RANDEEP S GREWAL v. COMMISSIONER OF INLAND REVENUE

CACV 3 /2024, [2025] HKCA 398

On appeal from [2023] HKCFI 3109

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 3 OF 2024

(ON APPEAL FROM HCIA NO 3 OF 2022)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This is an appeal by the taxpayer against the judgment of K Yeung J on 6 December 2023 (“Judgment”)[1]. The taxpayer brought an appeal against the decision of the Inland Revenue Board of Review dated 27 April 2022[2] (“the Board” and “Board’s Decision”). He objected to the assessments for salaries tax for the years of assessment 2006/2007 and 2011/2012 and the additional assessments for salaries tax for the years of assessment 2008/2009 to 2010/2011 and 2012/2013 (collectively “Relevant Years of Assessment”). He claimed that he had a non-Hong Kong employment and his income for the Relevant Years of Assessment should be assessed on a time-apportionment basis. By the Board’s Decision, his appeal in respect of those assessments and additional assessments was dismissed.

2.  Three questions of law were framed in the appeal before the judge.  By the Judgment, all three questions were answered in the negative in favour of the Commissioner of Inland Revenue (“CIR”).  Central to the questions of law is the correctness of CIR v Goepfert [1987] HKLR 888 (“Goepfert”)  on the interpretation of section 8 of the Inland Revenue Ordinance, Cap 112 (“IRO”)[3], which was followed in Lee Hung Kwong v CIR [2005] 4 HKLRD 80 (“Lee Hung Kwong”).

Factual background

3.  The Board found as facts the factual matters in the agreed facts of the taxpayer and the CIR[4], the gist of which was set out in section C of the Judgment and may be stated as follows.

4.  Green Dragon Gas Ltd (“Green Dragon”)  was incorporated in the Cayman Islands on 28 March 2006 and maintained its registered address there for the years ended 31 December 2006 to 2013.  Its shares were listed on the Alternative Investment Market of the London Stock Exchange.  Its principal activities were acting as a holding company and providing financing and management services to its subsidiaries.

5.  At the relevant time, Green Dragon’s board of directors comprised one executive director (being the taxpayer)  and four non-executive directors.

6.  In the Directors’ Report for the years ended December 2006 to 2008, Green Dragon disclosed that the principal activities were carried on from its principal place of business in Hong Kong.  In the Chairman’s Statement in the same report, the taxpayer as the Chairman stated that Green Dragon had its headquarters in Hong Kong.

7.  Greka Gas China Limited (“GGCL”)  was an investment holding company incorporated in the Cayman Islands in 1997.  In April 2006, Green Dragon acquired 100% equity interest in GGCL from the taxpayer, and became its holding company.  GGCL was registered in Hong Kong as a non-Hong Kong company in October 2007, with its principal place of address at a suite in Two Exchange Square, Central, Hong Kong (“HK Address”).  The taxpayer was its sole director since 1998.

8.  In July 2006, the taxpayer and Green Dragon entered into an Executive Employment Agreement (“2006 Agreement”).  The taxpayer agreed thereby to serve in the capacity of Chairman and Chief Executive Officer (“CEO”)  of Green Dragon.  His annual base salary was HK$3,900,000 (clause 7).  Benefits thereunder (“Executive Benefits”)  included bonus, stock option scheme, housing/rent allowance, insurances, club memberships, two full time live-in maids, education benefits, and reimbursements for inter alia travelling and entertainment (clause 8).

9.  On 1 January 2007, Green Dragon and GGCL entered into agreements, with the taxpayer’s consent, for his secondment to perform services for GGCL for a term of five years.  On 1 January 2012, the secondment was extended for ten years, subject to early termination and extension. 

10.  In the Relevant Years of Assessment, the salaries and Executive Benefits received by the taxpayer were as follows:

Year of Assessment	2006/07 (HK$)	2008/09 (HK$)	2009/10 (HK$)	2010/11 (HK$)	2011/12 (HK$)	2012/13 (HK$)
Salary	-	3,900,000	3,900,000	4,125,000	4,774,319	4,773,060
Education benefits	153,316	72,050	244,100	157,500	175,331	182,759
Other allowances	813,225	1,783,012	1,712,293	1,775,283	1,218,085	1,550,044
Rent	1,425,409	2,016,000	1,344,000	4,079,526	4,066,546	4,411,633
Share option gain	-	-	-	-	55,995,770	-
Total	2,391,950	7,771,062	7,200,393	10,137,309	66,230,051	10,917,496

11.  For some of the Relevant Years of Assessment, the Assessor initially raised on the taxpayer assessments principally in accordance with his tax returns and his offshore claims made therein.  The taxpayer had filed his tax returns on the premise that his employment with Green Dragon was not a Hong Kong employment and that he should be charged to salaries tax on a time-apportionment basis, with so much of his income from employment attributable to services rendered in Hong Kong taxable and such income as derived from services rendered overseas exempt.

12.  After further enquiries, the Assessor rejected the taxpayer’s contention and concluded that his employment with Green Dragon was a Hong Kong employment.  As a result, the Assessor made variably a number of assessment (for 2006/2007), additional assessments (for 2008/2009 to 2010/2011 and 2012/2013)  and revised assessment (for 2011/2012).  The taxpayer was not satisfied with those assessments and additional assessments and appealed to the Board.

13.  In the hearing before the Board, the taxpayer gave evidence via video-link.  The Board considered he was far from being a reliable witness and rejected various aspects of his evidence[5].  The Board made findings in respect of the places where he had been living, his role and duties under the 2006 Agreement, where it was negotiated and entered into, and certain terms of the same[6]. The Board accepted the CIR’s submissions that the central management and control of Green Dragon was Hong Kong[7]. On the basis of the facts as agreed and found, the Board “finds that the source of the Taxpayer’s income from his employment in the years of assessment in question was Hong Kong.  It follows that the Taxpayer’s income from his employment in the years of assessment in question was chargeable for Salaries Tax under section 8(1)  of the IRO.”[8]  The Board therefore dismissed his appeal.

The statutory provisions

14.  Section 8 is the charging provision for salaries tax.  The relevant provisions are as follows:

“8. Charge of salaries tax

(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; and

(b)  any pension.

