DECEMBER 2014 AND JUNE 2015 SUPPLEMENT. Qualification Programme. Module D Taxation

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1 DECEMBER 2014 AND JUNE 2015 SUPPLEMENT Qualification Programme Module D Taxation

2 Published by BPP Learning Media Ltd. The copyright in this publication is jointly owned by BPP Learning Media Ltd and HKICPA. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owners. HKICPA and BPP Learning Media Ltd 2014 ii

3 Changes at a glance Changes at a glance Amended on Learning Pack Supplement Chapter Name Page Part A: Identified Errata Learning Pack 3 Hong Kong property tax 1 8 Hong Kong stamp duty 2 Part B: Technical Update Learning Pack 1 The tax system in Hong Kong 5 2 Administration procedures under the Inland Revenue Ordinance 8 3 Hong Kong profits tax 9 4 Non-resident persons 14 5 Hong Kong salaries tax 15 8 Hong Kong stamp duty 17 9 Introduction to tax planning Tax Compliance and Tax Advisory Services Double taxation arrangements and agreements China tax system 26 iii

4 Taxation Reminder of the examination cut-off rule HKICPA operates a 'cut-off' rule whereby students will only be examined on standards and legislation that had been released on or before 31 May each year. The same examinable contents applies to the December session of 2014 and the June session of Examinable contents are applicable to both module and final examinations. In determining what is examinable, reference must be made to both the release date of the pronouncements (or the enactment date of the legislation) and their corresponding effective date. Legislation and the Institute's pronouncements that meet the following conditions will be examined: Condition 1: Have been released/enacted six months prior to the reference date of 1 December 2014 (cut-off being 31 May 2014) AND Condition 2: Have been effective/will be effective on or before the 13th month from the reference date i.e. 1 January iv

5 Introduction Introduction This Supplement has been produced for those candidates preparing for the December 2014 and June 2015 examination sessions of the HKICPA Qualification Programme. It is designed to be used in conjunction with the fourth edition of the Learning Pack, and it will bring you fully up to date for developments that have occurred in the period since publication of the Learning Pack and 31 May 2014, the cut-off date for examinable standards and legislation for the December 2014 and June 2015 examinations. The Supplement comprises a technical update on developments that will be examinable in December 2014 and June 2015 examination sessions that are not currently covered in the Learning Pack. The topics covered are listed on the contents page, and are covered in chapter order. In each case the text in the Supplement explains how the Learning Pack is affected by the change, for example whether the new material should be read in addition to the current material in the Learning Pack, or whether the new material should be regarded as a replacement. Good luck with your studies! v

6 vi Taxation

7 December 2014 and June 2015 Supplement Part A: Identified Errata Chapter 3 Section 5.1 Page 121 Section 12.3 Page 220 Hong Kong property tax In the second row of the table, last paragraph, revise the last sentence to This is further discussed in Chapter 9, section 4.6. In Example 72, the income statement should be as follow: $ $ Turnover 2,477,000 Less: Cost of goods sold (1,800,000) Gross profit 677,000 Less: Rent 600,000 Salaries 780,000 Other expenses 47,000 Depreciation 112,500 Loan interest 400,000 (1,939,500) Net loss (1,262,500) The solution to part (a) should be as follow: $ $ Loss per account (1,262,500) Less: Salaries to partners (180, ,000 10/12) 330,000 Salaries to partner s spouse (144,000 10/12) 120,000 Interest to partner s spouse 180,000 Interest to F Ltd (750,000 12%) 90,000 Depreciation 112, ,500 (430,000) Add: Depreciation allowance (200,000) Allowable loss (630,000) Section 14.3 Page 231 Section Page 233 Revise s.23a(2) in Premium from insurance business in Hong Kong includes (s.23a(2)) to s.23a(3). Revise s.23a(2) in Definitions in s.23a(2) to s.23a(3). 1

8 Taxation Chapter 8 Example 2 Page 468 Example 11 Page 476 Example 20 Page 484 Hong Kong stamp duty Replace the example with the following: E sells the shares in C Ltd to D. C Ltd owns a property with a market value of $5m and an outstanding mortgage of $2m. D agrees to acquire the shares in C Ltd by paying E $3m and provide an undertaking to repay $2m liability. Stamp duty payable on the conveyance will be based on $5 million, being cash plus value of the debt. In the diagram, revise Stamp duty $15,000 to Stamp duty $150,000 In the third line of the last paragraph, revise the sentence and the stamp duty payable is $300,000 ($8 million 3.75%) to and the stamp duty payable is $281,250 ($7.5 million 3.75%). 2

9 December 2014 and June 2015 Supplement Part B: Technical Update Tax tables Add the following on pages xviii, xix and xx under Profits Tax, Salaries Tax and Personal Assessment For 2012/13, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $10,000 per case (Enacted on 5 July 2013). The 2014/15 Budget (not yet enacted) proposed that for Year of Assessment 2013/14, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $10,000 per case. Add the following on page xxiii under Personal allowances: Increase the deduction of self-education expenses to $80,000 from 2013/14 onwards (enacted on 5 July 2013) Increase child allowance and the additional one-off child allowance in the year of birth to $70,000 from 2013/14 onwards (enacted on 5 July 2013) Increase employee s MPF deduction to $15,000 (max) for 2013/14 Increase employee s MPF deduction to $17,500 (max) for 2014/15 onwards The 2014/15 Budget proposed the following changes for 2014/15 (not yet enacted): Increase the deduction ceiling of elderly residential care expenses from $76,000 to $80,000 Increase basic dependent parent/grandparent allowance (aged 60 or above) from $38,000 to $40,000 each Increase additional dependent parent/grandparent allowance (aged 60 or above) from $38,000 to $40,000 each Increase basic dependent parent/grandparent allowance (aged between 55 to 59) from $19,000 to $20,000 each Increase additional dependent parent/grandparent allowance (aged between 55 to 59) from $19,000 to $20,000 each Add the following on page xxiv after On Sale or Transfer of Immovable Property in Hong Kong On 22 February 2013, the Financial Secretary announced that the Government would amend the Stamp Duty Ordinance to adjust the ad valorem stamp duty (AVD) rates. The new AVD rates are as follows. (Where the stamp duty calculated includes a fraction of $1, round-up the duty to the nearest $1.) Consideration/Market Value Stamp Duty Up to $2,000, % $2,000,001 $2,176,470 $30, % of excess over $2,000,000 $2,176,471 $3,000, % $3,000,001 $3,290,330 $90, % of excess over $3,000,000 3

