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

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Presentation on theme: "Hong Kong Taxation Workshop Presented by: Lusan Hung December 1, 2007."— Presentation transcript:

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 Income/Expenses RevenueCapital OnshoreOffshoreNot Taxable/Deductible Taxable/DeductibleNot 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 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 Bs 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 Profits derived taxable or not? 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.

21 Case Studies – Trading profits 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. 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.

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 ( ) Manufacturing activities DIPN 21 applies, 50:50 apportionment 2) Import processing ( ) 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 ( ) 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 ( ) 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 Reviews decision:- a high preponderance of the Taxpayers 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 Not taxable

41 Passive Income – contd 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 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?

43 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.

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 As 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 As 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) 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.

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 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 No Deductible but subject to interest flow back test S16(2B)

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 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. Expenses - Interest Case Studies – Secured loan test

57 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 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? $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.

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 Agreement exists where:- Company K & H are associated companies The 2 nd loan (Company H) is advanced by sub-participating in the 1 st 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 2 nd loan to the borrower Company K 1 st loan to bankInterest

65 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 Yes Deductible Under the Agreement:-

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 Scenario 1 1 st loan :- from an associate to Bank Loan: $70M interest income from bank $7M (Tax-free ) 2 nd loan:- from Bank to the borrower Loan: $100M interest expenses to bank $10M. Interest deductible?

68 Expenses - Interest Case studies –Interest flow-back test Scenario 1 1 st loan :- from an associate to Bank Loan: $70M interest income from bank $7M (Tax-free ) 2 nd loan:- from Bank to the borrower Loan: $100M interest expenses to bank $10M. Interest deductible? Deduction is reduced by $7M (interest attributable to the sub- participated portion) calculated as follows:- Interest expenses x 1 st loan 2 nd loan = $10M x $70M $100M Allowable interest deduction is $3M ($10-$7M) only.

69 Expenses - Interest Case studies –Interest flow-back test Scenario 2 1 st loan: From an associate to Bank Loan: $70M Interest income: $7M, for 6 months (Tax-free). 2 nd loan from Bank to the borrower Loan: $100M Interest expenses: $10M Interest deductible?

70 Expenses - Interest Case studies –Interest flow-back test Interest deductible? Deduction is reduced by $3.5M calculated as follows :- = Interest expenses x 1 st loan x 6 2 nd loan 12 = $10M x $70M x 6 $100M 12 Allowable interest is $6.5M ($10M-$3.5M) only. Scenario 2 1 st loan: From an associate to Bank Loan: $70M Interest income: $7M, for 6 months (Tax-free). 2 nd loan from Bank to the borrower Loan: $100M Interest expenses: $10M

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, 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, 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 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.

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 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.

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 Servicing industry Differentiate work done in Hong Kong from those outside of Hong Kong. Split contract arrangement. 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

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 PRC WOFE PRC factory manufacturing activities Buy/sell at arm's length prices

88 Common Tax Planning Techniques 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 goods Before planning Cos: $100 Interest: $10 Tax deduction: = $17.5

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 HK Co: buying agent / inspection agent Offshore company sell goods 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 (Contd):- 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 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.

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 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.

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:


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