(1A)  For the purposes of this Part[9], income arising in or derived from Hong Kong from any employment—

(a)  includes, without in any way limiting the meaning of the expression and subject to paragraph (b), all income derived from services rendered in Hong Kong including leave pay attributable to such services; (Amended 69 of 1987 s. 2)

(b)  subject to subsection (1AB)[10], excludes income derived from services rendered by a person who— (Amended 6 of 2019 s. 10)

(i)  is not employed by the Government or as master or member of the crew of a ship or as commander or member of the crew of an aircraft; and

(ii)  renders outside Hong Kong all the services in connection with his employment; and (Added 2 of 1971 s. 5. Amended 69 of 1987 s. 2)

(c)  subject to subsection (1C)  and section 50AA, excludes income derived by a person from services rendered by him in any territory outside Hong Kong where— (Amended 27 of 2018 s. 3)

(i)  by the laws of the territory where the services are rendered, the income is chargeable to tax of substantially the same nature as salaries tax under this Ordinance; and

(ii)  the Commissioner is satisfied that that person has, by deduction or otherwise, paid tax of that nature in that territory in respect of the income. (Added 69 of 1987 s. 2)

…

(1B)  In determining whether or not all services are rendered outside Hong Kong for the purposes of subsection (1A)  no account shall be taken of services rendered in Hong Kong during visits not exceeding a total of 60 days in the basis period for the year of assessment.  (Added 2 of 1971 s. 5)”

15.  In the appeal before the Board, the issue for determination is whether the taxpayer’s employment in the material years of assessment was a Hong Kong employment so that all of the taxpayer’s income in those years was assessable for salaries tax.  If it was not, only the services rendered in Hong Kong were assessable for salaries tax, applying section 8(1B).

Three questions of law

16.  In the appeal before the judge, three questions of law were framed in these terms:

Question 1

“Upon the true construction of Part 3 of the [IRO] and in particular its charging section, section 8(1), (1A)  and (1B), did the Board’s Decision (in company with the decisions of the High Court/Court of First Instance in [Goepfert] and [Lee Hung Kwong] – all concluding that: ‘the place where the [employee’s] services are rendered is not relevant to the enquiry under s.8(1)’)  misconstrue the charging section and apply the incorrect legal test as to whether or not the Assessments and Additional Assessments … had lawfully assessed income that was subject to the Part 3 charge?”

Questions 2(1)  and (2)

“Alternatively, upon the true construction of section 8(1), (1A)  and (1B)  and in the light of the facts agreed by the parties and/or found by the Board:-

(1)  If Goepfert and Lee Hung Kwong were correctly decided, was the Board’s Decision (e.g. [Decision §74 c/f [Decision §89] nonetheless incorrect in law by failing to recognise and apply the ratio decidendi of those decisions, namely:

(a)  following Bray v. Colenbrander (1953)  34 TC 138: ‘… the locality of the source of income is … the place where the contract for payment is deemed to have a locality or where the payments for the employment are made, which may mean the same thing’; but

(b)  where the place of payment is ‘nominal or pretended and unreal’ the real source is to be determined from: (i)  the contract of employment; (ii)  the residence of the employer; and (iii)  the place where the contract of employment was negotiated and entered into?

(2)  In any event, was the Board’s Decision ([Decision §§85-88])  also incorrect in law by failing to recognise that the facts agreed and/or found by the Board required the conclusion that, as a matter of law (e.g. Hui Yin Sang v. Tsoi Ping Kwan [2012] 2 HKLRD 1085), the residence of the Taxpayer’s employer was not Hong Kong?”

17.  As mentioned, the judge answered all three questions in the negative and dismissed the taxpayer’s appeal.

18.  In gist, his reasoning and holdings for Question 1 may be stated as follows:

(1)  The taxpayer submitted that section 8(1)  stipulates two pre-requisites for the charge in respect of income, namely, “arising in or derived from Hong Kong” (“Geographical Pre-requisite”)  and “from … any office or employment of profit” (“Contractual Pre-requisite”).  This is not controversial.  The issue is what the Geographical Pre-requisite entails, whether it means the situs of the employment (as the CIR contends – the “Employment Situs Criterion”)  or the place where the services concerned were rendered (as the taxpayer contends – the “Place of Services Criterion”)[11].

(2)  Central to the taxpayer’s submissions is the contention that Goepfert (and Lee Hung Kwong which followed it)  were wrongly decided in concluding that the place where the employee rendered his services is not relevant to the inquiry under section 8(1)[12]. The taxpayer contended that Goepfert and Lee Hung Kwong failed to apply and give voice to the statutory wording of the IRO in particular section 8, which mandates the place where the employee renders his services as the sole and exclusive criterion for the Geographical Pre-requisite, and that ‘dual’ cases (where services are rendered both in Hong Kong and overseas)  require apportionment[13].

(3)  The judge rejected the taxpayer’s submissions and held that the place where the employee’s services are rendered is not relevant to the inquiry under section 8(1).  This interpretation is supported by the proper construction of the IRO as a whole, and in particular by the wording, structure, context, purpose and legislative history of the statutory provisions (namely, sections 8(1), (1A)(a), (1A)(b), (1A)(c)  and (1B))[14].

(4)  Section 8(1A)(a)  clearly ties the Geographical Pre-requisite to the place where the services were rendered and adopts the Place of Services Criterion.  If section 8(1)  also adopts the Place of Services Criterion as the sole and exclusive criterion, this would render section 8(1A)(a)  virtually otiose[15]. The taxpayer’s interpretation also leads to absurdity arising in sections 8(1A)(b)  and (1A)(c).  Even without reference to various Official Reports of the Hong Kong Legislative Council (in particular that of 14 October 1987 on the second reading of the Inland Revenue (Amendment)  (No 2)  Bill 1987), the taxpayer’s contentions are inconsistent and at odds with the wording and structure of the relevant provisions[16].

(5)  When the Official Reports are referred to, the purposes of the various subsections in section 8 become “absolutely clear”.  The Inland Revenue Ordinance Review Committee and the Financial Secretary both appreciated the differences between the Employment Situs Criterionand the Place of Services Criterion.  From day one the Employment Situs Criterion has been used and maintained, supplemented by exclusions and relief in the various subsections in section 8.  The Place of Services Criterion has never been adopted[17].

