Hong Kong: Proposed tax deduction for spectrum utilization fees for telecommunication industry

Draft legislation would introduce a new tax deduction for spectrum utilization fees (SUFs) incurred by mobile network operators in connection with auctions on radio spectrum conducted on or after the effective date of the legislation.

Key features of the proposed tax deduction include:

• SUFs incurred by a taxpayer would be deductible provided that the expenditures are incurred in the production of the chargeable profits for the taxpayer’s use of the radio spectrum in the carrying on of its trade or business.  
• The deduction would generally be spread evenly over the spectrum assignment term (i.e., 15 years in general) in both cases of one-off lump sum payment and payment by instalments. However, if a taxpayer starts to use the spectrum in a year of assessment (YOA) after the “assignment year of assessment” (i.e., the YOA in which the assignment term begins), the deduction period would start from the YOA in which the taxpayer first uses the spectrum.    
• There are special rules to deal with the situations when the use of the spectrum is unilaterally transferred or transferred on a swap. 
• The transfer of the use of the spectrum on a swap (i.e., exchange of radio spectrum for use between transferor and transferee) would not affect the deduction claim. That is, for the purpose of applying the proposed deduction, the use of the spectrum (after the swap) by either the transferor or the transferee is deemed to remain the same as the original one throughout the assignment term as if the transfer had never occurred.
• Any SUFs that are reimbursed by way of any grant, subsidy or similar financial assistance would not be deductible. 
• The proposed tax deduction has no retroactive effect. That is, it will only apply to SUFs incurred for auctions on radio spectrum conducted on or after the commencement date of the new legislation on the tax deduction. SUFs paid or to be paid for all past auctions will continue to be non-deductible.

Since the proposed tax deduction is based on SUFs payable (as opposed to SUFs actually paid) in a YOA, if any SUFs payable have been deducted under the proposed regime but the liability to pay such SUFs is subsequently released, the liability so released would be regarded as taxable trading receipts accruing (1) at the time of the release or (2) immediately before the discontinuance of the business (if the release occurs on or after the date when the business is permanently discontinued).
 

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com