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Court of Appeal rules that license fees received by a non-Hong Kong resident for granting rights to a Hong Kong taxpayer to exhibit television programs outside Hong Kong are chargeable to tax in Hong Kong
Hong Kong Tax alert
4 June 2015 2015 Issue No. 10
This recent decision has established that “use” of an intellectual property is to be given an ordinary and non-technical meaning for the purposes of sections 15(1)(a), (b) and (ba) of the Inland Revenue Ordinance (IRO).1 Furthermore, sections 15(1)(a), (b) and (ba) are intended to deal with different situations, need not be mutually exclusive and in certain respects may overlap. The case illustrates the complexities inherent in considering how a statutory provision is to be interpreted within the context of a wider legislative scheme. Clients should seek professional tax advice where necessary.
1. The case concerned is Turner Entertainment Networks Asia Inc. for Muse Communications Co. Limited and Commissioner of Inland Revenue, the decision in respect of which was handed down by the Court of Appeal on 28 May 2015 under the reference CACV 259/2012
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Brief facts
Under two license agreements entered into in 2005 and 2006, Muse Communications Company Limited (Muse) which was a non-Hong Kong resident granted a Hong Kong taxpayer Turner Entertainment Networks Asia Inc. (the Company) the right to exhibit certain television programs in Taiwan in return for certain license fees.
Incomes generated by the Company from the exhibition of the relevant television programs in Taiwan were fully chargeable to tax in Hong Kong under section 14 of the IRO. Therefore, the Company was entitled to claim a tax deduction in Hong Kong for the license fees paid to Muse.
The Deputy Commissioner of Inland Revenue (CIR) determined that the license fees received by Muse were chargeable to tax in Hong Kong under the deeming provision contained in section 15(1)(ba) of the IRO, the same being chargeable in the name of the Company as payer of the sums concerned. The Company appealed on behalf of Muse against the CIR’s determination and subsequently, pursuant to Section 67 of the IRO, agreed with the CIR to transfer the appeal to be heard directly by the Court of First Instance (CFI), thereby bypassing a tax tribunal hearing.
The CFI held that the license fees received by Muse were chargeable to tax in Hong Kong under section 15(1)(ba) of the IRO. Not satisfied, the Company on behalf of Muse appealed to the Court of Appeal (CA) in respect of the taxability of the license fees.
Decision of the Court of Appeal
Provisions of the IRO relevant to the dispute
Sums received by a non-Hong Kong resident not carrying on business in Hong Kong from a Hong Kong payer are nonetheless deemed to be chargeable to tax in Hong Kong under Sections 15(1)(a), 15(1)(b) or 15(1)(ba) of the IRO in the respective circumstances as illustrated in the table below:
Arguments of the Company at the CA
Counsel for the Company essentially repeated the same arguments at the CA which he used at the CFI, namely:
i. there had been no relevant “use” of the television programs by the Company within the meaning of section 15(1)(ba); and
ii. section 15(1)(ba) did not cover fees paid for the use of “media works” which fell exclusively within section 15(1)(a), the latter section only charging to tax amounts in respect of exhibition of television programs in Hong Kong, but not outside Hong Kong as in this case in Taiwan.
i. No relevant “use” of the television programs by the Company under section 15(1)(ba)
Counsel contended that “use” in sections 15(1)(b) and (ba) was to be understood in a technical intellectual property (IP) sense, rather than in some ordinary economic sense of employing, utilizing or otherwise deriving benefit from the deployment of something.
In that technical sense, Counsel argued that only where the use of a copyright material by another person would involve that other person infringing the owner’s copyright subsisting in the material, if no license for the use were granted, can it be said that there is relevant “use” of the copyright material for the purposes of section 15(1)(ba) of the IRO. As such, Counsel contended that since the exhibition of the television programs by the Company did not involve the Company reproducing the television programs every time the same were exhibited, there would be no infringement of the copyright concerned. Thus, the exhibition of the television programs by the Company did not constitute “use” of the copyright materials subsisting in the television programs for the purposes of section 15(1)(ba). In this regard, Counsel noted that in relation to use of
For the payer’s use in Hong Kong of the following items (regardless of whether the payer can claim a tax deduction in Hong Kong for the sums paid):
Section 15(1)(a)*
From the exhibition or use in Hong Kong of television film [and of certain other items including cinematograph film, tape and sound recordings]
Section 15(1)(b)*
For the use of or right to use in Hong Kong any copyright material [and certain other types of intellectual property including patents, designs and trademarks]
For the payer’s use outside Hong Kong of the following items where the payer can claim a tax deduction in Hong Kong for the sums paid:
Section 15(1)(ba)#
For the use of or right to use outside Hong Kong any copyright material [and certain other types of intellectual property such as those listed in Section 15(1)(b), including patents, designs and trademarks]
Notes
*Enacted in 1971
# Subsequently enacted in 2000 in order to override the decision of the Court of Final Appeal (CFA) in Emerson Radio Corporation where the use of the trademark in question was held to be outside Hong Kong and therefore outside the ambit of section 15(1)(b), despite the payer being entitled to claim the payments as tax deductible in Hong Kong.
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copyright materials, generally only where the use involved that of computer programs, which are reproduced on being loaded each time the programs are used, would the owner’s copyright subsisting in the programs possibly be infringed by another person.
