The Court of Appeal considered four different methods of time-based apportionment to determine the amount of relief:
The Commissioner’s primary position | Apportionment based on the number of days the taxpayer worked outside Hong Kong |
The Board’s Formula | Apportionment based on the number of days the taxpayer did not work in Hong Kong |
DIDO Formula | Apportionment based on the number of days the taxpayer spent outside Hong Kong, whether working days or not |
The Commissioner’s alternative formula | Apportionment based on the number of days the taxpayer worked outside Hong Kong together with paid leave days attributable thereto |
The court accepted the Commissioner’s alternative formula, rejecting the other approaches. The court noted that, subject to contractual provisions, there is no dispute that relief should be available for income for working days worked outside Hong Kong, and not for income for working days worked in Hong Kong. The issue is the income for paid leave days. The court considered that when income accrues on leave days that is attributable to services rendered outside Hong Kong, there is no reason why such leave pay should not qualify for relief from double taxation and be excluded if other conditions in section 8(1A)(c) of the Inland Revenue Ordinance are satisfied.
The court then remitted the case back to the Board for a decision based on the below formula:
Excluded income = Income × [outside Hong Kong working days + leave days (including rest days and holidays) attributable to services rendered outside Hong Kong] ÷ calendar days
The court provided a numeric example. In the relevant year, the taxpayer had 200 working days – rendering services in Hong Kong for 80 days and rendering services outside Hong Kong for 120 days – and 165 leave days. The leave days prorated to services rendered outside Hong Kong may be calculated as 165 × 120 ÷ 200 = 99 days. The income that may qualify for exclusion under section 8(1A)(c) may be calculated as annual income × (120 + 99) ÷ 365 = 60% of annual income. This is arithmetically equivalent to prorating by reference only to working days (i.e., 120 ÷ 200, which is also 60%).
Whilst the above broadly refers to days rendering services outside Hong Kong, this should only include days in a territory outside Hong Kong in which the taxpayer’s employment income is subject to tax.
Notwithstanding the above, the court mentioned it is a question of fact as to what income is derived from services rendered outside Hong Kong, and what leave days are attributable to services rendered outside Hong Kong.