20(3) The performance of any of the services by the relevant individual is not subject to any control or supervision commonly
exercised by an employer – in this case, Mr Hui will continue to be under the instruction and supervision of his current
boss, GAL’s Group IT director.
(4) The remuneration is not paid or credited periodically or calculated on a basis commonly used in employment contracts
– the payment in this case will be made by GAL directly into the consulting company’s bank account on a monthly basis.
(5) The relevant person does not have the right to order the cessation of services in a manner or for reasons which are
commonly provided for in a contract of employment – the question does not provide details as to whether GAL has the
right to terminate Mr Hui’s services as if it is his employer.
(6) The relevant individual is not held out to the public to be an officer or employee of the relevant person – Mr Hui is
requested to continue with his current title of Regional IT manager, and thus it is obviously expected that he will be
presumed by others to be GAL’s employee.
As shown above, Mr Hui’s case satisfies some but not all of the above criteria.
In the circumstances, it is likely that s.9A would apply. Nonetheless, s.9A(4) also provides an ‘escape clause’ for the benefit
of taxpayers. It is provided that the Commissioner of Inland Revenue (CIR) has a wide discretionary power to exclude a case
from being deemed as an employment, if he is satisfied that in substance an individual is not holding an office or employment.
In considering cases under this escape clause, the CIR will usually look at the case law distinguishing between a contract of
service (i.e. an employment) and a contract for service (i.e. an independent contractor). Although there is no single decisive
test that can be used for all cases (Hall v Lorimer), there are factors which are commonly used by the courts to establish the
existence of an employment. These factors are generally known as the integration test, control test and economic reality test.
Briefly speaking, the integration test examines whether the service provider is part of the organisation and held out to the
public as an officer of that organisation. The control test examines whether the person demanding the service has control over
how and when the services are performed. The economic reality test examines whether the service provider performs the
services on his own account and bears his own business risk.
In the case of Mr Hui, it is fairly obvious that the proposed arrangement would be likely to fail all these tests. In conclusion,
it is highly likely that the proposed arrangement would be regarded as a disguised employment and thus Mr Hui would
continue to be treated as the employee of GAL.
Tutorial note: An arrangement which falls outside the scope of s.9A may nevertheless be charged to salaries tax by the IRD
through the application of the general anti-avoidance provisions in s.61 and s.61A.
(b) Where s.9A operates to ‘look through’ the arrangement and deem Mr Hui as the employee of GAL, the whole amount paid
by GAL to the consulting company would be regarded as the employment income of Mr Hui. This whole payment would
continue to be subject to salaries tax in the name of Mr Hui as is the case prior to 1 September 2012. If Mr Hui has entered
into an employment contract with the consulting company and receives remuneration under that contract, such remuneration
will be exempt from salaries tax in order to avoid Mr Hui being doubly taxed on the same income.
In the case of the consulting company, since the arrangement has been ‘looked through’, the income received by the
consulting company from GAL would not be subject to profits tax. This is to avoid double taxation because such ‘income’ has
been deemed as employment income received by Mr Hui and brought into the salaries tax net. In addition, the remuneration
paid by the consulting company to Mr Hui under the new employment contract would not be allowed as a tax deduction.
In the case of GAL, it will be regarded as the employer of Mr Hui regardless of the proposed arrangement and irrespective of
what clauses have been explicitly included in the service agreement. As an employer, GAL will be obliged to comply with the
necessary reporting obligations of an employer such as annual employer’s return for reporting remuneration, notification of
commencement and cessation of employment, and notification of leaving Hong Kong and retention of money. Failure to
comply with the reporting obligations would render GAL liable to penalties.
4 Compass Ltd and David Lo partnership
The additional information needed to determine the profits tax payable by the partnership business is as follows:
(1) Cost of sales – The basis of stock valuation and whether any goods were taken for private use by the partners.
(2) Interest income – A breakdown of the interest income to check whether the interest is on trade debts (which is taxable), or
from a loan provided in Hong Kong (which is onshore) or outside Hong Kong (which is offshore), or from a deposit placed
with a bank in Hong Kong (which is sourced in Hong Kong), or outside Hong Kong (which is offshore); and whether the
deposit is pledged as a security for any bank overdraft facilities or bank loans.
Interest accrued on deposits with financial institutions in Hong Kong is exempt from profits tax under the Exemption from
Profits Tax (Interest Income) Order 1998. However, the exemption does not apply to interest on a deposit which is used to
secure or guarantee money borrowed from a financial institution, if the borrowing fulfils s.16(1)(a), any of the conditions in
s.16(2)(c), (d) or (e) is satisfied, and s.16(2A) does not apply.