10 Taxation Consideration/Market Value Stamp Duty $3,290,331 $4,000, % $4,000,001 $4,428,580 $180, % of excess over $4,000,000 $4,428,581 $6,000, % $6,000,001 $6,720,000 $360, % of excess over $6,000,000 $6,720,001 $20,000, % $20,000,001 $21,739,130 $1,500, % of excess over $20,000,000 Over $21,739, % * The new AVD rates are subject to passage of the relevant legislation. Replace the last paragraph on page xxiv with the following: With effect from 20 November 2010, unless the transaction is exempted from Special Stamp Duty (SSD) or SSD is not applicable, any residential property acquired on or after 20 November 2010, either by an individual or a company (regardless of where it is incorporated), and resold within 24 months (the property was acquired on or after 20 November 2010 and before 27 October 2012) or 36 months (the property was acquired on or after 27 October 2012), will be subject to SSD. Replace the special stamp duty rates by the following tables on page xxv: Holding period The property was acquired on or after 20 November 2010 and before 27 October 2012 The property was acquired on or after 27 October month or less 15% 20% More than 6 months but for 12 months or less More than 12 months but for 24 months or less More than 24 months but for 36 months or less 10% 15% 5% 10% 10% Add the following on page xxv: The introduction of a 15% Buyer s stamp duty on residential properties acquired by any person (including companies) other than a Hong Kong Permanent Resident. The enhanced SSD rate and the Buyer s stamp duty were passed on 22 February

11 December 2014 and June 2015 Supplement Chapter 1 The tax system in Hong Kong Add the following in the fourth paragraph of section 1.3 on page 6: The agreements with Italy, Guernsey and Qatar for the avoidance of double taxation were gazetted on 4 October Add the following to the table in section 1.3 on page 6: Country CDTA/ Protocol Gazetted Came into force Take effect Austria Protocol 23 April July July 2013 Jersey CDTA 23 April July 2013 Y/A 2014/15 Kuwait CDTA 17 April July 2013 Y/A 2014/15 Italy CDTA 4 Oct 2013 Pending Pending Guernsey CDTA 4 Oct Dec 2013 Y/A 2014/15 Qatar CDTA 4 Oct Dec 2013 Y/A 2014/15 Canada CDTA 23 April Oct 2013 Y/A 2014/15 Vietnam Protocol In progress Pending Pending Modify the paragraph after the table in section 1.3 on page 6: In addition, there are 30 avoidance of double taxation agreements on airline income, six agreements on shipping income and two agreements on airline and shipping income. Modify the following on page 17 for DIPN 47: No. Subjects Date of Issue 47 (Revised) Exchange of Information January 2014 Replace the last paragraph of section 5.2 on page 21 by: There is a partial tax reduction for 2012/13 as a relief measure. All taxpayers liable to profits tax, salaries tax or tax under personal assessment will have a reduction of 75% of the 2012/13 final tax, subject to a ceiling of $10,000 per case (Enacted on 5 July 2013). Replace the special stamp duty table by the following table on page 26: Holding period The property was acquired on or after 20 November 2010 and before 27 October 2012 The property was acquired on or after 27 October month or less 15% 20% More than 6 months but for 12 months or less More than 12 months but for 24 months or less 10% 15% 5% 10% 5

12 Taxation Holding period The property was acquired on or after 20 November 2010 and before 27 October 2012 The property was acquired on or after 27 October 2012 More than 24 months but for 36 months or less 10% Replace section 7.3 on page 25 by the following: 7.3 Amendments proposed by the Budget Tax measures proposed in the Budget (not yet enacted by 31 May 2014), include the following changes: Increase the deduction ceiling of elderly residential care expenses from $76,000 to $80,000 Increase basic dependent parent/grandparent allowance (aged 60 or above) from $38,000 to $40,000 each Increase additional dependent parent/grandparent allowance (aged 60 or above) from $38,000 to $40,000 each Increase basic dependent parent/grandparent allowance (aged between 55 to 59) from $19,000 to $20,000 each Increase additional dependent parent/grandparent allowance (aged between 55 to 59) from $19,000 to $20,000 each Replaced the last two paragraphs on page 26 with the following: The enhanced special stamp duty rates were passed by Legislative Council on 22 February 2014 and would have retrospective effect from 27 October Under Buyer s stamp duty on acquisition of residential properties on page 27 item (c), replace the three paragraphs by the following: Buyer s stamp duty (BSD) on acquisition of Hong Kong residential properties by any person (including Hong Kong and foreign companies) other than a Hong Kong permanent resident would be charged at a flat rate of 15% of the stated consideration or the market value of the property acquired, whichever is higher. The BSD would be imposed on top of the ad valorem stamp duty and the SSD, if applicable. The BSD was passed by Legislative Council on 22 February 2014 and would have retrospective effect from 27 October Add new sections 7.8, 7.9 and 7.10 on page 27: 7.8 Islamic bonds (sukuk) The Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Ordinance 2013 (the Amendment Ordinance) was gazetted and came into operation on 19 July The Amendment Ordinance principally seeks to amend the Inland Revenue Ordinance and Stamp Duty Ordinance to provide a comparable taxation framework for some common types of Islamic bonds (sukuk) vis-a-vis conventional bonds, with a view to promoting the development of a sukuk market in Hong Kong. 6

