Hong Kong: No Reprieve For Taxpayers Where Fraudulent Profits Tax Paid

Last Updated: 26 March 2014
Article by Susanne J. Harris and Simon M.S. Au
Most Read Contributor in Hong Kong, September 2019

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.


(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 depend on the nature of the proceedings in which the attribution arises. This conclusion was reached by Lord Walker applying the recent English Court of Appeal decision of Bilta (UK) Ltd v. Nazir [2014] 1 All ER 168 and adopting a contrary position to His Lordship's own judgment in Stone & Rolls [2009] 1 AC 1391. Lord Walker classified such proceedings into three main categories:

  • "Liability" cases, where the company is being sued by an injured third party due to the fraudulent conduct of the company's agents. The fraud exception will not apply as the company is responsible for the dishonest conduct of its employees, even if the company itself is also a "victim";
  • "Redress" cases, where the company itself is suing its fraudulent directors or employees. The fraud exception applies as it would be absurd to allow a fraudulent director or employee to use the attribution of knowledge to shield themselves from liability; and
  • Cases which are neither liability nor redress cases, such as claims against insurers or auditors who have respectively undertaken to protect, or to use their professional skill, against fraudulent conduct. Here, the fraud exception will not apply to absolve such insurers or auditors of their contractual responsibilities who have undertaken to provide protection against or use reasonable professional skill to uncover the fraud.

Lord Walker held the IRD did not fit into either the "liability" or the "redress" categories, and was also markedly different from the position of an auditor or insurer. The IRD could not be expected to conduct inquiries into a taxpayer's business.

The CFA held that the fraud exception should not apply to the claim against the Commissioner and as such, the fraudulent knowledge of the directors would be attributed to the taxpayer.

As a result of the attribution of knowledge, the proviso to section 64(1) of the IRO would not apply as the taxpayer "chose not to" lodge an objection within time. Section 70A was also irrelevant as the tax assessments were in effect deliberate lies, instead of the "errors" required for that section to operate.

Public Policy Grounds

In reaching its decision, the CFA noted that the IRD's functions, powers and obligations were found in the IRO and the public sphere. The IRO aimed to ensure a fair and efficient taxation system featuring prompt payment and finality within a reasonably short time. This statutory purpose would be frustrated if the fraud exception extended to cover claims to indirectly recoup losses suffered as a result of misconduct by a director or employee.

Dissent on S70A

Mr. Justice Tang PJ disagreed with the majority regarding the application of the fraud exception in regard to section 70A of the IRO. His Lordship adopted a pragmatic approach and held that if the liquidators were able to prove the fraud of the directors, then "justice and common sense" required the application of the fraud exception as the IRD had suffered no injury at all. Finally, Tang PJ also noted that under the majority's ruling, shareholders in companies with negligent management would be better off than shareholders in companies with fraudulent management, even though the former type of mismanagement is far more common.


The CFA has adopted a narrow view of the fraud exception to attribution of knowledge and chosen to take a broad public policy approach to ensure finality of tax assessments, even where creditors stand to lose over HK$88 million in tax paid on false profits.

While the decision clarifies important aspects in the law of attribution, the key takeaway for the taxpayer is that unnecessary tax liabilities stemming from the fraudulent activity of directors will, in most cases, be irretrievable from the Commissioner. Even if the responsible individuals such as auditors or liquidators are able to discover the fraud within the short time frames allowed by tax law, the taxpayer company may still be forced to pay tax it would not otherwise have had to pay.

Originally published 24 March 2014

Learn more about our Hong Kong office, Litigation & Dispute Resolution and Tax Controversy practices.

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2014. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions