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

2. 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.

3. Hong Kong Taxation Workshop
Profits tax
Income
Expenses
Tax planning techniques
Non-resident taxpayers
Recent taxation updates

4. Hong Kong Profits Tax Capital vs. Revenue Onshore vs. offshore
Profits tax rate: 17.5%

5. Not Taxable/Deductible
Income/Expenses
Income/Expenses
Revenue
Capital
Onshore
Offshore
Not Taxable/Deductible
Taxable/Deductible

6. 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

7. Income
Active income:
Trading
Manufacturing
Servicing

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

9. Sources of Income Operation test Contract conclusion test DIPNs
Case Law

10. Trading Income- governing factors
Where sales and purchases are:-
negotiated, executed and concluded ?
Questions to ask: How / Where/ Whom ?
Negotiation–
Methods / place: via , phone, fax or in person, such as trade show or business trips?
Person: staff, agent or subcontractor?
Execution – via , fax or mail?
Conclusion – how and where?

11. 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.

12. 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

13. Case Studies – Trading profits
ABC Co. purchases garments from China and derive sales profits from selling them to the following US Customers:

14. Case Studies – Trading profits
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?

15. Case Studies – Trading profits
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?
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.

16. 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.
Profits derived taxable or not?

17. 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.
Profits derived taxable or not?
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

18. Case Studies – Trading profits
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.
Profits derived taxable or not?

19. Case Studies – Trading profits
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.
Profits derived taxable or not?
the sales agreement is negotiated & concluded in Hong Kong
the sales profits are taxable in Hong Kong.

20. Case Studies – Trading profits
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.
Profits derived taxable or not?

21. Case Studies – Trading profits
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.
Profits derived taxable or not?
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.

22. 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?

23. 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.

24. 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.

25. 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.

26. 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

27. 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.

28. 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

29. 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

30. 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”

31. 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?

32. 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?
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.

33. 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.
How the profits derived are taxed?

34. 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.
How the profits derived are taxed?
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

35. Servicing Income /Commission
Location where the services are rendered
Not apportioned generally
Passive commission –not taxable if structured properly

36. 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?

37. 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?
Co X performs its buying services in Hong Kong
The buying commission is subject to Hong Kong profits tax.

38. Case Studies – Service income
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?

39. Case Studies – Service income
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.

40. Passive Income Interest income Interest exemption order
Provision of Credit test
Dividend income
Not taxable
Withholding tax not applicable
Capital gains

41. 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.

42. Case Studies – Interest income
Interest income derived taxable or not?
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.

43. Case Studies – Interest income
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.
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.

44. 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.

45. Expenses /Deductions “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.

46. Expenses /Deductions
“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.

47. 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]

48. 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).

49. 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?

50. 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)].

51. Expenses - Interest -Section 16(2)
The borrower is a financial institution;
The borrower is a public utility company;
The lender is subject to Hong Kong tax on the interest received;
The lender is a financial institution and that loan is not secured or guaranteed by any deposit;
The loan is raised to finance purchase of plant, machinery or trading stock and the lender is not related to the borrower;
Interest paid by a corporation on debentures or similar marketable instrument listed on Hong Kong or any other stock exchanges.

52. 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)

53. Expenses - Interest S16(2A) - Secured Loan TestNo
Guaranteed by deposit or loan
Yes
Deductible but subject to interest flow back test S16(2B)
Security made by borrower or an associate? No
Yes
Security made to specified person (Lender, FI, associates)? No
Yes
Yes
Interest on deposit or loan is taxable in HK? No
Not deductible/ Reasonable appropriate deduction

54. 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

55. 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?

56. 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?
Deduction is reduced by $4M, being the tax-free interest earned.
Allowable deduction is $1M ($5M-$4M) only.

57. Expenses - Interest Case Studies – Secured loan test
Scenario 2
Mr. F borrows from Bank G
Loan :$100M
Interest expenses: $5M
The loan is secured by:
Bank deposit: $200M
Interest income: $6M (Tax- free)
Security > loan
Interest deductible?

58. Expenses - Interest Case Studies – Secured loan test
Scenario 2
Mr. F borrows from Bank G
Loan :$100M
Interest expenses: $5M
The loan is secured by:
Bank deposit: $200M
Interest income: $6M (Tax- free)
Security > loan
Interest deductible?
Deduction is reduced by $3M, calculated as follows:-
= $6M x $100M (loan)
$200M (deposit)
Allowable deduction is $2M ($5M-$3M)only.

59. Expenses - Interest Case Studies – Secured loan test
Scenario 3
Mr. F borrows from Bank G
Loan 1: $100M (onshore) interest expenses: $5M
Loan 2: $150M (offshore) interest expenses: $8M
Loans are secured by:
Bank deposit: $200M
Interest income: $8M (Tax-free)
Security < multiple loans
Interest deductible?