13 December 2014 and June 2015 Supplement The IRD will publish the related Departmental Interpretation and Practice Notes and Stamp Office Interpretation and Practice Notes to provide implementation guidance. 7.9 Tax concession for captive insurers On 19 March 2014, the Legislative Council passed the Inland Revenue (Amendment) (No. 3) Bill 2013 to provide a tax concession for captive insurers to enjoy a 50 per cent reduction in the profits tax on their insurance business of offshore risks. The concession would take effect from the year of assessment 2013/14 onwards. The tax concession would provide further impetus for groups or enterprises to consider setting up captive insurers in Hong Kong to underwrite their own risks Tax Information Exchange Agreement On 25 March 2014, Hong Kong signed a TIEA with the United States. This is the first TIEA signed by Hong Kong. Please see Chapter 12 for details. 7

14 Taxation Chapter 2 Administration procedures under the Inland Revenue Ordinance Modify the following to Moulin Global Eyecare Trading Limited case in Appendix (page 78): Taxpayer [Ref.] Moulin Global Eyecare Trading Limited (In Liquidation) v. CIR [2011] CACV 64 FACV No. 5 of 2013 Subject Matter Re-opening tax assessments in liquidation Extract of Facts and Determination The Court of Appeal allowed the CIR's appeal against the CFI s decision (HCAL 29/2010). The taxpayer has been granted leave to appeal to the CFA. On 13 March 2014, the CFA dismissed the appeal. The liquidators cannot rely on s64(1) and s70a to reopen tax assessments. Add the following new case to Appendix (page 78): Ta Taxpayer [Ref.] [Ref.] Good Mark Industrial Limited vs. Commissioner of Inland Revenue [HCAL 88/2012] Subject Matter Construction of s64(1) and s70a Extract of Facts and Determination Tax return for 2002/03 was submitted by the taxpayer to the IRD. The original assessment was issued in September 2004 based on the tax return filed. An additional assessment was issued in January 2005 disallowing certain bad debts. No objection was raised by the taxpayer against the Sep 2004 and the Jan The IRD made an additional assessment for 2003/04 in March On 15 April 2010, the applicant notified the IRD to object the March 2010 assessments for 2003/04 and reopen the previous two assessments for 2003/04 based on s70a. The Commissioner refused to entertain the s.70a claim in respect of the Sep 2004 assessment and the Jan 2005 assessment. Good Mark applied under judicial review. The judge of the CFI refused the application. 8

15 December 2014 and June 2015 Supplement Chapter 3 Hong Kong profits tax Under section 5.2 Concessionary trading receipts chargeable to tax at half of the rate on page 123, replace the last row of the table on s.14b with the following: Assessable profits of a corporation, to the extent they are the assessable profits of the corporation derived from the business of (i) Reinsurance of offshore risks as a professional reinsurer within the meaning of s.23a(2); or (ii) Insurance of offshore risks as an authorized captive insurer within the meaning of s.23a(2a) (with effect from the year of assessment 2013/14). An election for the tax concession, once made, is irrevocable. Under section 5.2 Concessionary trading receipts chargeable to tax at half of the rate on page 124, replace the second last paragraph with the following: The ascertainment of assessable profits of a corporation derived from the business of reinsurance of offshore risks as a professional reinsurer or from the business of insurance of offshore risks as an authorized captive insurer is outlined in section on Qualifying business of reinsurance of offshore risks and section on Qualifying business of insurance of offshore risks. Under section Doubt on the application of Sharkey v Wernher principle on page 133, replace the last two paragraphs with the following: The Commissioner lodged an appeal against the COA s judgement to the CFA, which was dismissed on 12 November The CFA upheld the decisions of the lower courts that unrealised revaluation profits recognised in accounts prepared in accordance with the prevailing accounting standards are not taxable while unrealised losses of NCIL are deductible. The CFA noted two cardinal principles of tax law: The word profits connotes actual or realised and not potential or anticipated profits; and Neither profits nor losses may be anticipated. Accounts drawn up in accordance with ordinary principles of commercial accounting must be adjusted for tax purposes if they do not conform to the underlying principles of taxation enunciated by the courts, even if these are not expressly stated in the statute. The above principles and the interpretation of the IRO by the courts cannot be overturned by the adoption of new international standards of commercial accounting. However, the latter principle should not be interpreted to prohibit a taxpayer from using an unrealised loss to reduce its liability to tax. A taxpayer can make a provision in the profit and loss account for the diminution in the value of the trading stock during the accounting period, if the diminution in value is material and likely to be permanent. Such a provision would not be anticipated losses and thus would be deductible. Whilst the CFI specifically rejected the application of the Sharkey v Wernher principle in Hong Kong, the CFA did not comment on this. It is arguable that the unrealised gain from the deemed disposal of the trading stock when it is changed to a capital asset should not be taxable. The trading stock has not yet been sold; the unrealised gain is not a real profit but notional profit which is not taxable. 9

