Hong Kong Taxation Workshop Presented by: Lusan Hung December 1, 2007

Hong Kong Taxation Workshop

Presented by:

Lusan Hung

December 1, 2007

Disclaimer

The materials of this seminar / workshop / conference are intended to provide general information and guidance on the subject concerned. Examples and other materials in this seminar / workshop / conference are only for illustrative purposes and should not be relied upon for technical answers. The Hong Kong Institute of Certified Public Accountants (The Institute), the speaker(s) and the firm(s) that the speaker(s) is representing for take no responsibility for any errors or omissions in, or for the loss incurred by individuals or companies due to the use of, the materials of this seminar / workshop / conference.

No claims, action or legal proceedings in connection with this seminar/workshop/conference brought by any individuals or companies having reference to the materials on this seminar / workshop / conference will be entertained by the Institute, the speaker(s) and the firm(s) that the speaker(s) is representing for.

Hong Kong Taxation Workshop

Profits tax Income Expenses Tax planning techniques Non-resident taxpayers Recent taxation updates

Hong Kong Profits Tax

Capital vs. Revenue Onshore vs. offshore Profits tax rate: 17.5%

Income/Expenses

Income/Expenses

Revenue Capital

Onshore Offshore Not Taxable/Deductible

Taxable/Deductible Not Taxable/Deductible

Capital vs Revenue

Section 14 of the IRO There is a trade, profession or business in Hong Kong That the trade, profession or business derives profits;

and The profits arise in or derived from HK

Capital : related to permanent structure of a business eg. Proceeds from sale of office premises

Revenue : proceeds from circulating or trading assets eg. Sales of trading stocks or services in the course of

business

Income

Active income: Trading Manufacturing Servicing

Income

Passive income: Dividend income Interest income Capital Gains Royalties Rental income Commission? Investment income?

Sources of Income

Operation test Contract conclusion test DIPNs Case Law

Trading Income- governing factors

Where sales and purchases are:- negotiated, executed and concluded ?

Questions to ask: How / Where/ Whom ? Negotiation–

Methods / place: via email, phone, fax or in person, such as trade show or business trips?

Person: staff, agent or subcontractor? Execution – via email, fax or mail? Conclusion – how and where?

Trading Income

Trading profits cannot be apportioned. Having a BVI company booking all the income ≠

Offshore operation. Buying from or Selling to overseas not necessarily =

Offshore operation. Re-invoicing via Accounting firm not necessarily =

Offshore operation.

Trading Income- rules and precedence

DIPN 21 CIR v Hang Seng Bank Limited CIR V HK-TVB International Limited Consco Trading Co. Ltd v CIR D76/03 D13/03 D172/04

Case Studies – Trading profits

Trading profits ABC Co. purchases garments from China and derive

sales profits from selling them to the following US Customers:


Scenario 1 US Customer A faxes a

purchase order to the Hong Kong office of ABC Co. ABC Co. accepts the purchase order in Hong Kong and faxes a sales confirmation back to US Customer A.

Profits derived taxable or not?


Scenario 1 US Customer A faxes a

purchase order to the Hong Kong office of ABC Co. ABC Co. accepts the purchase order in Hong Kong and faxes a sales confirmation back to US Customer A.


The sales contract is effected in Hong Kong as the purchase order is accepted in Hong Kong by faxing the sales confirmation in Hong Kong.

The sales profits are taxable in Hong Kong.

Case Studies – Trading profits Scenario 2 US Customer B sends

purchase orders to Hong Kong but does not require any acknowledgement. ABC Co approves the orders on receipt in Hong Kong but does not issue sales confirmations. It then sends a fax to the Chinese factory instructing them to manufacture the garment and ship them directly to the US.


Case Studies – Trading profits Scenario 2 US Customer B sends

purchase orders to Hong Kong but does not require any acknowledgement. ABC Co approves the orders on receipt in Hong Kong but does not issue sales confirmations. It then sends a fax to the Chinese factory instructing them to manufacture the garment and ship them directly to the US.


ABC Co has received and accepted US Customer B’s order in Hong Kong.

It also issues purchase order in Hong Kong to the Chinese factory.

