In this case, the property (moulds used in manufacturing garment hangers) was found to be the subject of a lease and thus was specifically excluded from the definition of assets used in a manufacturing process.
Thus, no deduction or depreciation allowance was available for the Hong Kong taxpayer whose equipment was made available to a factory outside Hong Kong for production of the taxpayer’s products.
The case is: Baitrim (Far East) Ltd. v. CIR.
The taxpayer / company was in the business of supplying plastic garment hangers to customers in the United Kingdom.
The hangers were manufactured by third-party manufacturers in mainland China, using moulds that were owned by the taxpayer. The taxpayer authorized the use of the moulds, and no money was paid by the factories for using the moulds.
The taxpayer’s profits were treated as fully taxable and subject to Hong Kong profits tax. The taxpayer claimed a deduction for the cost of the moulds, pursuant to section 16G of the Hong Kong Inland Revenue Ordinance. Section 16G allows a deduction on the cost of “prescribed fixed assets” used in a manufacturing process; however, assets subject to a lease are specifically excluded from the definition.
The issue, thus, was whether the moulds were used directly for the manufacturing process or were they subject to a lease.
The appellate court found that the moulds were the subject of an arrangement under which a right to use them was granted by the taxpayer to the manufacturers and that this right came within the definition of a “lease” under the Hong Kong tax law.
The case indicates that no deduction or depreciation allowance is allowable when plant and equipment is made available by a Hong Kong taxpayer to a factory outside Hong Kong, to use in manufacture of its product.
The taxpayer has filed for leave to appeal the decision to the Court of Final Appeal.
Read a February 2013 report [PDF 392 KB] prepared by the KPMG member firm in Hong Kong:
Hong Kong manufacturers providing plant and equipment in the mainland dealt a further blow