The court’s interpretation of the deeming provisions on taxation of royalties
The Court of Appeal (COA) handed down its judgment in Turner Entertainment Networks Asia, Inc. (Turner Entertainment) for Muse Communications Co. Ltd (Muse) v CIR on 28 May 2015. The case concerns whether the licence fees received by a non-resident company for granting of licences to exhibit certain television programs in Taiwan to a company carried on business in Hong Kong are chargeable to Hong Kong profits tax under section 15(1)(ba) of the Inland Revenue Ordinance (IRO) on the basis that the sums are deductible by the latter for Hong Kong profits tax purposes.
The outcome of the case hinged on the proper statutory interpretation of sections 15(1)(a), 15(1)(b) and 15(1)(ba) of the IRO. The COA held that the licence fees are taxable under section 15(1)(ba) since (1) the term ‘use’ in sections 15(1)(b) and (ba) should be given a broad and non-technical meaning and should be construed as including ‘exhibition’ and (2) section 15(1)(ba) also covers the sums received for the use of or right to use any ‘media work’ (and not just patent, design, trade mark, etc.) outside Hong Kong.
With the COA’s interpretation that section 15(1)(ba) also applies to ‘media works’ although the section’s wording mirrors that of section 15(1)(b) which refers to patent, design, trade mark, copyright material, etc., taxpayers should be mindful that sums derived for the use or exhibition of media works outside Hong Kong, though not chargeable to profits tax under section 15(1)(a) because they are not exhibited in Hong Kong, will become chargeable under section 15(1)(ba) if the sums are deductible for Hong Kong profits tax purposes. Companies in Hong Kong with intellectual property (IP) licensing arrangements should review their current tax positions and assess whether any potential Hong Kong profits tax exposure as well as reporting obligation exist in respect of the payments made under those IP licensing arrangements.
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