas company who paid for the services rendered by the taxpayer in Hong Kong from money originating overseas, the Board, in applying the reasoning they employed in that case, would have been obliged to decide that the taxpayer's income was not liable to salaries tax under section 8(1).  It is not surprising therefore that section 8(1A)(a) was enacted so as to operate as an extension to the basic charge under section 8(1).

57. After its enactment, the cases show that there was no consistency of approach adopted by variously constituted Boards of Review. It seems probable that the totality of facts test has been interpreted differently by different Boards. It is only when that so called test embraces the place where the services were rendered or otherwise introduces irrelevant matters that it becomes impermissible.

58. Having stated what I consider to be the proper test to be applied in determining for the purpose of sec. 8(1) whether income arises in or is derived from Hong Kong from employment, the position may, in my view, be summarised as follows.

59. If during a year of assessment a person's income falls within the basic charge to salaries tax under section 8(1), his entire salary is subject to salaries tax wherever his services may have been rendered, subject only to the so called "60 days rule" that operates when the taxpayer can claim relief by way of exemption under section 8(1A)(b) as read with section 8(1B). Thus, once income is caught by section 8(1) there is no provision for apportionment.

60. I hasten to add, however, that the "60 days rule" does not apply to the income derived from services rendered by those persons who, by the operation of section 8(1A)(b)(i) are excluded from enjoying the benefit conferred by section 8(1A)(b)(ii) as read with section (81B).

61. On the other hand, if a person, whose income does not fall within the basic charge to salaries tax under section 8(1), derives income from employment in respect of which he rendered services in Hong Kong, only that income derived from the services he actually rendered in Hong Kong is chargeable to salaries tax. Again, this is subject to the "60 days rule".

62. Thus the respondent, who in the light of the Board's findings does not fall within the basic charge imposed under section 8(1), is only liable to pay salaries tax on the whole of the income derived from the services he actually rendered in Hong Kong. Since he rendered services outside Hong Kong for 41 days he is not liable to salaries tax in respect of the income attributable to those services. In other words his income for salaries tax purposes is apportioned on a "time in time out" basis.

63. Had the respondent merely earned income from services rendered in Hong Kong during visits not exceeding a total of 60 days in the year of assessment, then by virtue of section 8(1A)(b)(ii) read with section 8(1B)(the "60 days rule"), that income would be exempt from liability to salaries tax.

64. There is no suggestion that the decision of the Board is open to challenge under the principle stated in Edwards v Bairstow⁽⁶⁾ , namely, that no person acting judicially and properly instructed as to the relevant law could have come to that decision. On the relevant evidence accepted by the Board, the respondent was bound to succeed.

65. The answers to the questions posed by the case are :-

66. Accordingly this appeal must be dismissed with costs to the respondent.

(1)    9 TC 261

(2)    22 TC 73

(3)    34 TC 138

(4)    2 T.C. 490

(5)    [1957] 98 GLR 398

(6)    [1965] ATTR 559

(6)    [1956] AC 14