No Reprieve For Taxpayers Where Fraudulent Profits Tax Paid

Keywords: taxpayers, CFA, fraudulent directors, fraud exception

On 13 March 2014, the Court of Final Appeal (CFA) handed down its ruling in Moulin Global Eyecare Trading Limited (In Liquidation) v. The Commissioner of Inland Revenue and Another FACV 5/2013. The CFA dismissed the taxpayer's appeal and held that the taxpayer should be attributed with the guilty knowledge of the fraudulent directors such that it could not receive a time extension to give notice of objection to an assessment under section 64(1)(a) or correct an "error" in a return under section 70A of the Inland Revenue Ordinance (IRO).

The CFA's decision provides an authoritative ruling on the extent to which a director's or employee's knowledge may be attributable to the taxpayer company. It also defines and limits the scope of the "fraud exception" to the rule of attribution.

Background

(For a more detailed summary of the case, please refer to our legal updates "Court of Appeal's Recent Tax Decisions" of 27 June 2012, and "Constant Vigilance - Two Recent Tax Decisions" of 19 April 2013.)

The taxpayer company had previously prepared profits tax returns and paid over HK$88 million tax pursuant to inflated profit data in false accounts prepared by the fraudulent directors. Years later, the liquidators of the taxpayer company discovered that the taxpayer had in fact made no profit at all, and attempted to reclaim the profits tax paid to the Inland Revenue Department (IRD). Pursuant to sections 64(1)(a) and 70A of the IRO respectively, the liquidators contended the fraud was either a "reasonable cause" to extend the one-month time limit for objection, or an "error" in the returns which caused excess tax to have been paid.

The Court of First Instance (CFI), relying on the general law of agency, found in favour of the taxpayer, holding conclusively that an agent's fraud can never be attributed to his principal. The Court of Appeal (CA) overturned the CFI decision, on the basis that other rules of attribution that facilitated the statutory objects of the IRO should instead be applied. The taxpayer appealed to the CFA.

In the CFA

In a long and careful judgment, Lord Walker NPJ, writing for the majority, dismissed the appeal on the grounds of attribution of fraudulent knowledge to the taxpayer and public policy.

Attribution and the Fraud Exception

The CFA held that the scope of the fraud exception is limited and the attribution of an individual's knowledge to a company will always...