Question

River Co is a company incorporated and carrying on business in Hong Kong. River Co is principally engaged in the sales of luxury silk clothing through approximately 100 department stores. The procurement staff of River Co liaise with overseas suppliers in different countries and source new suppliers by going to trade exhibitions around the world. The procurement staff would preliminarily negotiate the purchase contracts with suppliers in the countries where the exhibitions are held, or the suppliers are located. However, the procurement team must seek advice from an in-house lawyer in Hong Kong and further negotiate the terms and conclude the purchase contracts with the overseas suppliers via exchange of emails after they return to Hong Kong. To facilitate the sales activities in the PRC market, River Co has sent its staff to have meetings with distributors in the Mainland to negotiate and conclude the sales contracts. Sales in Hong Kong market are however all made by River Co’s sales team in Hong Kong.

River Co is also engaged in the business of investment holding in overseas subsidiaries. In view of the increasing trend for the demand of intra group financing and treasury services from its overseas subsidiaries, and with the profits tax concession granted under the relevant provisions of the IRO for these activities in recent years, the management of River Co plans to set up a treasury management function in 2020. Alternatively, River Co may establish an entity in Hong Kong specifically and exclusively for conducting corporate treasury activities for its overseas subsidiaries, on the basis that the entity can enjoy the profits tax concession.

Required:

(a) For River Co, explain the chargeability of its profits from sales made in the Hong Kong and Mainland markets. In particular, whether the Hong Kong and Mainland sales profits should be subject to, or exempt from, Hong Kong profits tax with reference to relevant provisions and case laws.

(b) By reference to the information about the sales made in the Hong Kong and Mainland markets, discuss the general deducibility of related expense, whether there are any major potential offshore tax risks, and any major potential non-tax risks.

(c) In the contexts of the relevant IRO provisions, explain advantages of being a ‘qualifying corporate treasury center’ (QCTC) and whether it is appropriate for River Co to apply for QCTC status.

Answer 1

ANSWER :

Summarized the information provided in the question i.e.., River Co is a company incorporated and carrying on business in Hong Kong - - - -

(a)

# Hong Kong's profit taxability is determined according to inland revenue ordinance( IRO)

* As per sec.14(1), a person carrying on trade, business or provision in Hong Kong is chargeable to tax for the profits derived from or arisen in Hong Kong excluding capital gains.

* Based on the facts given, River Co.was incorporated in Hong Kong and it carries on business in distributing luxury silk clothing through 100 departmens.

* It is worth noting that in River Co's case, their sales are taking at Hong Kong, sales profits arising from customers in mainland will be fully taxable

(b) The expenses incurred for producing profits chargeable to tax and that are not capital in nature are generally categorised as tax deductible expense.

* In the event of over claiming someone attempts to Mae too many expenses as well as claiming non business related expense , the auditor would ask for justification and evidence to support such claim.

(c) The Hong Kong government gazetted the IRO 2016 , bringing into law a concessionary profits tax rate for qualifying corporate test centres(QCTC)

* The new rules deem certain interest income and other gains as sourced and taxable in Hong Kong. Amendments to the earlier interest deduction provisions were also made to allow deductions for interest incurred on certain intra-group lending transactions.

To become a QCTC, any one of the following criteria has to be full filled:

1. Carried out in Hong Kong during the assessment year, one or more corporate treasury activities and carried out any activity other a corporate treasury activity ( being a dedicated (CTC) or

2. Satisfiesd the one year harbour rule or the multiple year safe harbour rule or

3. Has obtained the commissionor of inland revenues determination that it is a QCTC.

In the case of RiverCo, it fulfills the 1st criteria. So it can be a QCTC