Ans 8. Profits 2

Ans 8. Profits 2 - BUSI 0018 Hong Kong Taxation Tutorial...

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TA_U8_Profits_2 1 BUSI 0018 – Hong Kong Taxation Tutorial Questions Unit 8 – Profits Tax (2) Answer 19 Part I (a) Under s.15(1)(g), sums received by or accrued to a person, other than a corporation, carrying on a trade, profession or business in Hong Kong by way of interest are deemed taxable if (1) the interest is derived from Hong Kong and (2) the interest is in respect of the funds of the trade, profession or business in Hong Kong. In this question, the interest was earned on money placed in deposit in Hong Kong and thus was considered as derived from Hong Kong based on ‘provision of credit’ test. On the other hand, the interest was in respect of the business receipts available for use in the sole proprietor’s business. Therefore, the interest would be deemed as taxable under s.15(1)(g). However, with effect from 22 June 1998, an exemption order was issued under s.87 to exempt from profits tax all interest accrued on or after 22 June 1998 on deposits with financial institutions in Hong Kong. An exception to this exemption is when the deposit was used as a pledge against borrowing on which interest expense incurred was deductible under s.16(2)(c), (d) or (e) and where s.16(2A) does not apply. In this question, the deposit was not pledged for any borrowing. Therefore, the exemption order would apply to exempt the interest from profits tax although it is sourced in Hong Kong. (b) Under Section 15(1)(f), sums received by or accrued to a corporation carrying on a trade or business in Hong Kong by way of interest is deemed as taxable if the interest is arising in or derived from Hong Kong. In this question, Tasty Bakery Company Limited is carrying on business in Hong Kong and thus s.15(1)(f) may apply. The interest was earned from a deposit placed with Shenzhen branch of Bank of China. By virtue of ‘provision of credit’ test, the deposit money was first made available to the bank in Shenzhen, i.e. outside Hong Kong. As a result, the provision of credit was outside Hong Kong and interest income is regarded as sourced outside Hong Kong. Section 15(1)(f) does not apply to tax the interest income. The fact that the deposit money was originated from the sale money earned from Hong Kong shops is irrelevant since the nature of money has changed once it is put into bank deposit.
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Ans 8. Profits 2 - BUSI 0018 Hong Kong Taxation Tutorial...

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