16 Taxation Under section Timing of assessments on page 179, change the first line of the second paragraph to However, the COA and CFA in Nice Cheer... Add a new section 13.6 after section 13.5 on page 224: 13.6 Unabsorbed losses from normal and concessionary trading receipts Sections 19CA and 19CB provide for the cross set off of unabsorbed losses from profits taxed at the normal rates and profits taxed at the concessionary rates specified in s.14a (i.e. qualifying debt instruments) or s.14b (i.e. qualifying reinsurance business of a professional reinsurer and qualifying insurance business of an authorized captive insurer). For this purpose, profits or loss derived from normal trading receipts ( NTR ) are referred to as normal profits or loss, and profits or loss derived from concessionary trading receipts ( CTR ) are referred to as concessionary profits or loss. As these two streams of profits are taxed at different rates, it is necessary to apply an adjustment factor ( AF ) to the profits or loss to be set off. The adjustment factor is the ratio the concessionary tax rates bear to the normal tax rates, which is 2 (i.e. 8.25%/16.5% for corporations; 7.5%/15% for persons other than corporations) Same business and same year of assessment s.19ca Example 1 Normal profits exceed adjusted concessionary loss: s.19ca(2)(a) (Adapted from DIPN 8, Example 4) NTRs CTRs $ $ Profit/(loss) 10,000 (18,000) Reduced by concessionary loss/af (9,000) 18,000 Net assessable profits 1,000 Unabsorbed loss Nil Example 2 Normal profits do not exceed adjusted concessionary loss: s.19ca(2)(b) (Adapted from DIPN 8, Example 5) NTRs CTRs $ $ Profit/(loss) 10,000 (24,000) Reduced by normal profits AF (10,000) 20,000 Unabsorbed loss c/f (4,000) Net assessable profits Nil Example 3 Normal loss does not exceed adjusted concessionary profits: s.19ca(3)(a) (Adapted from DIPN 8, Example 6) NTRs CTRs $ $ Profit/(loss) (10,000) 24,000 Reduced by normal loss AF 10,000 (20,000) Net assessable profits 4,000 Unabsorbed loss Nil Example 4 Normal loss exceeds adjusted concessionary profits: s.19ca(3)(b) (Adapted from DIPN 8, Example 7) NTRs CTRs $ $ Profit/(loss) (10,000) 18,000 Reduced by concessionary profits/af 9,000 (18,000) Unabsorbed loss c/f (1,000) Net assessable profits Nil 10

17 December 2014 and June 2015 Supplement Different business and different year of assessment s.19cb Example 5 Normal profits exceed adjusted concessionary loss: s.19cb(2)(a) (Adapted from DIPN 8, Example 8) NTRs CTRs $ $ Loss b/f (10,000) Assessable profits 8,000 Reduced by concessionary loss b/f / AF (5,000) 10,000 Net assessable profits 3,000 Loss c/f Nil Example 6 Normal profits do not exceed adjusted concessionary loss: s.19cb(2)(b) (Adapted from DIPN 8, Example 9) NTRs CTRs $ $ Loss b/f (10,000) Assessable profits 4,000 Set-off by normal profits AF (4,000) 8,000 Loss c/f (2,000) Net assessable profits Nil Example 7 Normal loss does not exceed adjusted concessionary profits: s.19cb(3)(a) (Adapted from DIPN 8, Example 10) NTRs CTRs $ $ Loss b/f (10,000) Assessable profits 24,000 Reduced by normal loss b/f AF 10,000 (20,000) Net assessable profits 4,000 Loss c/f Nil Example 8 Normal loss exceeds adjusted concessionary profits: s.19cb(3)(b) (Adapted from DIPN 8, Example 11) NTRs CTRs $ $ Loss b/f (10,000) Assessable profits 18,000 Set-off by concessionary profits/af 9,000 (18,000) Loss c/f (1,000) Net assessable profits Nil Change the heading of section on page 232 to Qualifying business of reinsurance of offshore risks. Add a new section after section on page 233: Qualifying business of insurance of offshore risks Pursuant to s.23a(2a), with effect from the year of assessment 2013/14, where a non-life insurance company carries on the business of insurance of offshore risks as an authorized captive insurer, the assessable profits derived from such business for a year of assessment shall be ascertained in accordance with the following formula: 11

18 Taxation Formula to learn F E= H G E means such assessable profits; F means the assessable profits of the non-life insurance company during that basis period for that year of assessment as computed in accordance with ss.23a(1) (see section 14.3 above); G means the aggregate of the total income earned by or accrued to that non-life insurance company during that basis period for that year of assessment; and H means the aggregate of offshore insurance income earned by or accrued to that non-life insurance company during that basis period for that year of assessment. Pursuant to s.14b, the assessable profits of a non-life insurance company derived from the business of insurance of offshore risks as an authorised captive insurer within the meaning of s.23a(2a) are, upon an irrevocable election by the company in writing, chargeable to profits tax at 50% of the tax rate as a concessionary trading receipt. Renumber section Definitions in s.23a(3) on page 233 as and add the following after the last paragraph: Authorized captive insurer means a company that (a) Is a captive insurer as defined by s.2(7)(a) of the Insurance Companies Ordinance; and (b) Is authorized to carry on in or from Hong Kong insurance business as such a captive insurer under s.8 of that Ordinance. Gains or profits from offshore insurance investments means any sums derived from, attributable to, or in respect of gains or profits arising from the sale or other disposal of, or on the redemption on maturity or presentment of, and any interest received on (a) Investments made with premiums from insurance of offshore risks; or (b) Investments representing the whole or any part of the technical reserves of an authorized captive insurer referable to premiums from insurance of offshore risks. Offshore insurance income means any sums derived from, attributable to, or in respect of (a) Premiums from insurance of offshore risks; or (b) Gains or profits from offshore insurance investments. Premiums from insurance of offshore risk means premiums received by an authorized captive insurer in respect of the insurance of any risk outside Hong Kong or in transit in Hong Kong, and (a) In relation to facultative general reinsurance, the reinsured is not a person resident in Hong Kong or a PE maintained in Hong Kong; (b) In relation to treaty general reinsurance, not less than 75% of the total risk in terms of gross premiums is outside Hong Kong or is in transit in Hong Kong. Renumber section Tax cases on non-life insurance companies on page 233 as