In support of his argument that “use” of an IP for the purposes of section 15(1)(ba) has to be taken to only refer to “use” in the technical sense of the relevant IP law, Counsel relied on the CFA decision in the Emerson case referred to above. The CA however considered that the Emerson case did not support such reliance.
The CA noted that the fact that sections 15(1)(b) and (ba) cover a variety of forms of IP, is, in itself, a factor that militates against the adoption of technical and restrictive meanings of “use” in relation to each of the forms of IP concerned. This is the case because adopting such an interpretation would possibly require the word “use” to be given different meanings in the same provision depending on the nature of the IP concerned and what activities would amount to the technical “use” of each.
The CA added that it would not be correct to adopt a meaning of “use” which would have the effect of placing most types of copyright material (computer programs being possibly the only exception) outside sections 15(1)(b) and (ba), where no such limitation is expressed in the two sections themselves.
Furthermore, the CA noted that given the revenue protection context of sections 15(1)(b) and (ba) as deeming provisions intended to give rise to assessable profits where none would otherwise arise, there is no need to import the technical meanings particular to other areas of law in order to apply these sections.
Failing the above and as an alternative argument, Counsel contended that in relation to cinematograph or television film or tape, or sound recording (collectively referred to by Counsel as “media works”), the word “use” as adopted in section 15(1)(ba) does not cover “exhibition”.
Counsel argued this to be the case because section 15(1)(a) refers to both “exhibition” and “use” in relation to the relevant “media works”. As such, it follows that the legislature must have intended that there be a difference between “exhibition” and “use”, such that “use” does not include “exhibition”, otherwise the word “exhibition” would be redundant in the context of section 15(1)(a).
Counsel pressed that there is no reason to suggest that the word “use” in sections 15(1)(b) and (ba) should have a different, and wider, ambit than the same word when employed in section 15(1)(a). As such, Counsel submitted that “use” in sections 15(1)(b) and (ba) should be given the same meaning as that intended for section 15(1)(a), i.e., as not including exhibition of “media works”, which was the subject of the license fees in this case.
Rejecting this alternative argument, the CA took the view that the phrase “exhibition or use” in section 15(1)(a) should be read as “exhibition or other use”, with the word “other” being omitted because the sense of the provision remains the same whether or not the word “other” is included therein. Read in this manner, “exhibition” is in fact regarded as one form of “use” even in the context of section 15(1)(a).
In any event, the CA held that even if the word “use” in section 15(1)(a) were to be given the restricted meaning which Counsel contended, it would not be appropriate to transpose that restricted meaning to sections 15(1)(b) and (ba), which deal with a wider range of forms of IP.
On the above basis and taking the view that “use” be given a broad and non-technical meaning, the CA held the deployment of the television programs by the Company by way of exhibition constituted “use” of those programs as copyright materials. Accordingly, the license fees received for the exhibition of the television programs were caught by section 15(1)(ba) of the IRO.
ii. Section 15(1)(ba) did not cover fees paid for “media works”
Counsel contended that payments for the use of “media works” are only assessable under section 15(1)(a), and not under sections 15(1)(b) or (ba), with the consequence that since the relevant use in this case took place in Taiwan, and not in Hong Kong, the license fees in respect of such use was not assessable to tax under section 15(1)(a).
In essence the argument was that the existence of the specific provision for fees paid in respect of the “media works” contained in section 15(1)(a) should be taken as indicating that the “media works” are to be covered under that specific section only, and not under the more general sections contained in 15(1)(b) and (ba), i.e. the presumption that a general statutory provision is intended to give way to the specific.
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Rejecting this argument, the CA noted that there are two differences between section 15(1)(a) and section 15(1)(b) [equally for that matter between section 15(1)(a) and section 15 (1)(ba)] that illustrate that the two sections deal with different matters, are not mutually exclusive, and may in fact overlap in some respects.
First, by virtue of the wording of the respective sections, section 15(1)(a) more naturally relates to a situation in which the owner of the “media works” is itself involved in the exhibition or other use of the same, whereas sections 15(1)(b) and (ba) relate to a situation where the owner is itself not so involved and the use or right to use the relevant forms of IP is conferred by the owner on another person.
Secondly, including “media works” as copyright materials which also fall within the ambit of IP covered by sections 15(1)(b) and (ba) leads to the logical and desirable outcome of taxing those cases in which fees were paid for the right to exhibit or use “media works” but that right was, for whatever reason, not exercised. Otherwise, such payments would escape taxation even if the right granted was in respect of the use of the “media works” in Hong Kong. This would be the case because payments for such unexercised rights, not involving the actual exhibition or use of the “media works” in Hong Kong, would not be caught by section 15(1)(a).
On the above basis, the CA upheld the decision of the CFI and dismissed the Company’s appeal.
Commentary
The decision has established that “use” of an IP for the purposes of sections 15(1)(a),(b) and (ba) is to be given an ordinary and non-technical meaning.
Furthermore, since sections 15(1)(a), (b) and (ba) are intended to deal with different situations, they need not be mutually exclusive and may overlap in certain respects.
The case illustrates the complexities inherent in considering how a statutory provision is to be interpreted within the context of a wider legislative scheme. Clients should seek professional tax advice where necessary.
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© 2015 Ernst & Young Tax Services Limited. All Rights Reserved. APAC no. 03002017 ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/china
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