60. Expenses - Interest Case Studies – Secured loan test
Interest deductible?
$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.
Scenario 3
Mr. F borrows from Bank G
Loan 1: $100M (onshore) interest expenses: $5M
Loan 2: $150M (offshore) interest expenses: $8M
Loans are secured by:
Bank deposit: $200M
Interest income: $8M (Tax-free)
Security < multiple loans

61. Expenses - Interest Case Studies – Secured loan test
Scenario 4
Mr. F borrows from Bank G
Loan 1: $100M (onshore) interest expenses: $5M
Loan 2: $150M (offshore) interest expenses: $8M
Loans are secured by:
Bank deposit: $400M
Interest income: $16M (Tax-free)
Security > multiple loans
Interest deductible?

62. Expenses - Interest Case Studies – Secured loan test
Scenario 4
Mr. F borrows from Bank G
Loan 1: $100M (onshore) interest expenses: $5M
Loan 2: $150M (offshore) interest expenses: $8M
Loans are secured by:
Bank deposit: $400M
Interest income: $16M (Tax-free)
Security > multiple loans
Interest deductible?
$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).

63. 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.

64. Expenses - Interest S16(2B) – Interest flow back test
Bank J
Company H
2nd loan to the borrower
Company K
1st loan to bank
Interest
“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)

65. Expenses - Interest S16(2B) – Interest flow back test
Under the Agreement:-
Interest flow back to the borrower or connected person ? No
Deductible
Yes
Is the person receiving the interest an “expected person”?
Yes No
Not deductible/ deduction reduced to reflect the period of time when the interest flow back exists

66. 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.

67. Expenses - Interest Case studies –Interest flow-back test
Interest deductible?
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.

68. Expenses - Interest Case studies –Interest flow-back test
Interest deductible?
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.
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.

69. Expenses - Interest Case studies –Interest flow-back test
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
Interest deductible?

70. Expenses - Interest Case studies –Interest flow-back test
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
Interest deductible?
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.

71. 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.

72. Case study -Bad Debts
PAI Company Ltd is a finance company. For the y.e , 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?

73. Case study -Bad Debts
PAI Company Ltd is a finance company. For the y.e , 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]

74. 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)?

75. Expenses - Offshore Are offshore expenses deductible?
What are they incurred for?

76. 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?

77. 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.

78. Case Studies - Offshore expenses
Company GHI reimburses its Shanghai RO of all the expenses it incurs.
Are these reimbursements deductible?

79. Case Studies - Offshore expenses
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.

80. Case Studies - Offshore expenses
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?

81. Case Studies - Offshore expenses
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.
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?

82. 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.

83. 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?

84. Case Studies - Private 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.
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.

85. 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

86. Common Tax Planning Techniques
Overseas contract
Commission
paid for Work
done outside of Hong Kong
Overseas Buyers
Hong Kong buying agent company
Hong Kong contract
Commission paid for work done in
Hong Kong
Servicing industry
Differentiate work done in Hong Kong from those outside of Hong Kong.
Split contract arrangement.

87. Common Tax Planning Techniques
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
manufacturing activities
Buy/sell at arm's length prices
PRC WOFE
PRC factory

88. Common Tax Planning Techniques
Overseas company
Interest payment to overseas group company
Factor in the interest costs as part of cost of sales
Customs duties implications
Sell goods
After planning
Before planning
Cos: $ Interest: $10
Cos:$110
Tax deduction:
= $19.25
Tax deduction:
= $17.5
Hong Kong company

89. Common Tax Planning Techniques
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
sell goods
HK Co:
buying agent / inspection agent
Offshore
company
commission

90. Common Tax Planning Techniques
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

91. Common Tax Planning Techniques
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

92. Common Tax Planning Techniques
Double Taxation Treaty Shopping
Belgium, Thailand, PRC (Arrangement)

93. 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, etc.
Regular review on tax planning should be made.

94. Anti-avoidance provision – S61 & 61A
There must be an identifiable transaction
Transaction has the effect of conferring a tax benefit
Sole or dominant purpose of conferring a tax benefit.

95. Anti-avoidance provision – S61 & 61A
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.

96. Anti-avoidance provision – S61 & 61A
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”.

97. 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

98. 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

99. Recent Taxation Updates
DIPNs
Tax Cases

100. 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 New)
DIPN 44 (April New)

101. 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]

102. 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]

103. Higuma Consulting Limited
Rm 1817, 18/F
Hutchison House
10 Harcourt Road
Hong Kong
Tel: (852)
Fax: (852)
Website: