AF5208 Taxation Management in China and HK

AF5208 Taxation Management in China and HK

Second Semester 2020/21

Individual Case Study (due on 24 April 2021)

Guideline: This is a question from past exam paper, and it is for revision and preparation for the coming examination.

Estimated working time is 1 hour

Berry Case

Berry Ltd (“BEL”) carried on trading business in Hong Kong. Its provisional income statement for the year ended 31 March 2019 shows a net profit before taxation of $3,000,000, inter alia, after crediting the following income and charging the following expenses:

Explanatory Notes

• BEL purchased goods from Hong Kong suppliers and sold to overseas customers. Over 100 overseas agents solicited customers for BEL. The agents would receive orders for BEL in overseas and forward the same to BEL for final confirmation.

Guidelines: What is the broad guiding principle and specific test for trading profits? What is the IRD’s practice and case law principle, if either contract was effected outside HK?

2

Guidelines: Will the interest be taxable under s.15? Will it be exempt under Interest Exemption order? Remember if the HK deposit has been used to secure a loan and the loan interest is deductible, there will be no exemption.

3        During the year 2009, BEL bought the proprietary interest of a registered product design for use by its suppliers to produce BEL’s products at a price of $1 million. During the year 2018/19, BEL sold the proprietary interest of the product design at a price of $1.3 million and hence made a profit of $300,000. Also BEL bought a registered trademark during the year 2019/20 at a price of $2 million, which was not reflected in the above income statement. The trademark has a protection period of 4 years starting from 2018/19. (guidelines below)

Guidelines:

You should treat and adjust the profit $300,000 and sales proceeds $1.3M separately.

Is the profit taxable, capital or trading nature? Will the sale proceeds be deemed taxable? Note the sales proceeds is deemed taxable, but the taxable amount is limited to deduction allowed. Also, note the rule for deduction for product design is effective from the year 2011/12.

Registered trademark cost is deductible over 5 years or remaining protection period, whichever is shorter. Also, note if any item which is not taxable but included in P&L, it should be less out in the tax computation; if any item which is taxable but not yet included in P&L, should be added back. Any item which it deductible, but not yet deducted from the P&L should be less out in the tax computation

Please also note: the deduction for registered mark should start from the year of acquisition, over 5 years of remaining protection year (starting from the year of acquisition. Be careful for the year of acquisition in the case, and the remaining protection period starting from the year of acquisition.

4        The product research expense included $150,000 for new research equipment.

Guidelines: Note the enhanced deduction for R&D, may it apply or NOT.

5

*The bank loan was used to buy trading stock.

Guidelines:

Was it for the purpose of trade?

Any condition in s.16(2) being satisfied?

Any restrictions?

6       The repairs expense of $100,000 was for initial repairs to a second-hand packing machine which was acquired during the year. The expense was for the purpose to put the machine back to operable condition for obtaining the relevant license from the government. (Guidelines: was the repairs expense capital nature?)

7                                                                                                                           $

Write-off of a staff loan* (5% interest and 95% principal)                  20,000

Bad debts recovered (trade debts written off in the year 2018/19)      (8,000)

Provision – 5 % on total trade debtors’ balance                                    10,000

– on specified trade debtors                                                  53,000 

Total per accounts                                                                                75,000 

The loan was provided to the staff’s bank account in Hong Kong.

Guidelines: Was the staff loan, interest and principal, a trade debt taxed before? Was it lent in ordinary course of money lending business?

8         Depreciation allowance agreed by the Inland Revenue Department for the year was $200,000

Guidelines: Adjust the accounting depreciation and depreciation allowance separately

Required

• Calculate the profits tax payable by BEL for the year of assessment 2018/19, ignore provisional tax.

Guidelines: MUST follow the format in the lecture notes. State the title, tax rates, tax reduction clearly.

(11 marks)

• Explain your profits tax treatments for the following items:

• Sales through overseas agents $5,000,000 (3 marks)
• Interest from fixed term bank deposit interest $300,000 (3 marks)
• Sales proceeds of the registered product design $1,300,000 (2 marks)
• Registered trademark acquisition cost $2,000,000 (2 marks)
• Interest on bank loan $140,000 (3 marks)
• Write-off of staff loan $20,000 (3 marks)
• Initial repairs expense of the second-hand packing machine $100,000 (3 marks)

Guidelines:

Your explanation should include:

1. Rules: Relevant provision in the IRO, DIPN, case law (summarising in brief, don’t copy from notes, you don’t need to copy the whole story of a case, just state the principle and case name in sufficient
2. Analysing the tax position with reference the case facts and the relevant rules you stated in (A) above.
3. Don’ts: Remember, don’t just state it is taxable or deductible. It is also wrong to just mention, say under s.14 it is not taxable. YOU must explain by using A+B I mentioned above.

(sub-total 19 marks)

Total (30 marks)