The sale is taxable in Hong Kong


Scenario 3 US Customer C send its

buying manager to Hong Kong once a year. While in Hong Kong he signs a sales contract with ABC Co. for the supply of the garments.



Scenario 3 US Customer C send its

buying manager to Hong Kong once a year. While in Hong Kong he signs a sales contract with ABC Co. for the supply of the garments.


the sales agreement is negotiated & concluded in Hong Kong

the sales profits are taxable in Hong Kong.



Scenario 4 The sales manager of ABC

Co. visits the US and signs a sales contract with US Customer D. The sales manager informs the buying manager of the new order. The buying manager goes to China and negotiates the purchase of the garments from the Chinese factory. While in China, the buying manager signs a contract to buy the garments.



Both the purchase and sales contracts are negotiated and concluded outside Hong Kong (in China and US)

the sales profits are not subject to tax in Hong Kong.

Scenario 4 The sales manager of ABC

Co. visits the US and signs a sales contract with US Customer D. The sales manager informs the buying manager of the new order. The buying manager goes to China and negotiates the purchase of the garments from the Chinese factory. While in China, the buying manager signs a contract to buy the garments.

Case Studies – Trading profits Scenario 5 ABC Co. appoints a US

Co as its US agent. The agent is authorized to negotiate and conclude sales contracts on behalf of ABC Co. The agent faxes details of the orders both to ABC Co in HK and to its Shanghai buying office. The Shanghai office orders the garments from a Chinese factory and ships them to the US.


Case Studies – Trading profits Scenario 5 ABC Co. appoints a US

Co as its US agent. The agent is authorized to negotiate and conclude sales contracts on behalf of ABC Co. The agent faxes details of the orders both to ABC Co in HK and to its Shanghai buying office. The Shanghai office orders the garments from a Chinese factory and ships them to the US.

Profits derived taxable or not? The sales profits have a

foreign source as both the purchase and sales contracts are negotiated and concluded outside Hong Kong.

Care should be taken where “the agent” is a related company.

Refer to ING Baring Case.

Manufacturing Income

Determined by the location where the goods are manufactured.

Place where the goods are sold are irrelevant. Factory outside of HK – contract processing vs. import

processing.

Manufacturing Income

HK Co. engages a mainland entity to process goods on a co-operative basis: 1) Contract processing (來料加工 )

Manufacturing activities DIPN 21 applies, 50:50 apportionment

2) Import processing (進料加工 ) Trading activities No apportionment

Subcontracting – could be viewed as trading.

Contract Processing or Import Processing?

Governing factors:- Who provide raw materials, equipment? Who has the ownership on raw materials and finished

goods? Substance over form? All goods are for export? Sales to other customers?

Case: Consco Trading Company Limited

Contract Processing (來料加工 )

D132/99 HK Co.

provides raw material, equipment & technical assistance to mainland entity at no cost

has ownership & title on raw materials & processed goods pay a processing fee to the mainland entity for production

Mainland entity Acts as a processing unit, exported all processed goods back to

HK Co. provides factory premise, land and labor

Manufacturing activities Plant & machineries provided for the factory will not be entitled to

16G deduction, included in 30% pool instead.

Import Processing (進料加工 )

D111/03 HK Co.

Sell raw materials & purchases processed goods from Mainland entity

has no ownership & title on raw material & processed goods

Mainland entity (typically set up as a WOFE) provides raw material, process goods and sell the

finished goods to HK Co. on its own accounts has ownership and title on raw materials and

processed good Trading activities

Consco Trading Company Limited

Board of Review’s decision:- “a high preponderance of the Taxpayer’s profit-

making activities taking place in Hong Kong” “most of the activities which earned the profits were

carried out in Hong Kong, namely the sourcing, the financing, the appointment of the US agent and the negotiation of the sale”

Taxpayer was not a manufacturer, it was a trader

Consco Trading Company Limited

High Court:- Totality of facts:

“much more had to be done before and after signing the contract and that those activities were carried out in Hong Kong”

“The opening of letters of credit and placing of orders by the taxpayer were relevant and crucial factors in determining the source of profits”

Case Studies – Mfg profits Scenario 1 XYZ Co. subcontracts the

assembly to a factory in China.