19.  Question 2(1)  is based on the premise that Goepfert and Lee Hung Kwong were correctly decided.

20.  The taxpayer’s contentions were as follows[18]:

(1)  Goepfert and Lee Hung Kwong adopted the “2-limbed approach” in Bray v Colenbrander.  The first limb is that in the absence of sham, the locality of the source of income should be equated with “the place where the contract for payment is deemed to have a locality or where the payments for the employment are made, which may mean the same thing”.

(2)  As the Board did not find that the place of payment for the taxpayer’s income was a sham, Goepfert and Lee Hung Kwong require the Board to conclude as a matter of law that the source of the taxpayer’s employment income was New York.

(3)  Where the place of payment is a sham, the second limb requires the real source of payment to be determined from (i)  the contract of employment; (ii)  the residence of the employer; and (iii)  the place where the contract of employment was negotiated and entered into.

(4)  Had the second limb arisen and was properly applied, each of the three factors was outwith Hong Kong and would have required the Board to conclude as a matter of law that the source of the taxpayer’s employment income was outside of Hong Kong.

(5)  Instead, the Board adopted the fallacious argument of the CIR that because the taxpayer was based in Hong Kong, his employment was located in Hong Kong and hence all his employment income, whether derived from services rendered within Hong Kong or outside, was sourced in Hong Kong.

21.  The judge rejected the above contentions for these reasons[19]:

(1)  The language and structure of section 8 does not admit the adoption of the 2-limbed approach, nor was this approach propounded or supported by any of the cases cited – Bray v Colenbrander, Goepfert and Lee Hung Kwong.  None of the cases had laid down any single determining factor of the “contract for payment”.  The question remains the deemed locality of the contract of employment.

(2)  To determine the deemed locality of the employment, there is no single decisive factor.  It is necessary to scrutinise all the relevant evidence and give such weight as appropriate to the factors considered to be relevant.

(3)  The Board did not accept the CIR’s submissions regarding the base of the taxpayer’s employment as an additional factor.  Its conclusion was based principally on the finding that the employment contract was most connected to Hong Kong.

22.  In respect of Question 2(2), the taxpayer contended that the findings of fact of the Board required the legal conclusion that the employer’s residence was in London and that it failed to apply the principles in Hui Yin Sang v Tsoi Ping Kwan.[20]

23.  The judge rejected this contention.  The location of a company’s residence is determined by a range of factors and the weight to be given to each factor is a matter of judgment for the fact-finding tribunal.  The taxpayer has not shown that the Board’s decision is contrary to the only true and reasonable conclusion[21].

The application to amend the notice of appeal

24.  The taxpayer filed a notice of appeal on 3 January 2024.  In August 2024, he changed his legal team.  He then issued a summons on 24 September 2024 for leave to amend the notice of appeal settled by his former counsel, as per the draft supplementary notice of appeal appended to the summons.  On 7 October 2024, leave was granted to amend those parts of the supplementary notice of appeal not opposed by the CIR.  It was directed that the application to amend the remaining parts, which are opposed (all the proposed amendments under Question 2, and §§4 to 6, 15, 20 to 23), was to be dealt with at the hearing of the appeal on 14 January 2025.

25.  Having considered all the submissions[22], we dismissed the application to amend the remaining parts of the supplementary notice of appeal at the outset of the hearing, with costs to the CIR.  These are the reasons for refusing leave.

26.  The opposed amendments relate to (1)  the taxpayer’s repudiation of Hui Yin Sang v Tsoi Ping Kwan as the authority for the proper approach to ascertaining the residence of the taxpayer’s employer Green Dragon, for the purpose of the employer’s residence criterion in the ‘totality of facts’ test in Goepfert[23]; and (2)  the proposition that salaries tax is charged on an annual basis and accordingly the elements of the principal charging provision to salaries tax in section 8 must be satisfied in each year of assessment, rather than on a ‘once and for all’ basis[24].

27.  Mr Charles Hollander[25] submitted on the taxpayer’s behalf that leave to amend should be granted because the amendments raise important questions of law for which there is currently no binding precedent in Hong Kong.  He contended that allowing the amendments would not materially prejudice the CIR, nor take the CIR by surprise given that the summons to amend was issued over three months before the hearing.

28.  Before the Board, the taxpayer’s former counsel submitted that the factors in Hui Yin Sang applied to ascertain the employer’s residence for the ‘totality of facts’ test in Goepfert[26].  The taxpayer sought to argue on appeal that the Board’s application of Hui Yin Sang was an error of law, as that case turned on the proper test to ascertain the ordinary residence of a company in the context of an application for security for costs.  The notion of “ordinarily resident” is distinct from “resident”.  There is no reference to “ordinarily resident” in Goepfert or Lee Hung Kwong.  In the security for costs context, central management and control (“CMC”)  of a company is a broader test and requires the consideration of, among other matters, the eight factors enumerated in §14(2)  of Hui Yin Sang[27].  In the tax context, the principal if not the sole factor is where the CMC of the company abides at the board level, namely, where the decisions at board level are made, irrespective of where the principal assets are or where the substantive trade and business is carried on[28].  CMC in the narrow sense is relevant both to the Hui Yin Sang approach as one relevant factor and to the conventional tax residence test where it is the only material factor.  What is at issue is the juristic question whether the Board applied the right test.

29.  Mr Hollander contended for tax purposes, the general rule is that CMC resides with the board of director, unless that the authority has been usurped.  Otherwise, there is a “rebuttable presumption” that the CMC abides where the board of directors meets and conducts its business.  And if a company keeps house in more than one place, it has multiple residences, that may require a tiebreaker which should favour the place where the superior or directing authority of the company was to be found.  He contended also that the other indicia in the multifactorial test in Hui Yin Sang are “extraneous” to the common law CMC test, cf Board’s Decision §86.  The Board erred in relying on irrelevant factors in identifying the CMC of Green Dragon and erroneously assumed that Hui Yin Sang applied by reference to other indicia contemplated by that test.

30.  Applying the correct test, it would have followed that the CMC of Green Dragon was outside Hong Kong as most board meetings were held overseas, the majority of directors present were non-resident, the meetings in substance discussed and decided the real strategic direction of Green Dragon.

31.  Furthermore, the Board erred in law in not assessing the ‘totality of facts’ for each year of assessment, as the factors in the ‘totality of facts’ change over time and the process of ascertaining where the source of employment income is to be found is not fixed once and for all.  It was an error of law for the Board to look only to the indicia in certain years that comprised the Relevant Years of Assessment.  It should have conducted that exercise for each year of assessment under appeal.  The Board wrongly thought that once it found in a given year of assessment Green Dragon had its CMC and/or was resident in Hong Kong, that was the end of the matter when it came to residence and sufficient to fix the taxpayer’s employment with a Hong Kong situs, irrespective of subsequent factual developments in the pattern of CMC.  It was incumbent on the Board to look at the ‘totality of facts’ position for each year of assessment.  The failure of the taxpayer to take the point before the judge is irrelevant.

32.  Mr Hollander referred to Heath Brian Zarin v CIR [2022] HKCA 412 at §§38 to 42 in support of his contention that the Court of Appeal has jurisdiction to grant leave to amend a notice of appeal in a revenue appeal from the Court of First Instance.

33.  Mr Stewart Wong, SC[29] advanced three broad grounds of opposition for the CIR.

34.  First, the amendments go outside the scope of the questions of law for which leave to appeal was granted by the Court of First Instance, which neither the parties nor the Court of First Instance nor the Court of Appeal may go beyond.

35.  Second, New Question 2(2)  and New Question 2(4)  are in any event not arguable.

36.  Third, §§5 and 21 of the supplementary notice of appeal are not proper grounds of appeal.  An appellant cannot simply turn the ultimate conclusion of the Board into the form of a question[30]. §§5 and 21 simply ask whether the Board’s conclusion on the employer’s residence is contrary to the true and only reasonable conclusion without giving any particulars why the Board erred in law.

37.  We do not think the judgment of the Court of Appeal in Zarin would assist the taxpayer.  That case has nothing to do with whether the Court of Appeal has power to grant leave to amend a notice of appeal where the questions of law in the new grounds of appeal go outside the scope of the questions of law for which leave to appeal against the Board’s decision was granted by the Court of First Instance pursuant to section 69(3).  The powers of the Court of Appeal to grant leave to amend the notice of appeal are constrained by the requirements of section 69(3).  It is necessary for an appeal from the Board for questions of law to be identified and stated precisely, as that is the foundation for the court to exercise its appellate jurisdiction on points of law[31].

38.  The position is further made clear by contrasting the powers of the Board to grant leave to an appellant to rely on new grounds of appeal, as provided in section 66(3).  Sections 69 and 69AA, which govern an appeal against the Board’s decision, do not have an equivalent provision for the court to grant leave to rely on new questions of law on appeal.

39.  We do not agree with Mr Hollander that New Question 2(2)  is within the scope of Question 2(2).  The question of law in Question 2(2)  was framed on the premise that Hui Yin Sang applied.  New Question 2(2), which is inconsistent with Question 2(2)  (re-numbered as 2(3)  in the supplementary notice of appeal), is framed on the basis that Hui Yin Sang was not applicable and raises a different question of law.  The matters in New Question 2(4)  were not raised below.  New Question 2(2)  and New Question 2(4)  plainly go beyond the questions for which leave to appeal was granted by the Court of First Instance.  On this basis alone, leave to amend should be refused.

40.  We turn to consider New Question 2(2), New Question 2(4)  and §§5 and 21.

(1)  New Question 2(2)

41.  The employer’s residence is relevant to ascertain – as a matter of fact – the situs of the employment.  As rightly pointed out by Mr Wong, it is not whether the employer is “resident” in Hong Kong as that word is used in a tax statute.  Nor is “resident” considered in the context of the tax liability of an employer where the liability is residence based.  To answer this factual question of the employer’s residence, both parties and the Board found it convenient to adopt the guidance on corporate residence in Hui Yin Sang.  In the absence of special, context-specific meanings, we are inclined to agree with Mr Wong it is difficult to see where a company is resident can be different for tax and non-tax purposes, or why a narrower meaning should be adopted in a tax context.

42.  The relevant factors in considering a company’s residence, which are by reference to the location of its CMC, are not factors additional to the question of CMC[32]. Furthermore, the approach to ascertaining residence in security for costs cases is based on tax residence cases[33]. There is no material difference between the test applied in tax residence cases and in Hui Yin Sang.  The eight factors in §14(2)  of Hui Yin Sang were identified by Lindsay J in Little Olympian Each Ways Ltd at 568H to 569A, and were taken from leading tax residence cases including De Beers Consolidated Mines Ltd, Swedish Central Railway Co Ltd and Cesena Sulphur Co Ltd.  Hui Yin Sang at §45 rejected the argument that the weighing of the factors should be done with reference to the purpose of Order 23.  The tax cases that were cited in turn applied Little Olympian Each Ways Ltd[34].  The word “ordinary” in “ordinary residence” is not a point of distinction[35].

43.  For the above reasons, we reject Mr Hollander’s contention that there is a “rebuttable presumption” that the CMC abides where the board of directors meets and conducts its business and that other indicia in the multifactorial test in Hui Yin Sang are “extraneous” to the common law CMC test.  The CMC test is an evaluative “question of fact to be determined … upon a scrutiny of the course of business and trading”[36]. As pointed out by Mr Wong, the coincidence of the CMC and the location of the board in some of the cases cited is merely the result of that evaluation and not a legal principle.

44.  New Question 2(2)  and §§4 and 20 of the supplementary notice of appeal are not arguable.  Leave to amend should be refused on this basis as well.

(2)  §§5 and 21 of the supplementary notice of appeal

45.  §§5 and 21 seek to challenge the Board’s conclusion on the employer’s residence even if the test in Hui Yin Sang applied.  It is contended that the Board had misapplied the test such that its finding that the employer’s residence was in Hong Kong was perverse and unfounded in the evidence.

46.  As stated in Hui Yin Sang at §42, the weight to be accorded to any particular factor in any given case is a matter of judgment in the circumstances of that case and there is no hierarchy of factors[37]. It does not appear from Mr Hollander’s submissions in this regard[38] that the points raised establish any error of law.  He is just asking this court to do the evaluation once again, which the Board had done in §§86 to 89 of its Decision.

