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There is now a case before the Court of Final Appeal on Nice Cheer Investment Ltd (Nice Cheer). The case is noteworthy because the decision may have significant impact on the tax consequence of fair value accounting in Hong Kong.
Nice Cheer is an investment company and in accordance with the current accounting standards, it re-values its trading securities at the end of the accounting year; which revaluation is commonly referred to as mark-to-market accounting. The Inland Revenue Department (IRD) sought to tax the revaluation gain and Nice Cheer appealed to the Courts. The amount of tax involved is substantial.
In both the High Court and the Court of Appeal the IRD lost. In other words, unrealized gains resulting from mark-to-market accounting are not taxable.
However, the Court of Appeal in fact also handed down a decision on the other leg of this scenario, namely that unrealized losses are allowable. In other words, there will be asymmetry in tax treatments between unrealized profits and unrealized losses.
The court arrived at this decision on the basis that when stocks are written down to market value, the losses are realised. The loss is an aspect of the cost of an asset which is actually incurred by the act of purchase whereas a profit is earned by an act of disposition which has not happened at all in this case.
It is envisaged that the IRD will not sit idle if the decision is confirmed by the Court of Final Appeal. We expect the IRD will attempt to bring about legislative changes to re-establish the symmetry between what for the time being can only be called revaluation gains and losses. However, any such legislative changes are likely to be hotly debated in the Legislative Council.
Please consult your tax engagement partner on the impact of the Nice Cheer case on your company’s tax position. We will keep you updated on the decision of the Count of Final Appeal.
If you are in any doubts or have any questions, please contact your engagement tax adviser.
