Taxation Project - ACCT 3107 HONG KONG TAXATION UNIT 8...

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Unformatted text preview: ACCT 3107 HONG KONG TAXATION UNIT 8 QUESTION 19 Agenda 1. Identifying Income chargeable to HK Profits Tax 2. Capital vs Revenue Receipts 3. General Deduction Rule Part I 1. Identifying Income chargeable to HK Profits Tax s. 14 (1) “Subject to the previous of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.” 2-Limb Test 1st Limb • Carrying on a trade/profession/busi ness in HK 2nd Limb • Profits arising in or derived from HK Chargeabl e to profits tax 1st limb Carry on trade, profession or business? No Yes Carry on trade, profession or business in HK? No Not falls under the main charging section s.14 (1) of IRO Yes 2nd Limb Test 2nd Limb Source of Profits 1. Operation test (manufacturing and service income) 2. Contract conclusion test (trading income) 3. Provision of credit test (passive interest income) 4. Situs test (passive interest income) Part I (a) Right to show films in HK payment Foreign film production company Chargeable to HK profits tax? Hong Kong television company Part I (a) Carry on trade, profession or business? Yes Permanent Establishment (IRR 5) • A branch, management or other place of business • Agent who exercises a general authority to negotiate and conclude contracts • Agent who has stock of merchandise in HK Carry on trade, profession or business in HK? No Not falls under the main charging section s.14 (1) of IRO Foreign film production company No representative office or agent in Hong Kong s.15(1)(a) Receipt from exhibition or use in Hong Kong of Cinematograph or television film or tape Sound recording Taxable Connected advertising material Part I (a) Right to show films in HK payment Foreign film production company Chargeable S15(1)(a) Hong Kong television company s.21A 100% x gross receipt 30% x gross receipt Assessa ble profit • Income received from an associate, AND • The property has been owned, partly or wholly, by any person carrying on business in HK Part I (a) Hong Kong television company is not an associate Assessable profit = 30% x gross receipt Tax = 30% x gross receipt x corporation tax rate (16.5%) Foreign film production company s.20B “…a non-resident person is chargeable to tax in the name of the Hong Kong person who paid or credited sums to him or any other non-resident…” DIPN No.17 Hong Kong television company Chargeable to tax on behalf of Foreign film production company Part I (a) Withholdi ng obligatio Deduct n Hong Kong television company tax amount from payment Part I (b) Patent Royalty Foreign patent owning company Chargeable to HK profits tax? Hong Kong associate Part I (b) Carry on trade, profession or business? Yes Carry on trade, profession or business in HK? No Not falls under the main charging section s.14 (1) of IRO Foreign patent owning company s.15(1)(b) Receipts for the use or right to use in HK Patent Tradema rk Design, secret process, formula Copyrig ht Taxable Part I (b) Patent Royalty Foreign patent owning company Chargeable S15(1)(b) Hong Kong associate Part I (b) Income from HK associ ate s.21 Assessab A le income = 100% x gross receipt Foreign patent owning company Patent previously owned by HK associate Tax = 100% x gross receipt x corporation tax rate (16.5% Part I (b) Withholding obligation s.20B Hong Kong associate Deduct tax amount from royalty Source Testing Rule Operation test Where do the operations take place from which the profits in substance arise? What? Where? How importa nt? Activities Test Where the profit-making activities are carried out? normally for servicing and manufacturing business DIPN No.21 Broad guiding principle “one looks to see what the taxpayer has done to earn the profits in question and where he has done it” Hang Seng Bank case, HK-TVBI case & ING Baring case Simple Particular Matter Legal circumsta of Fact nces Test DIPN No.21 Types of income that allow apportionment Manufacturing income and service income Rational basis 50:50 apportionment – norm No apportionment Trading profits Source of manufacturing profits Profit-making activity • Manufacturing operations Manufacturing operation • • • • Procurement of raw material Employment of labour Design of products Use of machinery and plant Goods manufacture d in HK Fully Taxable Contract processing arrangement Goods manufactured Partly in HK Partly outside HK Profit apportion ment 50:5 0 Part I (c) Manufacturi ng Company Partly manufact ure in HK & partly in PRC Greatl y involv ed Expertis e Machine ry RM QC Sales of produ cts in HK Part I (c) Manufacturing Co.: Partly HK; Partly Mainland Substantial involvement (expertise, machinery, RM, QC) Contract processing arrangement Assessable profit apportioned = 50% x profit Tax = assessable profit x corporation tax rate (16.5%) Part II 2. Capital vs Revenue Receipts s. 14 (1) “Subject to the previous of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.” Fixed Capital vs Circulating Capital Test Nature Capital Revenue Connected with: Fixed Capital Assets are: Fixed Circulating Capital Current Turns to profit by: Tax excludable? Keeping in possession YES Resale NO Part II (a) Trading Stock Insurance compensation Company A Chargeable to HK profits tax? Insurance Company [Green v J Gliksten & Son Ltd (1929)] ompensation taxable? Event leading to loss Nature of the asset Part II (a) Trading stock Circulati ng asset Compensati on Taxable REVENU E in nature Part II (b) supply agreement Compensation payment Company A Supplier Chargeable to HK profits tax? 2 Scenarios ompensation taxable? Nature of the receipt Revenu Capital e 1. Revenue Nature cancellation of one of a number of trading contracts [Kelsall Parsons & Co v CIR (1938)] not affect the entire operating structure Reven ue receip t Contractual rights are circulating assets Taxable 2. Capital Nature cancellati on of the only trading contracts Nontaxable [Barr Crombie & Co Ltd v CIR (1945)] Lead to cessation Capit al recei pt Contractu al rights are capital assets Company A Part III 3. General Deduction Rule Under s16(1) “There shall be deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment in the production of profits chargeable to profits tax for any period. “ To the extent Incurred In the production of profits To the extent 1. Disallow the part of expenditure not related to the production of chargeable profits Incurred 2. Not confined to a cash payment Has a definite commitment or legal liability to pay In the production of profits 3. Expense must be made for the purpose of earning profits Real intention for the expenses incurred Part III(a) Board of directors announced cessation in the future Severance payment on basis of Employment Ordinance HK Textiles Co. Ltd. Deductible in the final tax return? Staff It is deductible, when… CIR v Cosmotron Manufacturing Co. Ltd (1997) Severance payments made under Employment Ordinance on cessation of business Payment represent a discharge of statutory obligations incurred in the running of the business before it ceases Payments were accrued as a cost of employing staff but the liability was only crystallized when business cease The timing of crystallization would not affect the deductibility of payment Part III(a) Board of directors announced cessation in the future Severance payment on basis of Employment Ordinance HK Textiles Co. Ltd. Deductibl e! Staff Part III(b) Interest expense CK Property Development Co. Ltd Housing estate for sale Part III(b) Interest expense is capitalized in “Property under developmen t” Completion of construction Deductible for profit tax purpose? Part III(b) Interest expense capitalized NOT CIR v Secan Ltd. & Anor. (2001) DEDUCTIBLE Capitalized under “property under development” But not, put into expense in the Income Statement The treatment follow accounting principles and IRO Not deductible until the property is sold Part III(b) CK Property Development Co. Ltd had incurred interest expense in financing the development of a housing estate for sale. Before the completion of the construction, the relevant interest expenses were capitalized in the account “property under development”. Property not yet sold Treatment is consistent with general accounting principle and IRO Interest is capitalized instead of record as an expense in I/S SO, the capitalized interest is not deductible ...
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