19 December 2014 and June 2015 Supplement Under section Double tax arrangements on international aviation income on page 243, replace the third paragraph with the following: A DTA on shipping and air services income was entered into with Singapore in November A similar agreement with Sri Lanka was entered into in November In respect of international aviation income, Hong Kong has entered into 30 DTAs (Air Services Income Agreements) with Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Korea, Kuwait, Laos (pending order by the Chief Executive in Council), Macau SAR, the mainland of China, Maldives, Mauritius, Mexico, the Netherlands, New Zealand, Norway, the Russian Federation, Seychelles, Sweden, Switzerland and the United Kingdom. In Appendix 2 on page 252, for the second last case Nice Cheer Investment Ltd, insert Not taxable under the column Privy Council/Court of Final Appeal. In Appendix 3 on page 254, for the last case Braitrim (Far East) Limited, revise the column Privy Council/Court of Final Appeal to Taxpayer s application to the CFA for leave to appeal was heard and dismissed on 19 August In Appendix 10 on page 270, replace the last paragraph with the following: Hence, by a judgement dated 22 October 2012, the CFI decided that the license fees, but not the technical costs, were chargeable to tax under s.15(1)(ba). Turner's appeal to the COA was heard on 10 December 2013 and judgment was reserved. In Appendix 11 on page 272, replace the last paragraph with the following: The Commissioner's appeal to the CFA in respect of that part of the judgment concerning balancing charges is scheduled to be heard on 24 November 2014 (with 25 November 2014 reserved for hearing). In Appendix 12 on page 277, replace the last sentence in the last paragraph with the following: The taxpayer s appeal to the COA was heard on 24 and 25 October 2013 and judgment was reserved. In Appendix 13 on page 289, replace the last paragraph with the following: BFE's application for leave to appeal to the CFA was heard and dismissed by the COA on 19 April BFE's application to the CFA for leave to appeal was heard and dismissed on 19 August

20 Taxation Chapter 4 Non-resident persons Replace the second paragraph on page 347 with the following: In respect of international aviation income, Hong Kong has entered into 30 DTAs (Air Services Income Agreements) with Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Korea, Kuwait, Laos (pending order by the Chief Executive in Council), Macau SAR, the mainland of China, Maldives, Mauritius, Mexico, the Netherlands, New Zealand, Norway, the Russian Federation, Seychelles, Sweden, Switzerland and the United Kingdom. Under Topic recap on page 348, under the column Double Taxation Agreements (DTAs), replace 25 airline income with 30 airline income. 14

21 December 2014 and June 2015 Supplement Chapter 5 Hong Kong salaries tax Add the following to the second paragraph of page 383 (Section 5.7 Elderly residential care expenses) before However, the person claiming. : Amend first bullet point of second paragraph of page 386 (5.9 Contributions to recognised retirement schemes): The amount specified in Schedule 3B of the IRO (refer below); or Amend the third paragraph of page 386 (5.9 Contributions to recognised retirement schemes): The maximum annual tax deduction for mandatory contributions to Mandatory Provident Fund schemes specified in Schedule 3B of the IRO: $12,000 for the years of assessment 2001/02 to 2011/12 (inclusive) $14,500 for the year of assessment 2012/13 $15,000 for the year of assessment 2013/14 $17,500 for the year of assessment 2014/15 $18,000 for the year of assessment 2015/16 and onwards Delete This change was made in the light of the increase of the maximum relevant income level under the Mandatory Provident Fund Schemes Ordnance to $25,000, which has become effective from June Add the following before the fourth paragraph of page 386 (5.9 Contributions to recognised retirement schemes): The Legislative Council passed the amendment of the minimum relevant income level and the maximum relevant income level under the Mandatory Provident Fund Schemes Ordnance. The monthly minimum relevant income level has been increased from $6,500 to $7,100. This applies to contribution periods commencing on or after 1 November The monthly maximum relevant income level has been increased from $25,000 (which has become effective from June 2012) to $30,000. This applies to contribution periods commencing on or after 1 June Amend the fourth paragraph of page 386 (5.9 Contributions to recognised retirement schemes): (earning more than $7,100 per month (after 1 November 2013)) are required subject to an income ceiling of $30,000 per month (after 1 November 2013). They may contribute $12,000 for the years of assessment 2001/02 to 2011/12 under Schedule 3B of the IRO Modify the following to the table for personal allowances on page 388: Under 2014/15 Budget, all personal allowances for Year of Assessment 2014/15 remain unchanged with the exception of dependent parent/grandparent allowances. The proposed changes are as follows (not yet enacted): 2013/14 $ 2014/15 Budget $ Dependent parent/grandparent allowance for parent aged 60 or more* (each) Dependent parent/grandparent allowance for parent aged between 55 and 59 (each) 38,000 40,000 19,000 20,000 15