XYZ Co. purchases the raw materials, designs the products while the Chinese factory controls its own production procedures and sold the finished products to XYZ Co. and other customers besides XYZ Co.

How the profits derived are taxed?

Case Studies – Mfg profits Scenario 1 XYZ Co. subcontracts the

assembly to a factory in China.

XYZ Co. purchases the raw materials, designs the products while the Chinese factory controls its own production procedures and sold the finished products to XYZ Co. and other customers besides XYZ Co.


the Chinese factory is only an independent contractor of XYZ Co

XYZ Co. cannot claim 50% of its profits as tax-exempt foreign income

the profits derived are 100% taxable under Hong Kong profits tax.

Case Studies – Mfg profits Scenario 2 XYZ Co. co-operates with

a China entity who agrees to provide factory space and workers for production in return for a processing fee.

XYZ Co. provides raw materials, skilled labor and technical support to the factory at no cost.

XYZ Co. has ownership & title on raw materials and finished goods at all times.

All processed goods are returned to XYZ Co.


Case Studies – Mfg profits Scenario 2 XYZ Co. co-operates with

a China entity who agrees to provide factory space and workers for production in return for a processing fee.

XYZ Co. provides raw materials, skilled labor and technical support to the factory at no cost.

XYZ Co. has ownership & title on raw materials and finished goods at all times.

All processed goods are returned back to XYZ Co.


Chinese factory is a processing unit of XYZ Co. i.e. part of the manufacturing operations is in China

50% of its manufacturing profits may be exempt from Hong Kong tax

Servicing Income /Commission

Location where the services are rendered Not apportioned generally Passive commission –not taxable if structured properly

Case Studies – Service income

Scenario 1 Co X receives buying

commissions for purchasing textiles in Hong Kong and inspecting them at the Hong Kong factory before they are shipped to the US.

Commissions derived taxable or not?


Scenario 1 Co X receives buying

commissions for purchasing textiles in Hong Kong and inspecting them at the Hong Kong factory before they are shipped to the US.

Commissions derived taxable or not?

Co X performs its buying services in Hong Kong

The buying commission is subject to Hong Kong profits tax.


Scenario 2 A director of Co X takes a

US customer to see a new factory in Taiwan. The director helps the US customer negotiate a purchase in Taiwan. The director is required to visit Taiwan for inspection of the goods before they are shipped to the US.

Commission derived taxable or not?


Scenario 2 A director of Co X takes a

US customer to see a new factory in Taiwan. The director helps the US customer negotiate a purchase in Taiwan. The director is required to visit Taiwan for inspection of the goods before they are shipped to the US.

Commission derived taxable or not?

The buying commission is received for services rendered primarily outside Hong Kong

Should not be subject to Hong Kong tax.

Passive Income

Interest income Interest exemption order Provision of Credit test

Dividend income Not taxable Withholding tax not applicable

Capital gains Not taxable

Passive Income – cont’d Royalties

S15(1)(b),(1)(ba) & S21A Charged if the use or right to use the trademark,

patent, copyright etc. is in Hong Kong. 100% gross receipts taxable if paid to associates

where the mark has previously been owned in HK. Otherwise, 30% taxable.

Effective tax rate: 5.25% or 17.5% Landmark case: Emerson Radio Corporation vs. CIR S15(1)(ba) : to deem royalties paid in respect of right

use outside of HK after June 25, 2004, if deductions claimed.

Case Studies – Interest income C Ltd , a HK company,

lends US$100,000 to another HK company, D Ltd, by transferring the money from its US bank account to the US$ account of D Ltd in New York. D Ltd paid interest to C Ltd for the money borrowed.

Interest income derived taxable or not?

Case Studies – Interest income C Ltd , a HK company,

lends US$100,000 to another HK company, D Ltd, by transferring the money from its US bank account to the US$ account of D Ltd in New York. D Ltd paid interest to C Ltd for the money borrowed.

Interest income derived taxable or not?

The interest received by C Ltd has a foreign source under the provision of credit test as the loan was made available in New York, i.e. outside Hong Kong.

Expenses /Deductions

Section 16(1) of the IRO. Outgoings and expenses are allowed to the extent that

they are incurred in the production of profits which is chargeable to Profits tax in any period.

