Home' A Plus Magazine : March 2013 Contents March 2013 45
In Year 2, Company HK would be
granted tax deductions of HK$200,000 [i.e.
(HK$600,000 ÷ 5) + (HK$400,000 ÷ 5)] as
it made both Hong Kong and U.S . sales of
the branded goods in that year.
From this example, it appears that a
relevant intellectual property right would
only be considered by the IRD as being
“used” when it is actively exploited by a
taxpayer in the course of their own sales
or production operations, and that the
relevant use is territorial according to the
place of registration.
In particular, it is understood that the
IRD has rejected submissions made by
certain professional bodies that a rel-
evant intellectual property right can be
considered as being used by the owner
in a defensive sense. These submissions
argued that in the case of this example, the
owner can be considered as using the U.S .
Tra c y Ho is tax location leader, Hong Kong and Macau, and
Patrick Kwong is executive director at Ernst & Young.
registered mark to guard against infringe-
ment in the U.S .
As such, these submissions contended
that the U.S . registered mark, used in such
a defensive manner, enables or facilitates
the owner exploiting the same mark, also
registered in Hong Kong, to produce profits
which are chargeable to tax in Hong Kong
in Year 1. Therefore, these submissions
argued that a tax deduction should also
be granted in Year 1 in respect of the cost
incurred on the purchase of the U.S .
registered mark. However, the IRD has
apparently rejected such argument.
Nonetheless, DIPN 49 states “[that
where] a taxpayer purchased a relevant
right which has been registered in 10
jurisdictions but he only used the relevant
right in four jurisdictions and claims for
deduction of the expenditure to acquire the
relevant right in respect of all the jurisdic-
tions, on the ground that the purpose of
purchasing the relevant right in the six
other jurisdictions is to protect the registra-
tion of the relevant right in the four jurisdic-
tions where the relevant rights are used.
The IRD would accept the above claim only
if the taxpayer could provide substantive
and reasonable evidence to prove that the
relevant right registered in the six jurisdic-
tions has direct and actual impact on the
production of profits chargeable to tax in
However, given the IRD’s rejection of the
submissions made by the professional bod-
ies mentioned above, it remains to be seen
what kind of other evidence the IRD would
accept for this purpose. It would therefore
be helpful if the IRD could elaborate and
give more guidelines on this point.
The IRD’s views that (i) pending registration
of a relevant intellectual property right on
the date of acquisition would not qualify for
tax deductions and (ii) a relevant intellec-
tual property right would only generally be
considered as being used when it is actively
exploited in the course of the taxpayer’s
sales and production operations may be
Commercially, the consideration paid
for the acquisition of a relevant intellectual
property right may be on a worldwide or
regional basis, including the vendor’s pend-
ing registration of the relevant intellectual
property right in certain jurisdictions on the
date of the transaction.
Furthermore, in the initial years fol-
lowing the acquisition, the purchaser, due
to various reasons, may not have sales or
production operations in certain jurisdic-
tions covered by the relevant intellectual
property right acquired.
It is to be hoped that the IRD can revisit
its views on the above controversial issues
and consider whether the new law can be
more liberally interpreted in favour of tax-
payers. If not, consideration may be given
to amend the new law to address the issues
so that the new law can better achieve its
stated objective of “promoting the wider
application of intellectual property by
enterprises and the development of creative
U.S. registered mark
There were sales of
the branded goods
in Hong Kong (there-
fore “use” of the HK
(HK$600,000 ÷ 5)
There were no sales
of the branded goods
in U.S. (therefore
no “use” of the U.S.
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