Question

A Ltd, is a company incorporated and carrying on business in Hong Kong, is organizing a pop music concert to be staged in Hong Kong in January 2018. A Ltd has appointed another Hong Kong resident company, B Ltd, to procure the performance of an overseas artist at the concert, for which A Ltd will pay B Ltd $11 million. Ms. Happy, a famous international star singer from the US, has been approached by B Ltd to undertake this performance. The remuneration for her performance in Hong Kong has been agreed as $10 million, payable to Mr. Money, the US resident manager of Ms. Happy. In the performance agreement, there will be a clause providing that when paying the remuneration, B Ltd will be entitled to deduct a sum equivalent to 10% of the gross payment, or any other amount which is sufficient to cover the Hong Kong tax applicable. Ms. Happy is not convinced of the need for this clause and has raised the following challenges: (1) She deals with B Ltd on a principal-to-principal basis and thus, B Ltd is not an ‘agent’ acting on her behalf. Therefore, B Ltd has no authority to deduct any tax from the payment. (2) Should there be any tax liability incurred, an assessment should be made by the Hong Kong Inland Revenue Department and issued to her directly as a demand for tax, given that Hong Kong does not operate a self assessment system. (3) Hong Kong profits tax should be based on the net assessable profits which are calculated by reference to gross income and deductible expenses. The 10% or any other deemed notional percentage has no legal basis.

Required:

(a) Explain why Ms. Happy will be chargeable to Hong Kong tax.

(b) Explain how the Hong Kong tax payable by Ms. Happy will be determined and collected. Note: with the exception of Mr. Money, none of the parties referred to are agents for any other person.

(c) State, giving reasons, whether there will be any difference in the tax position if Ms. Happy incorporates a company in Hong Kong to receive the payment on her behalf.

Answer 1

Ms. Happy is a non-resident and will be chargeable to Hong Kong Tax as per Tax implication rules in Hongkong as mentioned below.

How Non-resident Entertainers and Sportsmen are chargeable at Hongkong

Usually chargeable to Profits Tax² Sums received from performances in Hong Kong given by a non-resident entertainer or sportsman on or in connection with a commercial occasion or event are chargeable to Profits Tax.

Chargeable in the name of the “Hong Kong Payer”² The Inland Revenue Ordinance provides that a non-resident entertainer or sportsman is chargeable to tax in the name of the person in Hong Kong who pays or credits the sums to that entertainer or sportsman or his/her agent. The Hong Kong person who made the payment became the “Hong Kong payer”. In the majority of situations, the payer would be the Hong Kong promoter or sponsor of the activity concerned.

The responsibility of the “Hong Kong Payer”²

1. Complete form IR623 in duplicate immediately when the non-resident entertainer of sportsman arrives in Hong Kong. –

The form IR623 may be obtained through the Fax-A-Form Service at 2598 6001, or downloaded” from IRD Web Site at www.ird.gov.hk. under “Public Forms and Pamphlets”. –

The completed form may be sent to the IRD by post at G.P.O. Box 132 Hong Kong or by fax at 2519 9316.

2. Retain a percentage of the gross amount payable to the entertainer or sportsman or his/her agent, as follows:

Year of Assessment 2013/14 and onwards

If the performance is procured directly

with the entertainer/ sportsman                                                            10%

If the performance is procured

through a non-resident agent who is

(a) an individual person or a partnership 10%

(b) a corporate agent or a corporation 11%

Note:

For 2018/19, 100% of the final tax payable under profits tax would be waived, subject to a ceiling of $20,000 per case.

(c) if Ms. Happy incorporates a company in Hong Kong to receive the payment on her behalf.then tax is payable and treated as business income.