Expenses of a private nature or capital nature, not deductible.


“incurred” is not the same as paid Note DIPN 40 re Prepayments (Secan case) “to the extent”

no definite rule on apportionment. e.g. based on turnover basis, gross profit basis and

asset basis. General provisions not normally deductible

contingent and no fixed liability.


“in the production of profits” - with the expectation of generating profits or for the purpose of trade. re CIR vs. Cosmotron Manufacturing

“any period” – expenses incurred are deductible irrespective of income derived in a prior or later year. e.g. Pre-commencement trade expenses, are these

deductible? How to define pre-commencement of business?

Recent trend: follow accounting treatment with exceptions such as stock option gains.

Capital vs. Revenue Expenses

Capital – in the form of investment, purchase of fixed assets etc.

Some capital expenditure receives tax concession or exemption, such as: Purchase of patent & know how [S16E]; Expenditure on building refurbishment [S16F]; Expenditure on prescribed fixed assets [S16G]

Expenses - Interest

Section 16(1)(a) Deductible if for the purpose of producing

assessable profits; AND Meet conditions in S16(2) of IRO AND Sub-sections 16(2A)-(2H).

Case Studies - Interest expenses

Scenario 1 A’s Perfumes borrows

US$1m loan from the bank, secured by personal guarantee, to buy 50% of the shares in S Ltd as a long term capital investment.

Interest paid on the loan tax-deductible?

Case Studies - Interest expenses

Scenario 1 A’s Perfumes Ltd borrows

US$1m loan from the bank, secured by personal guarantee, to buy 50% of the shares in S Ltd as a long term capital investment.

Interest paid on the loan tax-deductible?

The interest paid is not tax-deductible because it is not incurred in the production of taxable profits [S16(1)(a)].

Expenses - Interest -Section 16(2)

a. The borrower is a financial institution;b. The borrower is a public utility company;c. The lender is subject to Hong Kong tax on the interest

received;d. The lender is a financial institution and that loan is not

secured or guaranteed by any deposit;e. The loan is raised to finance purchase of plant,

machinery or trading stock and the lender is not related to the borrower;

f. Interest paid by a corporation on debentures or similar marketable instrument listed on Hong Kong or any other stock exchanges.

Expenses - Interest

New Conditions (Amendments on S16(2) since June 2004):

Original Sections

16(2C), 16(2F), 16(2G), 16(2H)

16(2)(f)

16(2A), 16(2B), 16(2D), 16(2E)

16(2)(c), 16(2)(d), 16(2)(e)

Expenses - Interest S16(2A) - Secured Loan Test

Not deductible/ Reasonable appropriate deduction

Guaranteed by deposit or loan

Security made by borrower or an associate?

Security made to specified person (Lender, FI, associates)?

Interest on deposit or loan is taxable in HK?

Yes

Yes

YesYes

No

No

No

No

Deductible but subject to interest flow back test S16(2B)

Expenses – Interest

Loan is NOT considered as “secured” if:- Bankers have right to utilize balance in deposit to set

off the outstanding loan and interest payable The right of the taxpayer to withdraw the deposit is

not restricted at any time Taxpayer has unrestricted right to operate before the

bank exercise the right to set-off

Expenses - Interest Case Studies – Secured loan test Scenario 1

Mr. F borrows from Bank G Loan: $100M Interest expenses: $5M The loan is secured by:

Bank deposit: $100M Interest income: $4M

(Tax-free)

Interest deductible?

Scenario 1

Mr. F borrows from Bank G Loan: $100M Interest expenses: $5M The loan is secured by:


(Tax-free)


Deduction is reduced by $4M, being the tax-free interest earned.

Allowable deduction is $1M ($5M-$4M) only.

Expenses - Interest Case Studies – Secured loan test


Mr. F borrows from Bank G Loan :$100M Interest expenses: $5M The loan is secured by:


(Tax-free) Security > loan



Mr. F borrows from Bank G Loan :$100M Interest expenses: $5M The loan is secured by:


(Tax-free) Security > loan


Deduction is reduced by $3M, calculated as follows:-

= $6M x $100M (loan) $200M (deposit)

Allowable deduction is $2M ($5M-$3M)only.