47.  It is not correct to say there was nothing of commercial relevance for Green Dragon to do in Hong Kong, as contended by Mr Hollander. Nor do we accept that the listing of the HK Address as the principal place of business of Green Dragon in its annual reports between 2006 and 2008 is irrelevant to the CMC test.  The principal activities of Green Dragon were acting as a holding company and providing financing and management services to its subsidiaries[39]. It was not merely a holding company, so the place where it did business was also relevant[40]. The Board found that corporate activities in the nature of “keeping house” were carried out by staff at Green Dragon’s office at the HK Address, and Hong Kong was where part of the financing services for the subsidiaries were carried out.  There is no legal error and no basis to challenge its finding.

48.  The Board effectively rejected the taxpayer’s claim that he predominantly carried on business outside Hong Kong and his argument that Hong Kong was purely a residential base[41].  The presence of the taxpayer, being the executive director, chairman and CEO of Green Dragon, is a relevant consideration as to the physical presence of the company[42]. The Board is entitled to find his residence in Hong Kong “decisive of the ascertainment of Green Dragon’s most significant assets”, as the entrepreneur who sought business opportunities and presented them to the Board and the provider of management services to the subsidiaries[43].  This finding could not be regarded as misconceived, perverse or unfounded in the evidence.

49.  There was no suggestion that Green Dragon had a residence besides Hong Kong or London.  The taxpayer cannot overcome the findings as to the limited activities in London[44].  He cannot therefore discharge the burden of establishing that the employer’s place of residence was not Hong Kong.

50.  As for the contention that CMC and residence are not immutable and falls to be determined for each year of assessment, this would be dealt with under New Question 2(4).

51.  As §§5 and 21 of the supplementary notice of appeal are not proper grounds of appeal, leave to amend should be refused.

(3)  New Question 2(4)

52.  The Board reached the conclusion that the employer’s residence was in Hong Kong for each and every year of assessment based on the facts found, and it did consider the issue throughout the relevant years[45]. Its finding that the employer’s residence was in Hong Kong for the years of assessment is a conclusion of fact that can only be disturbed if there was an error of law[46].

53.  The Board did not make any error of law.  There is no indication it arrived at its conclusion because it believed that the place of employer’s residence was immutable or is fixed once and for all, as the point was not argued before the Board.  There was no suggestion before the Board that the employer’s residence had ever changed.

54.  The only change identified in Mr Hollander’s submissions[47] is the contents of Green Dragon’s annual reports after 2008.  The Board had rejected the taxpayer’s claim that the statements in the 2006 to 2008 annual reports (that Green Dragon was “headquartered” in Hong Kong and had “its principal place of business” in Hong Kong)  were erroneous, and had considered the 2006 to 2008 reports to reflect the true position for all the years of assessment[48].  There was no evidence or finding of any change in reality.

55.  As New Question 2(4)  and §§6 and 22 of the supplementary notice of appeal are not arguable, leave to amend should not be given.

This appeal

56.  We now turn to this appeal.  It is not entirely easy to deduce what would remain as proper grounds of appeal, which should address any questions of law arising in respect of Question 1, Questions 2(1)  and (2), for which leave to appeal against the Board’s decision was granted by the Court of First Instance, because Mr Hollander chose to include all his arguments in one submission (contrary to our directions), regardless of whether they relate to the existing grounds of appeal or the disputed amendments.  The court is left to do what it can to separate the dross from the nuggets.

57.  Furthermore, his arguments on Question 1 are presented on a premise very different from the taxpayer’s former counsel before the judge.  This prompted Mr Wong to raise a Flywin objection[49]. We will come back to this objection.

58.  Mr Hollander summarised his broad grounds of appeal in this manner[50]. He has three alternative submissions:

(1)  The first is that Goepfert was wrongly decided to the extent Macdougall J held that the locality where services in employment are rendered is irrelevant to the determination of the source of income from that employment. (“Ground 1”)

(2)  The second is that if Goepfert was rightly decided, the Board erred in law by relying on Hui Yin Sang (which was not a revenue law case)  in ascertaining the residence of Green Dragon, such that its decision on the ‘totality of facts’ approach in Goepfert was contrary to the only true and reasonable conclusion. (“Ground 2(a)”)

(3)  Even if the Board had been right to apply Hui Yin Sang, it nevertheless considered irrelevant matters whilst failing to consider relevant matters, such that its conclusions on the residence of Green Dragon cannot stand. (“Ground 2(b)”)

(4)  With respect to each of Grounds 1, 2(a)  and 2(b), it is further submitted that the source of the taxpayer’s income (irrespective of what the court finds the correct test in that regard to be)  fell to be determined on an annual basis, and, accordingly, the Board erred in assuming that because the taxpayer’s income from employment in a given year of assessment was, in its view, Hong Kong source, the same analysis applied by default to subsequent years of assessment.

(5)  If the taxpayer were successful on one or more of the above grounds, it must follow that his income from employment with Green Dragon was not (whether wholly or in part)  Hong Kong source and that it should be apportioned under section 8(1A)(a).  Alternatively, a remission to the Board with a direction from the court could be made.

59.  Mr Hollander’s argument on Ground 1 in respect of Question 1 is that as can be seen from section 8’s express statutory language and consistent with the legislative genealogy of the Ordinance, the place where the employee’s services are rendered is, “at the very least”, “relevant to the enquiry under s 8(1)”[51]. This is very different from the taxpayer’s case before the Board or the Court of First Instance.

60.  Before the Board, the taxpayer’s case was based on Goepfert and Lee Hung Kwong, which held that the place where the employee’s services are rendered is of no relevance at all to decide the source under the general charge in section 8(1)[52].  Before the judge, the taxpayer changed his case.  He contended that Goepfert and Lee Hung Kwong were wrongly decided, and the correct approach under section 8 was that “the sole and exclusive criterion to be applied [was] whether or not the employee’s services were rendered within Hong Kong” and that it “expressly mandates the manner in which ‘dual’ cases (of some services rendered in Hong Kong and others outside Hong Kong)  are required to be apportioned”[53]. In either instance, there was no half-way house.