22 Taxation Additional dependent parent/grandparent allowance for parent aged 60 or more* (each) Additional dependent parent/grandparent allowance for parent aged between 55 and 59 (each) 38,000 40,000 19,000 20,000 Replace the table (tax relief) at the top of page 393 with the following: 2007/ / /10 to 2010/ / / /14* % of final tax reduction Maximum limit 75% 100% 75% 75% 75% 75% $25,000 $8,000 $6,000 $12,000 $10,000 $10,000 *not yet enacted as at 31 May 2014 Add the following BoR cases related to Salaries Tax on page 414 Ref. Issues considered D34/12 and D35/12 Whether the housing benefits received by the taxpayers as part of their remuneration packages are rental refunds or cash housing allowances D11/12 Whether certain sums received by a solicitor from a global law firm are in the nature of salaries income or dividend payments 16

23 December 2014 and June 2015 Supplement Chapter 8 Hong Kong stamp duty Add the following paragraph at the end of page 465: Two further measures were proposed by the Financial Secretary on 26 October 2012, comprising a measure to enhance the SSD rates and the introduction of a 15% buyer s stamp duty (BSD). The Stamp Duty (Amendment) Ordinance 2014 was enacted on 22 February 2014 to give effect to the proposal. This is discussed in section 3.4 on Buyer s stamp duty. Replace the first paragraph in Example 2 on page 468 with the following: E sells the shares in C Ltd to D. C Ltd owns a property with a market value of $5 million and an outstanding mortgage of $2 million. D agrees to acquire the shares in C Ltd by paying E $3 million and undertaking repayment of the $2 million liability. Replace the last sentence on page 470 with the following: The ad valorem rates of stamp duty on conveyance on sale of immovable property from 1 April 2010 to 22 February 2014 are as follows: Add the following after the table on page 471: On 22 February 2013, the Financial Secretary announced that the Government would amend the Stamp Duty Ordinance to adjust the ad valorem stamp duty (AVD) rates. The new AVD rates are as follows. (Where the stamp duty calculated includes a fraction of $1, round-up the duty to the nearest $1.) Consideration/Market Value Stamp Duty Up to $2,000, % $2,000,001 $2,176,470 $30, % of excess over $2,000,000 $2,176,471 $3,000, % $3,000,001 $3,290,330 $90, % of excess over $3,000,000 $3,290,331 $4,000, % $4,000,001 $4,428,580 $180, % of excess over $4,000,000 $4,428,581 $6,000, % $6,000,001 $6,720,000 $360, % of excess over $6,000,000 $6,720,001 $20,000, % $20,000,001 $21,739,130 $1,500, % of excess over $20,000,000 Over $21,739, % Replace the paragraph immediately after the table on page 470 with the following: As an anti-avoidance measure, if a duty-payer wishes to enjoy the progressive rates rather than the maximum rate of 8.5%, he or she must include in the conveyance on sale a s.29 certificate stating that the transaction does not form part of a larger transaction or a series of transactions, in respect of which the 17

24 Taxation aggregate consideration or value exceeds the amount for that progressive rate. Under section Rates of SSD on page 477, add the following after the table: Effective from 27 October 2012, the SDO was amended to adjust the SSD rates upwards and extend the coverage period to 36 months. The adjusted regressive rates for the extended holding period are as follows: Holding period Original SSD rate Enhanced SSD rate 6 months 15% 20% 6 months but 12 months 10% 15% Holding period Original SSD rate Enhanced SSD rate 12 months but 24 months 5% 10% 24 months but 36 months 0% 10% The adjusted rates and extended holding period of SSD are applicable to all residential properties acquired on or after 27 October Residential properties acquired between 20 November 2010 and 26 October 2012 were subject to the original SSD regime. Add a new section 3.4 after page 480: 3.4 Buyer s stamp duty (Head 1(1AAB) and 1(1C)) To address the overheated residential property market, BSD is imposed on the acquisition of residential properties by a person (including a company) on or after 27 October BSD is imposed on top of the existing ad valorem stamp duty and SSD, if applicable, on a chargeable AFS of residential property under s.29cb and Head 1(1C); or a conveyance on sale under s.29db and Head 1(1AAB). BSD is charged at a flat rate of 15% on the stated consideration or the market value of the property, whichever is higher. Exemption from BSD is granted when evidence is shown to the satisfaction of the Collector that the person is a Hong Kong permanent resident (HKPR) acting on his/her own behalf in acquiring the residential property (i.e. the person is both the legal and beneficial owner). In order to examine any claim for the BSD exemption, the IRD requires each applicant to declare, by virtue of the Oaths and Declarations Ordinance, that he/she is a HKPR and was acting on his/her own behalf in the acquisition of the residential property Time for payment of BSD BSD has to be paid within 30 days after the execution of the chargeable document. For chargeable documents executed between 27 October 2012 and the date on which the Stamp Duty (Amendment) Ordinance 2014 was published in the Gazette (i.e. 28 February 2014), BSD had to be paid on or before 31 March Persons liable to pay BSD The buyer or the transferee who is not a HKPR is liable to pay the BSD. A HKPR is defined as a person who: (a) Holds a valid permanent identity card (PIC) under the Registration of Persons Ordinance; or 18