Mr. F borrows from Bank G Loan 1: $100M (onshore)

interest expenses: $5M Loan 2: $150M (offshore)

interest expenses: $8M Loans are secured by:


(Tax-free) Security < multiple loans







(Tax-free) Security < multiple loans


$8M offshore interest is not deductible under S16(1).

Onshore deduction is reduced by $3.2M, calculated as follows:-

= $8Mx $100M (onshore loan) $250M (Total loans)

Allowable onshore deduction is $1.8M ($5M-$3.2M) only.






(Tax-free) Security > multiple loans







(Tax-free) Security > multiple loans


$8M offshore interest is not deductible under S16(1).

Onshore deduction is reduced by $4M, calculated as follows:-

=16Mx250M(total loan)x100M(onshore)

400M(deposit) 250M(total loan)

Allowable onshore deduction is $1M ($5M-$4M).

Expenses – Interest

DIPN 34(revised): Exemption order: If Interest expense on the loan is allowable, Interest

income from deposit is not exempt Partial exemption for the interest income is not

allowed. Taxpayer cannot choose to give up the interest

expense deduction and claim the interest income exemption.

Expenses - Interest S16(2B) – Interest flow back test “Agreement” exists where:-

Company K & H are associated companies

The 2nd loan (Company H) is advanced by sub-participating in the 1st loan (Company K)

Bank J: Interest and loan payable to Company K will be subject to repayment of interest and loan by Company H (ie. Bank J is risk free)

Bank J

Company H

2nd loan to the borrower

Company K

1st loan to bankInterest

Interest

Expenses - Interest S16(2B) – Interest flow back test

Interest flow back to the borrower or connected person ?

Is the person receiving the interest an “expected person”?

Not deductible/ deduction reduced to reflect the period of time when the interest flow back exists

Yes

No

No

Yes

Deductible

Under the Agreement:-

Expenses - Interest S16(2B) – Interest flow back test

“Expected person”: chargeable to tax on interest income FI, A bare trustee, government owned corporation, public

body, member of recognized retirement scheme, beneficial of unit trust etc.

Expenses - Interest Case studies –Interest flow-back test Scenario 1

1st loan :- from an associate to Bank Loan: $70M interest income from bank

$7M (Tax-free )

2nd loan:- from Bank to the borrower Loan: $100M interest expenses to bank

$10M.



1st loan :- from an associate to Bank Loan: $70M interest income from bank

$7M (Tax-free )

2nd loan:- from Bank to the borrower Loan: $100M interest expenses to bank

$10M.


Deduction is reduced by $7M (interest attributable to the sub-participated portion) calculated as follows:-

Interest expenses x 1st loan 2nd loan

= $10M x $70M $100M

Allowable interest deduction is $3M ($10-$7M) only.


1st loan: From an associate to Bank Loan: $70M Interest income: $7M, for 6

months (Tax-free). 2nd loan from Bank to the borrower Loan: $100M Interest expenses: $10M


Expenses - Interest Case studies –Interest flow-back test


Deduction is reduced by $3.5M calculated as follows :-

= Interest expenses x 1st loan x 6

2nd loan 12

= $10M x $70M x 6

$100M 12

Allowable interest is $6.5M ($10M-$3.5M) only.

Scenario 2

1st loan: From an associate to Bank Loan: $70M Interest income: $7M, for 6

months (Tax-free). 2nd loan from Bank to the borrower Loan: $100M Interest expenses: $10M

Expenses -Bad Debts

Section 16(1)(d) The debt must have been returned as trading receipts or

incurred in the normal course of business. Debt must have turned bad during the basis period. Debt in respect of deposits and advances made in the

normal course of business is deductible under S16(1) of the IRO.

Bad debt recovered are taxable.

Case study -Bad Debts

PAI Company Ltd is a finance company. For the y.e. 31.12.2006, it has incurred specific bad debt of HK$2.5m. After discussion with the auditors, Management decided to provide for bad debt in the accounts on February 14, 2007.

Is the provision deductible? In which year of assessment

can the company claims the deduction?

