Verdict Delivered In Ngai Lik Transfer Pricing Case

by Mary Swire, Tax-News.com, Hong Kong

04 August 2009

The Court of Final Appeal in Hong Kong has given its final verdict in the transfer pricing case between the Commissioner of Inland Revenue (CIR) and Ngai Lik Electronics Company. While the Court of Final Appeal upheld the appeal by the company, the CIR has been requested to work out fresh assessments of Ngai Lik’s tax liability.

The dispute arose over assessments raised by the Hong Kong tax authorities for the fiscal years between 1991/92 and 1995/96. In June 1992, following advice, the company’s group structure underwent a reorganisation under which three British Virgin Islands entities were established. Subsequently, the latter’s intra-group supply transactions with their Hong Kong parent gave rise to the CIR concluding that the purpose of the reorganisation was to enable the company to obtain a tax benefit, contrary to the anti-avoidance provisions of section 61A of the Inland Revenue Ordinance.

This view was upheld by the previous court which found that “the pricing mechanism operated by the taxpayer did not result in arm’s length prices being paid by the taxpayer.” The main thrust of the CIR’s complaint was that this price-fixing mechanism resulted in the company paying an inflated price for goods, and in a corresponding reduction to its tax-assessable profits.

The Court of Final Appeal partially reversed the previous decision and upheld the appeal by the company, mainly on the grounds that the CIR’s assessments under section 61A were not validly made for certain technical reasons. However, the court has asked the CIR to raise “fresh additional assessments on a proper basis” for the years 1993/94 to 1995/96.

The court continued that: “Such fresh assessments should be aimed at counteracting the tax benefit derived from the price-fixing arrangement for the three years in question. In practice, such assessments may be expected to be raised on the basis of an estimate of the assessable profits which would have been earned by the taxpayer if it had hypothetically paid an arm's length price for the goods.”

The result of the CIR’s further deliberations on what such an arm’s length price should be are awaited. Even the court admitted that “one could not expect the exercise to be conducted in great detail or with a high degree of precision.”

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