25 December 2014 and June 2015 Supplement (b) Is eligible to, but exempted from, applying for the issue of a PIC under regulation 25(e) of the Registration of Persons Regulation (the aged, the blind or the infirm). Although BSD will not apply to HKPRs, it will apply to companies that acquire residential properties, regardless of whether they are controlled by or have any shareholders or directors who are HKPRs. A non-hkpr acquiring a residential property in the capacity of a trustee on behalf of a HKPR is liable to pay BSD, unless the HKPR is a mentally incapacitated person Exchange of residential properties If a non-hkpr uses his/her residential property to exchange for another residential property and has to pay a sum of money (i.e. equality money) which represents the difference in value of the two properties, BSD is charged on the instrument with reference to the equality money and the non-hkpr is regarded as the buyer. If a non-hkpr uses his/her non-residential property to exchange for a residential property, BSD is charged on the instrument with reference to the value of the residential property and the non-hkpr is regarded as the buyer Refund of BSD If a chargeable AFS is cancelled (other than for further resale such as confirmor sale or nomination of another buyer), the buyer can apply for refund of the BSD within two years after the AFS is cancelled Exemptions from BSD BSD will be exempted under the following circumstances: (i) Acquisition of a residential property by a HKPR jointly with a close relative(s) (i.e. spouse, parents, children, brothers and sisters) who is/are not HKPR and each of the purchasers is acting on his/her own behalf; (ii) Transfer of a residential property to a close relative who is not a HKPR, or to a close relative(s) jointly one or more of whom is/are not HKPR and each of the transferees is acting on his/her own behalf; (iii) Nomination of a close relative(s) who is/are not HKPR to take up the assignment of a residential property and each of the nominees is acting on his/her own behalf; (iv) Addition/deletion of name(s) of a person(s) who is/are not HKPR to/from a chargeable AFS or a conveyance on sale in respect of a residential property if the person(s) is/are a close relative(s) of the original purchaser(s) and each of the persons is acting on his/her own behalf; (v) Acquisition or transfer of a residential property by a court order or pursuant to a court order, which includes a foreclosure order obtained by a mortgagee whether or not it falls under the definition of a financial institution within the meaning of s.2 of the IRO; (vi) Transfer/vesting of a mortgaged residential property under a conveyance to/in its mortgagee that is a financial institution within the meaning of s.2 of the IRO, or a receiver appointed by the mortgagee; (vii) Acquisition or transfer of a residential property by or to a body corporate from an associated body corporate; 19

26 Taxation (viii) Acquisition of a residential property by a person acting on his/her own behalf to replace another residential property that was owned by that person and that has been Purchased or acquired pursuant to redevelopment projects pursued by the Urban Renewal Authority; or Resumed under an order made under s.3 of the Lands Resumption Ordinance or purchased under s.4a of that Ordinance; or Sold pursuant to an order for sale made by the Lands Tribunal under the Land (Compulsory Sale for Redevelopment) Ordinance; or Resumed under an order made under s.4(1) of the Mass Transit Railway (Land Resumption and Related provisions) Ordinance; or Resumed under an order made under s.13(1) of the Roads (Works, Use and Compensation) Ordinance; or Resumed under an order made under s.16 or 28(1) of the Railways Ordinance; or Acquired under an acquisition order made under s.3(1) or (2) of the Land Acquisition (Possessory Title) Ordinance; or Resumed under an order made under s.37(2) of the Land Drainage Ordinance. (ix) Acquisition or transfer of residential properties by or to the Government; and (x) Gift of residential properties to charitable institutions exempted from tax under s.88 of the IRO. If a residential property is jointly acquired by a HKPR and a non-hkpr who is not a close relative of the HKPR, there will not be any exemption from BSD. BSD will be payable on the stated consideration or full value of the property, whichever is the higher, regardless of the share of interest of the non-hkpr in the property. A residential property which is inherited by a non-hkpr from a deceased person s estate under a will, the law of intestacy or right of survivorship by a beneficiary is exempted from stamp duty, which is defined under the SDO to include ad valorem stamp duty, SSD and BSD Relief for residential property acquired by a non-hkpr for redevelopment A non-hkpr acquiring a residential property for redevelopment can apply to the Collector for a refund of the BSD paid after the person, or if the person is a body corporate, jointly with its associated body corporate, has become the owner of the entire lot to be redeveloped and (a) Either has obtained consent to commence any foundation works for the lot (whether or not together with any other lot) from the Building Authority under the Buildings Ordinance; (b) Or has (i) Demolished or caused to demolish all buildings (if any) existing on the lot, other than a building the demolition of which is prohibited under any Ordinance; and (ii) Obtained approval of plans in respect of building works to be carried out on the lot (whether or not together with any other lot) from the Building Authority under the Buildings Ordinance. 20

27 December 2014 and June 2015 Supplement If the residential property is subsequently transferred by a body corporate to an associated body corporate, the latter may also, under the aforesaid conditions, apply for a refund of the BSD paid by the former Documents required for claiming exemption from BSD (a) (b) (c) By a HKPR buyer/transferee For e-stamping cases, the original statutory declaration (IRSD131) of the applicant and a copy of his/her Hong Kong Permanent Identity Card have to be submitted within 30 days after the stamping application is submitted. In respect of paper application, the applicant has to submit the following: (i) A duly completed form IRSD112; (ii) The original statutory declaration (IRSD131); and (iii) A copy of the applicant s Hong Kong Permanent Identity Card. For the reason of transfer of residential property between close relatives The stamping must be by paper application, the applicant has to submit the following: (i) Duly completed form IRSD112 and IRSD118; (ii) A certified copy of the relevant documentary evidence showing the relationship of the parties; and (iii) The original statutory declaration (IRSD131) declaring that the buyer/ transferee was acting on his/her own behalf in acquiring the property. For the reason of acquiring residential property by a HKPR jointly with his/her close relative who is a non-hkpr The stamping must be by paper application, the applicant has to submit the following: (i) Duly completed form IRSD112 and IRSD118; (ii) A certified copy of the relevant documentary evidence showing the relationship of the parties; and (iii) The HKPR s original statutory declaration (IRSD131) declaring that he/she is a HKPR and was acting on his/her own behalf in acquiring the property; and the original statutory declaration (IRSD131) made by the non-hkpr declaring that he/she is acting on his/her own behalf in acquiring the property. Renumber Sections 3.4, 3.4.1, 3.4.2, and on pages as 3.5, 3.5.1, 3.5.2, and

