Hong Kong Taxation

ABC Co. (the Company) is incorporated and carrying on a retailing business through various retail in the US and does not maintain any management or control in Hong Kong. To be in line with the group’s long-term strategy, the Company is considering expanding into the Hong Kong market. There are two expansion proposals:

Proposal 1: To set up a subsidiary in Hong Kong, which will buy the goods from the Company and sell them in Hong Kong via retail outlets. All transactions are conducted at arm’s length. Proposal 2: To set up a branch in Hong Kong (HK Branch) to liaise directly with the potential customers in Hong Kong. HK Branch will be responsible to negotiate with customers on the terms of purchase based on a set of prescribed policy from the Company. Customers’ orders will be accepted and signed by the HK Branch, following which goods will be shipped directly from the US to the buyers in Hong Kong. The Branch will remain as a cost center without making any profits.

Required:

(a) Based on the Inland Revenue Ordinance and Rules, discuss the circumstances in which a non-resident company can be assessable to profits tax in Hong Kong.

(b) For each of the two proposals described, discuss the Hong Kong profits tax implications for ABC Co., including whether ABC Co. would be considered as carrying on business in Hong Kong, and if so, how assessable profits could be determined. (Note: Transfer pricing issue is not required to be discussed.)

CC Inc. (the Company) is incorporated and carrying on a retailing business through various retail in the US and does not maintain any management or control in Hong Kong. To be in line with the group’s long-term strategy, the Company is considering expanding into the Hong Kong market. There are two expansion proposals:

Proposal 1: To set up a subsidiary in Hong Kong, which will buy the goods from the Company and sell them in Hong Kong via retail outlets. All transactions are conducted at arm’s length.

Proposal 2: To set up a branch in Hong Kong (HK Branch) to liaise directly with the potential customers in Hong Kong. HK Branch will be responsible to negotiate with customers on the terms of purchase based on a set of prescribed policy from the Company. Customers’ orders will be accepted and signed by the HK Branch, following which goods will be shipped directly from the US to the buyers in Hong Kong. The Branch will remain as a cost center without making any profits.

Required:

(a) Based on the Inland Revenue Ordinance and Rules, discuss the circumstances in which a non-resident company can be assessable to profits tax in Hong Kong.

(b) For each of the two proposals described, discuss the Hong Kong profits tax implications for CC Inc., including whether CC Inc. would be considered as carrying on business in Hong Kong, and if so, how assessable profits could be determined. (Note: Transfer pricing issue is not required to be discussed.)

(Total for Question 4: 14 marks)

CC Inc. (the Company) is incorporated and carrying on a retailing business through various retailers in the US and does not maintain any management or control in Hong Kong. To be in line with the group’s long-term strategy, the Company is considering expanding into the Hong Kong market. There are two expansion proposals: Proposal 1: To set up a subsidiary in Hong Kong, which will buy the goods from the Company and sell them in Hong Kong via retail outlets. All transactions are conducted at arm’s length. Proposal 2: To set up a branch in Hong Kong (HK Branch) to liaise directly with the potential customers in Hong Kong. HK Branch will be responsible to negotiate with customers on the terms of purchase based on a set of prescribed policy from the Company. Customers’ orders will be accepted and signed by the HK Branch, following which goods will be shipped directly from the US to the buyers in Hong Kong. The Branch will remain as a cost centre without making any profits.

Required: (a) Based on the Inland Revenue Ordinance and Rules, discuss the circumstances in which a non-resident company can be assessable to profits tax in Hong Kong.

(b) For each of the two proposals described, discuss the Hong Kong profits tax implications for CC Inc., including whether CC Inc. would be considered as carrying on business in Hong Kong, and if so, how assessable profits could be determined. (Note: Transfer pricing issue is not required to be discussed.)

1.A Company A sells 1200 bottles of a dietary supplement per week. The supplement is ordered from a supplier who charges Company A $80 per order and $50 per bottle. Company A’s annual holding cost percentage is 30%. Assume Company A operates 50 weeks in a year. What is the economic order quantity?

1.B Company A sells 1200 bottles of a dietary supplement per week. The supplement is ordered from a supplier who charges Company A $80 per order and $50 per bottle. Company A’s annual holding cost percentage is 30%. Assume Company A operates 50 weeks in a year. If Company A chooses to use the economic order quantity for supplement purchases, what will be the total of its holding and ordering costs per year?

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $240,000 including installation. The company estimates that the equipment will have a residual value of $30,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows: Year Hours Used 1 2,600 2 2,100 3 2,200 4 1,800 5 1,600 6 1,700 1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.) 2. Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.) 3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $261,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows:

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $264,000 including installation. The company estimates that the equipment will have a residual value of $25,500. University Car Wash also estimates it will use the machine for six years or about 12,500 total hours. Actual use per year was as follows: Year Hours Used 1 2,900 2 1,300 3 1,400 4 2,600 5 2,400 6 1,900

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.) 2 Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.) 3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $258,000 including installation. The company estimates that the equipment will have a residual value of $28,500. University Car Wash also estimates it will use the machine for six years or about 12,500 total hours. Actual use per year was as follows:

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.)

2. Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.)
3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $234,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows:

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.)

2. Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.)

3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)