Case study -Bad Debts

PAI Company Ltd is a finance company. For the y.e. 31.12.2006, it has incurred specific bad debt of HK$2.5m. After discussion with the auditors, Management decided to provide for bad debt in the accounts on February 14, 2007.

Is the provision deductible? In which year of assessment

can the company claims the deduction?

The provision is only deductible in the year of assessment 2007/08 as the provision was not made before the year end. [S16(1)(d) of the IRO]

Expenses - Research & Development

Must be made to an approved research institute Expenditure on plant & machinery for R&D can allowed

as deduction When such plant & machinery is sold or destroyed:

Proceeds from the sale or compensation received shall be treated as a trading receipt.

If not qualify under S16B, can we consider S16(1)?

Expenses - Offshore

Are offshore expenses deductible? What are they incurred for?

Case Studies - Offshore activities

Company GHI is in the trading business. It has a sales team who travel frequently overseas to visit buyers and conclude sales arrangement.

Would the traveling expenses be deductible?

Case Studies - Offshore activities

Company GHI is in the trading business. It has a sales team who travel frequently overseas to visit buyers and conclude sales arrangement.

Would the traveling expenses be deductible?

GHI – if exp.attributable to offshore activities and offshore profits claim is lodged, →not deductible.

If no offshore profits claim → deductible.

Case Studies - Offshore expenses

Company GHI reimburses its Shanghai RO of all the expenses it incurs.

Are these reimbursements deductible?


Company GHI reimburses its Shanghai RO of all the expenses it incurs.

Are these reimbursements deductible?

Expenses deductible to the extent they generate taxable profits to Company GHI.

Apportionment may apply if offshore profits claim is lodged.

Beware of PRC tax implications.


F Ltd is a Hong Kong company. It opens a purchasing office in the Philippines and funded all the activities in the Philippines.

Are the expenses incurred by the Philippines office deductible to F Ltd for Hong Kong tax purposes?


F Ltd is a Hong Kong company. It opens a purchasing office in the Philippines and funded all the activities in the Philippines.

Are the expenses incurred by the Philippines office deductible in the books of F Ltd for Hong Kong tax purposes?

On the basis that the Philippines office is not a separate legal entity, the expenses → deductible.

Otherwise, the funding to the Philippines would be considered as intercompany loan or investment and would not be deductible.

Consider if the P.office is generating assessable profits for F Ltd in Hong Kong.

Expenses – Private in nature

S17(1)(a) of IRO Expenses of a private or domestic nature, including

traveling between residence and place of business , not deductible.

E.g. Life insurance of directors; household expenses.

Case Studies - Private expenses

Mr. X is the director and shareholder of Company XYZ. He would like to have his life insured, the company pays for his car and medical expenses.

How can he obtain these benefits while the company can enjoy the deductions?

Case Studies - Private expenses

Mr. X is the director and shareholder of Company XYZ. He would like to take a key man insurance. The company also pays for his car and medical expenses.

How can he obtain these benefits while the company can enjoy the deductions?

For key man insurance, premium → not deductible

Car expenses, the car should be owned by Company XYZ.

Medical expenses → the company could sign up a group policy or company account with the medical providers.

Should also consider the Salaries Tax implications on Mr. X.

Tax Planning

Reduce tax liabilities within the scope of the legal framework

Tax reduction ≠ tax avoidance Structural vs. Transactional Must be commercially viable. Anti-avoidance provision: S61 & 61A

Common Tax Planning Techniques

Servicing industry Differentiate work done

in Hong Kong from those outside of Hong Kong.

Split contract arrangement.

Overseas contractCommission paid for Work done outside of Hong Kong

Overseas Buyers

Hong Kong buying agent

company

Hong Kong contractCommission paid for work done in Hong Kong


Manufacturing industries Set up WOFE in the PRC

rather than enter into processing arrangement or JV.

PRC tax implications should be taken into consideration.

Transfer Pricing issues.

Hong Kong company

PRC WOFE

PRC factory

manufacturing activities

Buy/sell at arm's length prices


Interest payment to overseas group company

Factor in the interest costs as part of cost of sales

Customs duties implications

Overseas company

Hong Kong company

After planning

Cos:$110

Tax deduction: = $19.25

Sell goodsBefore

planning

Cos: $100 Interest: $10Tax deduction:= $17.5


Offshore co. Tax liabilities in other

jurisdiction? Feasibility of moving

staff? Substantiation of

activities of the offshore company.