61.  The taxpayer now seeks to change his case again and contends that the place where the employee’s services are rendered is one of the relevant factors to determining the source under the general charge. Mr Hollander made no attempt to defend the stance before the judge that the place of service is the sole and exclusive criterion, although he did not abandon this expressly in his submissions.

62.  Mr Wong makes a Flywin objection on this new stance.  It is a new point not argued before the Board or the Court of First Instance.  The taxpayer’s grounds of appeal to the Board were premised “on the basis of the established law”[54]. His latest contention involves a fact-sensitive inquiry and qualitative analysis.  The state of the evidence would have been different.  If the place where the employee’s services are rendered were a relevant factor under the general charge (denied by the CIR), to be considered with all other factors for the CIR, the Board or the court to come to a conclusion under section 8(1)  as to whether the relevant income arose in or was derived from Hong Kong, it would be relevant for the Board to find facts in relation to the nature and type of services in fact rendered in and outside Hong Kong.  Under the law established in Goepfert and Lee Hung Kwong, facts relating to the services actually rendered are irrelevant under section 8(1), and hence they were not the subject of cross-examination or submissions by the CIR, or findings by the Board.  Further, while Mr Hollander submitted that the Court of Appeal may decide on apportionment if the taxpayer were successful on one or more of his grounds, it is not apparent how the apportionment may be done by us.  The only realistic option is a remission to the Board.

63.  We agree with Mr Wong.  We do not think it is right for the taxpayer to raise for the first time in this court that the place of service is a relevant factor to the inquiry under section 8(1).  Mr Hollander’s arguments with regard to Question 1 are to be considered on the basis that the Flywin objection is upheld.

64.  With regard to Question 2, the stance taken by Mr Hollander in his submission is an odd one.  The supplementary notice of appeal repeats the taxpayer’s argument below that the source for the general charge is defined by the place of payment unless a sham[55].  This argument on the place of payment did not feature in his skeleton submissions for the appeal and is inconsistent with his argument that the most important factor is the employer’s residence for the ‘totality of facts’ analysis[56]. His primary submissions on Question 2 evolved around what he called his Ground 2(a)  (whether Hui Yin Sang was the right test)[57], which is the New Question 2(2)  in the disputed amendments disallowed by us.  His Ground 2(b)  (challenge on the Board’s conclusion on the employer’s residence even if Hui Yin Sang applied)[58], has been addressed in connection with the disputed amendments in §§5 and 21 of the supplementary notice of appeal.  We have also dealt with the contention that the Board erred in assuming that the source of the taxpayer’s income fell to be determined on a once and for all basis when we disallowed the amendments in New Question 2(4).

65.  All the arguments relating to Question 2 have either been addressed when we disallowed the disputed amendments, or have not been pursued or properly pursued in Mr Hollander’s submissions.  What is left is his submissions on Question 1 and that should be the focus of the remaining part of this judgment.

The taxpayer’s contentions on Question 1

66.  Mr Hollander’s contention here is that Goepfert was wrongly decided to the extent Macdougall J held that the locality where services in employment are rendered is irrelevant to the determination of the source of income from that employment.  His submissions why Goepfert was wrongly decided are along similar lines as summarised in the Judgment at §21, though more elaborately developed.  In support of the contention that the courts failed to construe section 8 correctly, he took us to the legislative genealogy of the IRO.

67.  The judge had scrutinised the legislative history in section D5 of the Judgment for the purpose of the interpretation of the relevant sections in the IRO and had examined the relevant principles of statutory interpretation in section D4.  We do not propose to repeat those parts of the Judgment.

68.  The salient points made by Mr Hollander regarding the legislative history may be stated as follows:

(1)  Whereas the judge started from Ordinance No 20 of 1947, Mr Hollander took us further back to the proforma Model Income Tax Ordinance in 1922 (“MITO”; from which the IRO was derived, like the tax codes of other British colonies)  and the War Revenue Ordinance 1940 (“WRO 1940”; the first statute to levy a tax on income in Hong Kong).

(2)  He pointed out that MITO was territorial in the sense that it only charged to tax income sourced or received in the colony.  In contrast, the United Kingdom had a residence-based tax code and a British resident was and remains chargeable to income tax on his worldwide income, irrespective of its source or place of receipt.  Also, section 5 of MITO provided for a general tax on income arising from certain enumerated sources, which included both trading profits and income from employment.

(3)  In WRO 1940, income was not taxed under a single charging provision, including tax charged on income from an employment “held or exercised” in Hong Kong (section 8).  From this was derived the salaries tax code in the IRO in 1947.

(4)  The judge had regard to extrinsic legislative materials but his summary with incomplete by two “critical omissions”.

(5)  First, the Report of the Second Inland Revenue Ordinance Review Committee (1967-1968)  (“2^nd Report”)  recorded that: (a)  the place where services were rendered was a material consideration in identifying the source of employment income (§104); (b)  the rationes of UK case law (the three English cases cited in Goepfert: Pickles v Foulsham[59], Bennet v Marshall[60], and Bray v Colenbrander and Harvey v Breyfogle[61];“3 English Cases”)  disregarding the place where services were rendered should not, in principle, be applicable in Hong Kong (§§103 to 106); (c)  the reason for the deeming provisions in sections 8(1A)  to (1B)  (“Deeming Provisions”)  was, in the context of a tax code that was and remains territorial, to ensure that persons only temporarily absent from Hong Kong in the performance of their duties nonetheless be chargeable to tax on their emoluments from employment, and to prevent double taxation and/or the taxation of persons who found themselves in Hong Kong on a temporary or fortuitous basis (§§110 to 111).

(6)  Second, the Report of the Third Inland Revenue Ordinance Review Committee (1976)  (“3^rd Report”), which post-dated the Inland Revenue (Amendment)  Bill 1971 (“1971 Bill”)[62], relevantly affirmed the 2^nd Report’s analysis on the source of employment income and the legislative purpose of the Deeming Provisions (§§115 to 116), and construed the principal charge as requiring that the income itself, as distinct from the employment, be Hong Kong source (§116).