28 Taxation Chapter 9 Introduction to tax planning In section 4.6 on page 539, add the following after Example 5: The application of ss.15(1)(m) and 15A was examined in the following case: Taxpayer Subject matter Reference Aviation Fuel Supply Company Whether the lump sum was received as consideration for the transfer of the right to receive income without transferring the underlying property. (2011) HCIA 6/2009 (2012) CACV 150/2011 The CFI considered that there was no transfer of AFSC s right to receive the Facility Payments to the Airport Authority ( AA ) because the AA s right to receive the Facility payments were already in place under the pre-existing terms of the Operating Agreement. The lump sum also fell within the s.15a(3) exception as the legal and equitable interests of AFSC in the Facility would have been transferred on the termination of the lease. Therefore, the lump sum was not chargeable under ss.15(1)(m) and 15A. This case is discussed in Appendix 11 of Chapter 3. In section on page 572, in the third paragraph, replace the Note under stamp duty with the following: The SSD implications have to be considered if the residential property was acquired on or after 20 November 2010, either by an individual or a company (regardless of where it is incorporated), and resold within 24 months (for residential properties acquired between 20 November 2010 and 26 October 2012), or 36 months (for residential properties acquired on or after 27 October 2012). The BSD implications also have to be considered if the residential property was acquired on or after 27 October

29 December 2014 and June 2015 Supplement Chapter 11 Tax Compliance and Tax Advisory Services Please amend the address shown in Paragraph 7.4 on page 663 and the answer to self-assessment question 2 on page 670 for the Clerk to the Board of Review. Change from the old address shown in the Learning Pack: 1/F, Low Block Queensway Government Offices 66 Queensway Hong Kong The new address is: Room 1003, Tower 2, Lippo Centre, 89 Queensway, Hong Kong 23

30 Taxation Chapter 12 Double taxation arrangements and agreements In section 1.1 on page , modify the second paragraph as follow: In respect of international aviation income, Hong Kong has entered into double taxation arrangements with Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Korea, Kuwait, Laos (pending order by Chief Executive in Council), Macau SAR, Maldives, Mauritius, Mexico, the Netherlands, New Zealand, Norway, Russian Federation, Seychelles, Sweden, Switzerland and the United Kingdom. On 24 June, 2013, Hong Kong and Seychelles signed air services agreement. Section on page 682, add the following at the end of this Section: On 1 April 2013, a set of new forms for the applications of a Hong Kong tax resident certificate for claiming treaty benefits. The application process for Hong Kong tax residency certificates would become simpler for Hong Kong incorporated companies. Add a new section 4.5 on page 697: 4.5 Tax Information Exchange Agreement The Inland Revenue (Amendment) Bill 2013 by the Legislative Council was passed on 10 July The Bill enables Hong Kong to enter into Tax Information Exchange Agreements (TIEAs) with other jurisdictions where necessary and to enhance the existing exchange of information (EoI) arrangements under comprehensive avoidance of double taxation agreements (CDTAs). Under the prevailing Inland Revenue Ordinance, Hong Kong can only exchange tax information with another jurisdiction under the framework of a CDTA that Hong Kong has entered into with that other jurisdiction. With the passage of the Bill, Hong Kong can enhance the existing EoI arrangement in terms of the coverage of tax types and the limitation on disclosure of information. Hong Kong will be able to continue with its efforts in negotiating CDTAs with existing as well as potential partners whilst providing in place a legal framework for TIEAs for Hong Kong to meet its international obligations. On 25 March 2014, Hong Kong signed a TIEA with the United States. This is the first TIEA signed by Hong Kong. The HK-US TIEA provides the necessary basis for Hong Kong to provide for EoI upon requests made in relation to the information reported by financial institutions in Hong Kong to the US under the US Foreign Account Tax Compliance Act (FATCA). FATCA requires US persons, including those who live outside the US, to report to the US tax authorities their financial accounts held in other jurisdictions, and requires foreign financial institutions including those in Hong Kong to report the financial information in respect of their US clients. The HK-US TIEA will become effective after Hong Kong has completed the necessary legislative procedures for bringing the agreement into force. In section 5 on page 698, delete the following: The agreements with Liechtenstein, France, Japan and New Zealand, and the Protocol to the Agreement with Luxembourg for the avoidance of double taxation and the prevention of fiscal evasion were gazetted on 13 May

31 December 2014 and June 2015 Supplement The agreements with Kuwait, Switzerland and Malta for the avoidance of double taxation were gazetted on 18 May The agreements with Jersey and Canada and the second protocol to the agreement with Austria for the avoidance of double taxation were gazetted on 3 May Add the following before the last two paragraphs of Section 5: The second protocol to the comprehensive double taxation agreement with Austria came into force on 3 July The comprehensive double taxation agreement with Jersey came into force on 3 July 2013 and will take effect in Hong Kong starting from the year of assessment 2014/15. The comprehensive double taxation agreement with Kuwait came into force on 24 July 2013 and will take effect in Hong Kong starting from the year of assessment 2014/15. The agreements with Italy, Guernsey and Qatar for the avoidance of double taxation were gazetted on 4 October The comprehensive double taxation agreement with Canada came into force on 29 October 2013 and will take effect in Hong Kong starting from the year of assessment 2014/15. The Second Protocol to the comprehensive double taxation agreement between Hong Kong and Vietnam was signed on 13 January The second protocol upgrades the Exchange of Information Article in the agreement to the 2004 version of the OECD. 25