HK co to provide auxiliary services.

Use local Macau company?

Overseas Customers

HK Co:buying agent / inspection agent

Offshorecompany

sell goods

commission


Macau taxation: Territorial source concept

Complementary income tax (Profits Tax) levied on taxable profits derived from any commercial

or industrial business outgoings and losses directly incurred in the

production of income are allowed as deductions progressive tax rate from 3% to 12%, with an annual

allowance of MOP 32,000

Relatively low Profits Tax rate Max. 12% in Macau vs. 17.5% in HK


Macau taxation (Cont’d):-

Industrial Tax (Business Tax) Charged on all individuals and companies engaged in

any commercial or industrial business. Fixed annual fee varies according to the nature of the

business, generally,MOP300 for most activities Initial industrial tax should be paid for newly

commencing industrial or commercial activities


Double Taxation Treaty Shopping Belgium, Thailand, PRC (Arrangement)

Tax Planning

More aggressive tax audit or review on previously established offshore claim is adopted by the Inland Revenue Department

Obtain information from operations staff and correspondence such as letters, faxes, email etc.

Regular review on tax planning should be made.

Anti-avoidance provision – S61 & 61A

D109/03 There must be an identifiable transaction Transaction has the effect of conferring a tax benefit Sole or dominant purpose of conferring a tax benefit.


The manner in which the transaction was entered into; The form and substance of the transaction; The result that would have been achieved; Any change in the financial position of the relevant

person; Any change in the financial position of the connected

person; Rights or obligations created; Participation by corporation carrying on business outside

of Hong Kong.


D94/04 The Board:

“Sub-participation loan arrangement….the sole and dominant purpose was to obtain a tax benefit by creating interest expenses to offset the income received”.

Non-Resident: HK Profits Tax Exposure

Section 14 Trading Income through agent/ Consignment sales Advance Ruling Case 16

Foreign company engages the HK branch to provide marketing, liaison and supporting services to customers in HK

Deemed as carrying on business in HK Profits derived in Hong Kong are chargeable to tax

Non-Resident: HK Profits Tax Exposure

Other deeming sections:- S15(1)(a), (b) & (ba) S20A

non-resident person may be assessed directly or in the name of his agent in respect of his profits arising in or derived from Hong Kong

S20B – for principal to principal transactions Transfer pricing

Recent Taxation Updates

DIPNs Tax Cases

DIPNs - Updates

DIPN 1 (July 2006) DIPN 5 (August 2007) DIPN 6 (November 2006) DIPN 9 (September 2006) DIPN 10 (June 2007) DIPN 11 (October 2007) DIPN 23 (September 2006) DIPN 35 (May 2007) DIPN 37 (September 2006) DIPN 43 (September 2006- New) DIPN 44 (April 2007- New)

Tax Cases - Updates

Cases Finalized Common Empire Limited [CACV83/2006] Kim Eng Securities (HK) Ltd [FACV11/2006] Zeta Estates Ltd [FACV15/2006] Macquarie Securities Ltd [FACV 19/2006]

Tax Cases - Updates Cases not yet Finalized

Tai Hing Cotton Mill (Development) Ltd [CACV343/2006]

HIT Finance Ltd & HK Int'l Terminals Ltd [HCIA14&15/2005]

Real Estate Investments (N.T.) Ltd [CACV15/2006] Indosuez W I Carr Securities Ltd [CACV57/2006] China Map Ltd & Others [HCIA4/2005] Tong S.L., Franco [HCIA2/2006] Ngai Lik Electronics [not yet heard] Shui On Credit Co Ltd [not yet heard] Datatronic Ltd [not yet heard] Canton Industries Ltd [not yet heard]

Higuma Consulting Limited

Rm 1817, 18/F

Hutchison House

10 Harcourt Road

Hong Kong

Tel: (852) 2203 4183

Fax: (852) 2203 4186

Website: www.higumaconsulting.com

Documents

Hong Kong Taxation Workshop Presented by: Lusan Hung December 1, 2007