69.  Drawing on the legislative context, Mr Hollander submitted that Goepfert took a wrong turn in the law insofar as it held that no weight should be attached to the locality where services are rendered in the ‘totality of facts’ test.  He put forward three reasons for this contention:

(1)  The doctrine of source in the context of profits tax in section 14 is applicable to the interpretation of section 8(1)  in the context of salaries tax.  This proposition was wrongly rejected by the judge[63].  Leading authorities on the source principle[64] cannot be analysed in a vacuum.  What these decisions had in common was that they were all on the locality of income, which is a more general class of receipt than business profits.  Income as a class of receipts comprises both trading profits and income from employment.  The doctrine of source was uniformly applicable to all classes of income, irrespective of whether it is trading profits or employment income.  To distinguish source as understood in section 8 and section 14 is to postulate a false dichotomy, unsupported by the authorities.

The “broad guiding principle” is that one looks to see what the taxpayer has done to earn the profit in question[65], and the proper approach is to ascertain what were the operations which produced the relevant profits and where those operations took place[66].  The ascertaining of the actual source of income is a “practical hard matter of fact”[67]. This is to be understood in the commercial sense rather than the strictly juristic sense.  The majority of the South African appellate division in CIR v Lever Brothers & Unilever Ltd[68] clarified that the “practical hard matter of fact” doctrine of source should apply to income from employment on the same footing as other kinds of income.

(2)  The 3 English Cases were not in pari materia and should not have been applied.  Macdougall J in Goepfert and the judge below[69] were wrong to prefer the 3 English Cases to the reasoning of the High Court of Australia in Federal Commissioner of Taxation v French (1957)  98 CLR 398.

  Australia’s tax statute at the time was territorial like the IRO but unlike the UK Income Tax Acts.  The majority in French concluded that the common understanding of an employment contract for wages periodically payable is that it is the service that earns the remuneration and hence it was the place where services were rendered that was crucial (at 410).  The 3 English Cases were distinguished in French (at 411 to 412).  Macdougall J was apparently unaware that the relevant provisions in the Hong Kong and Australian tax codes were similar and had an analogous territorial character.

  Conversely, the relevant question in the 3 English Cases was whether income from a trade or employment exercised abroad was income from an overseas “possession”, and had nothing to do with the source of income from employment in the territorial sense.  The chief criterion was whether income was received by a UK resident so that he could be taxed on the same footing as a taxpayer who derived all his income from the UK.

(3)  The Deeming Provisions would not be rendered otiose if the locality of services were taken into account in applying the ‘totality of facts’ test.  Where applying the “practical hard matter of fact” approach and the income is Hong Kong source income from employment, it is wholly taxable.  If the income is not Hong Kong source, some part of it is nevertheless deemed to be so by section 8(1A).  The Deeming Provisions variously exclude or include from the general charge income that would, applying the “broad guiding principle” on the source of income, otherwise be taxable or exempt.  The Deeming Provisions operate as mandatory rules of apportionment, converting the factor of the locality where services are rendered under the general source doctrine into a dispositive factor to the extent that the circumstances contemplated in any of the Deeming Provisions obtain.  They would not be rendered otiose.

Discussion of the taxpayer’s contentions on Question 1

70.  We do not think the further materials referred to by Mr Hollander regarding the legislative history add much to the debate.  MITO was merely a starting point and not a helpful reference, as the law drafters quickly decided to produce provisions for Hong Kong’s specific circumstances[70]. Section 8 of WRO 1940 charged salaries tax on “all income received from (a)  any … employment of profit held or exercised within the Colony”.  This wording foreshadowed the subsequent dual regime of taxing income from (a)  Hong Kong-sited employment (“employment held within” Hong Kong)  as a general charge; and (b)  Hong Kong-rendered services (“employment exercised within” Hong Kong)  as an extended charge, which existed since the original 1947 version of the IRO[71].  A further point to note in WRO 1940 is that salaries tax was treated as separate from, and was differently worded as compared to profits tax, which charged profits “made from transactions in the Colony” (sections 13 to 14).

71.  WRO 1940 was replaced by WRO 1941, in which the wordings of the salaries tax provision (section 8)  and the profits tax provision (section 16)  were revised into a form similar to that in IRO 1947.  The “extended charge” for salaries tax and a deeming provision for profits tax were added to section 2.  The explanatory memorandum to the 1941 Bill explained the amendments:

(1)  the Reconstituted War Revenue Committee recommended a different basis for the assessment of the tax on profits made by those carrying on a trade, profession or business, with a view to increasing the yield on this tax[72];

(2)  the addition of the extended charge for salaries tax and deeming provision for profits tax were “new definitions of ‘profits arising in or derived from the Colony’ and ‘income arising in or derived from the Colony’ which come nearer to expressing the intention of the original War Revenue Committee that the tax should be limited to income or profits made in the Colony”[73]. For salaries tax, the original words “received from” were replaced by “arising in or derived from the Colony in respect of”, and the words “held or exercised within the Colony” were deleted[74]. The rewording for corporation profits tax similarly referred back to the new definitions[75].

72.  As submitted by Mr Wong, WRO 1941 reinforced the distinction between salaries tax and profits tax.  Both were (and are)  sourced-based, but the legislature kept them in separate parts of the statute, applied separate deeming or defining provisions to them, and subjected them to targeted amendments where necessary.  It did not adopt the wording of “transactions” as was done for the deeming provision for profits tax.  Notwithstanding the policy intention that tax should be limited to income made in the Colony, the legislature deliberately did not define the source of salaries tax by reference to the place where services were rendered, but instead enshrined this as the extended charge.

73.  As for the views of the Second Inland Revenue Ordinance Review Committee (1967-1968)  in the 2^nd Report, the Committee recommended following UK and amending section 8 to “income derived from services rendered in the Colony in the exercise of an office or employment” (§§106 to 110).  In the end, this recommendation (which would have required wholesale re-wording of the salaries tax provisions)  was not adopted in the Inland Revenue (Amendment)  Ordinance 1971.  As explained by the Financial Secretary at the second reading of the 1971 Bill, the situs test was maintained at the test for the general charge:

“In the context of Salaries Tax the Committee recommended the maintenance of the concept of the ‘situs of the employment’ as determining liability to Salaries Tax. But at the same time it proposed to use a residence test (although strictly in conflict with our basic principles)  for the relief of certain categories of employees who in practice render services almost wholly outside the Colony, except for visits of short duration. This applies particularly to the case of sea-men and air-crews. These relieving provisions are in clause 5(a)  and clause 5(b)(iii).”[76]

“My honourable Friend, Mr BROWNE, went on to say that it is not altogether clear how clause 5 is intended to apply to seamen and aircrews and to ask for examples. I think I shall have to go into the basic concepts behind our salary tax. Liability to tax may arise from two separate factors― (a)  from a Hong Kong contract of employment, wherever services are performed (the so-called situs of employment); (b)  from the performance of services in Hong Kong.

I said, when I introduced the bill, that we intended to maintain the first of these as the main general criterion but to give general exemption in the case of both (a)  and (b)  where a person otherwise chargeable renders services in the Colony for not more than 60 days in a year of assessment. This applies whether or not there is a Hong Kong contract of employment.”[77]

74.  Thus, the situs of employment test was expressly understood to be based on the place of the “contract of employment, wherever services are performed”, and the place of service was considered a “separate factor” from the situs test and not a relevant factor under the situs test.

75.  The 3^rd Report shed light on the inconsistency between the 2^nd Report and the 1971 Bill.  The 1971 Bill implemented the recommendation of the 2^nd Report of charging salaries tax based on the place of service, not by amending section 8(1), but by keeping the original wording (and thus the situs test)  for the general charge in section 8(1), and adding section 8(1A)(b)  (excluding income if all services are rendered outside Hong Kong)  and section 8(1B)  (the 60-day rule).  These were (and remain)  the “two separate factors” mentioned in the speech of the Financial Secretary.

76.  The 3^rd Report referred to the then controversial state of the law on the interpretation of section 8(1)  considered at the level of the Board (§§115 to 116), and concluded by not recommending any change to the law (§117).  The controversy was resolved by the court in Goepfert in 1987.  That Goepfert was a decision at first instance is beside the point.

77.  The Inland Revenue (Amendment)  (No 2)  Ordinance 1987 was the last time the place of service as the test for the general charge was mooted but not adopted.  As explained by the Financial Secretary when moving the 1987 Bill: (1)  originally, due to the controversial state of the law, the Financial Secretary would have proposed adopting the place of service test for the general charge; (2)  however, “on further consideration”, he changed his mind; (3)  an “important factor” was the “well-known Goepfert decision”, which divided salaries taxpayers into two distinct categories: “first, taxpayers who have a Hong Kong source of employment, and who are taxable on all income from that employment whether they render services in or outside Hong Kong; and second, taxpayers who have a source of employment outside Hong Kong and who are only taxable on income derived from services rendered in Hong Kong”[78].

78.  In summary, the legislative history demonstrates that (1)  since WRO 1940, Hong Kong has always adopted a mutually exclusive distinction between the situs test (which is the general charge)  and the place of service criterion (which is the extended charge); (2)  the 2^nd and 3^rd Reports confirmed that the place of service criterion was considered important, but it was decided for policy reason to retain the situs test and add specific targeted rules regarding the place of service (those in sections 8(1A)  and (1B)); (3)  in case there was any doubt, the legislature confirmed in 1987 that section 8(1)  shall bear the meaning established by Goepfert.

79.  Under the Barras principle[79], where the legislature re-enacts a statutory provision which has been the subject of authoritative judicial interpretation, the court will readily infer that the legislature intended the re-enacted provision to bear the meaning that case law had already established.  This is a presumption the strength of which will vary according to the context, the question in the end is whether the legislature intended the term to be given the meaning it has been given previously[80].

80.  In the present case, it was clear beyond peradventure that the legislature adopted Goepfert and affirmed that section 8(1)  shall bear the meaning established by that case, namely, that the place where services are rendered is not relevant to the inquiry under section 8(1)  whether income arises in or is derived from Hong Kong from any employment. It is a fact and not just a presumption that the legislature adopted Goepfert, as would most cases be under the Barras principle.  The legislature having given its blessing to Goepfert, it is too late to hold that the reasoning of that case is erroneous[81]. Goepfert is now the law and can only be repealed by legislation.  The taxpayer’s contention that Goepfert was wrongly decided in that the place of service is relevant to the inquiry under section 8(1)  (whether as the sole and exclusive criterion or as one of the relevant factors)  on a proper construction of that provision is a hopeless argument.

81.  The contention that the “broad guiding principle” and the operations test for profits tax purposes should apply for the general charge for salaries tax was rightly rejected by the judge for the reasons he gave.  In short, profits tax and salaries tax have been treated as distinct by the legislation, as apparent from the legislative history, and reflects the principled distinction between salaries tax being contract-based and profits tax being activity-based[82]. The operations test would be inconsistent with the policy decision made by the legislature (concern about the loss of tax, concern about difficult apportionment calculations[83]), ie to recognise the importance of the place of service by putting it in specific rules rather than amending section 8(1).  The legislature could not have intended that the general charge in section 8(1)  be determined by the place of service (whether solely or partly), but then have further rules, intended to implement the same policy decision, to modify the general charge to salaries tax.  The legislature would be of two conflicting minds if it intended the place of service to be a factor with varying weight for the general charge, but then of determinative weight where the specific rules on place of service apply.  Reading section 8 as a purposive unity, it is plain that the legislative scheme is that the importance of the place of service is reflected solely in the specific rules.

82.  We agree with the judge that the majority decision in French is not of assistance for the reasons he gave.  Insofar as it suggests place of service as a test, that was expressly rejected by the legislature in 1971 and 1987.

83.  As for the 3 English Cases, neither Goepfert nor the judge relied on them primarily for their decisions.  It is not necessary to discuss the 3 English Cases further for present purpose.

84.  The arguments on the Deeming Provisions are premised on applying the “broad guiding principle”.  Having rejected the applicability of the “broad guiding principle”, we do not propose to deal with those arguments.

85.  For all the above reasons, we reject the taxpayer’s contentions on Question 1.  It is not necessary to deal with §§1.3 to 1.4 of the respondent’s notice, which are premised on the place of service being a relevant factor for the general charge.

Conclusion

86.  We dismiss the taxpayer’s appeal.  There is no dispute that costs should follow the event.  We order the taxpayer to pay CIR’s costs of this appeal.