Refund of excessive tax reserve certificates purchased plus interest in unsettled Hong Kong tax dispute cases


The Court of First Instance (CFI) handed down its judgment in Besins Healthcare (Hong Kong) Limited v Commissioner of Inland Revenue on September 28 2022.

The case concerned a judicial review initiated by the taxpayer on the refusal by the Commissioner of Inland Revenue (CIR) to refund a sum of approximately HK$6 million (the ‘Excess Amount’, amounting to about $770,000) to the taxpayer. The amount represented excessive tax reserve certificates (TRCs) purchased by the taxpayer as a result of a subsequent downward adjustment made by the CIR in his determination of the taxpayer’s objection.

The key issues in dispute were:

  • Illegality – whether the CIR has the power to refund or repurchase TRCs under Section 71(7)(d) of the Inland Revenue Ordinance (IRO) before the substantive tax appeal is finally determined; and

  • Irrationality – whether it is unreasonable and/or irrational for the CIR to retain the Excess Amount where there is no principled basis to do so and given he is empowered to vary the terms of the holdover of tax under Section 46 of the Interpretation and General Clauses Ordinance (IGCO).

The CFI’s judgment and analysis

On the issue of illegality:

  • The same approach should apply to the principal of the excess TRCs purchased and any interest accruing on it.

  • The phrase “final determination of the objection or appeal” refers to the single endpoint of the process comprising an objection and an appeal under the IRO. This means the single endpoint of the objection (if there is no valid appeal) or the objection and the appeal (if there is a valid appeal). The determination of an objection is not the “final determination” if there is an appeal.

  • Therefore, it is not illegal or contrary to the IRO for the CIR to refuse redeeming or refunding the Excess Amount and any accrued interest under Section 71(7)(d) of the IRO.

  • On the other hand, the CIR has a discretionary power to vary his original holdover order as required.

On the issue of irrationality:

  • Although the commissioner’s determination is not the final position of the case and taxes in excess of the amount demanded in the determination may be raised by the Board of Review, the determination reflected the CIR’s view that the Excess Amount is simply not tax payable at the present stage.

  • Section 46 of the IGCO permits the CIR to make the necessary amendment to the initial holdover order. It is therefore unreasonable and/or irrational for the CIR to retain the Excess Amount given he conceded that he should never have had those funds. It also seems obviously irrational for the CIR not to pay interest at the same time as refunding the principal amount.

The CFI therefore ordered the CIR to:

  • Vary the terms of the original holdover order (i.e., the HK$6 million should be held over unconditionally); and

  • Refund the principal sum of HK$6 million together with the accrued interest within 21 days.

This case illustrates that when judicial review proceedings on tax matters are brought to the court, it is not only the proper statutory interpretation of the material provisions in the IRO that matters. Consideration also needs to be given to whether the acts of the Inland Revenue Department (IRD) result in sufficiently serious “unfairness” or “unreasonableness” to taxpayers that justifies judicial interference.

Another potential unfairness to taxpayers in the objection and appeal process in Hong Kong highlighted by the CFI in its judgment is the huge disparity between the interest rate on TRCs payable by the CIR (i.e., currently at 0.5833% per annum) and the interest rate on judgment debts payable by taxpayers (i.e., currently at 8.169% per annum).

Taxpayers with a similar situation to this case should consider whether a request for a refund of the excessive TRCs purchased together with the accrued interest should be made in light of the CFI’s judgment in this case.

In addition, taxpayers with long-outstanding tax disputes with the IRD should explore effective strategies for early settlement of the cases to minimise the financial impact arising from the requirement to purchase TRCs (in the case of a conditional holdover) or the interest payable upon withdrawal of, or failure in, the objection or appeal (in the case of an unconditional holdover).

KPMG has a team of tax experts specialised in tax controversy services who can help to resolve tax disputes in a timely manner and on a ‘win-win’ basis.

For more details of the case, please refer to KPMG’s publication via this link.

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