Paper P6 (HKG) Advanced Taxation (Hong Kong) Thursday 7 June Professional Level Options Module

Transcription

1 Professional Level Options Module Advanced Taxation Thursday 7 June 2018 P6 HKG ACCA Time allowed: 3 hours 15 minutes This question paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 and 3 Do NOT open this question paper until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (HKG) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future. 2. Calculations and workings should be rounded down to the nearest HK$. 3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise. 4. All workings should be shown. 5. Ignore provisional tax and statutory tax reductions, unless specified otherwise. TAX RATES AND ALLOWANCES The following 2017/18 tax rates and allowances are to be used in answering the questions. Profits tax rates Companies 16 5% Unincorporated business 15% Salaries tax rates First $45,000 2% Next $45,000 7% Next $45,000 12% Remainder 17% Standard rate 15% Allowances $ Basic allowance 132,000 Married person s allowance 264,000 Single parent allowance 132,000 Child allowance 1st to 9th child (each) 100,000 Child allowance additional allowance in the year of birth (each) 100,000 Dependent parent/grandparent allowance basic 23,000/46,000 additional 23,000/46,000 Dependent brother/sister allowance 37,500 Disabled dependant allowance 75,000 Deductions $ Self-education expenses (maximum) 100,000 Home loan interest (maximum) 100,000 Elderly residential care expenses (maximum) 92,000 Mandatory provident fund contributions (maximum) 18,000 Depreciation allowance rates Initial allowance: Plant and machinery 60% Industrial buildings 20% Annual allowance: Computers 30% Motor cars 30% Furniture and fixtures 20% Machines 10% 30% Industrial buildings 4% or formula Commercial buildings 4% or formula 2

3 Stamp duty rates Stock 0 2% + $5 Immovable property Conveyance on sale and agreement for sale (ignoring marginal reliefs) Scale 1 Scale 2 Up to $2,000, % $100 $2,000,001 to $3,000, % 1 50% $3,000,001 to $4,000, % 2 25% $4,000,001 to $6,000, % 3 00% $6,000,001 to $20,000, % 3 75% $20,000,000 and above 8 5% 4 25% Conveyance on sale and agreement for sale chargeable with special stamp duty Holding period Not exceeding six months 15% or 20% as applicable Between six and 12 months 10% or 15% as applicable Between 12 and 24/36 months 5% or 10% as applicable Conveyance on sale and agreement for sale chargeable with buyer s stamp duty 15% Lease (a) Key money, construction fee etc only As for conveyances (above) (b) Rent only (as a percentage of the average yearly rent) Undefined term 0 25% Not exceeding one year 0 25% More than one year but not exceeding three years 0 50% Exceeding three years 1 00% (c) Key money, construction fee etc and rent Key money, construction fee etc 4 25% of the consideration Rent As for rent-only lease (above) 3 [P.T.O.

4 Section A BOTH questions are compulsory and MUST be attempted 1 Goodfit (HK) Ltd (HK-Co) is a company incorporated and carrying on business in Hong Kong, which is engaged in buying and selling rehabilitation equipment manufactured in mainland China. The team of procurement specialists frequently travels to China to discuss requirements with the supplier, negotiate the procurement terms (including the price and delivery schedule) and to sign the contracts in China on behalf of HK-Co. HK-Co sells all the equipment procured to customers in Singapore. These Singapore customers regularly visit Hong Kong to attend trade fairs and exhibitions where they place their orders directly with HK-Co. The equipment is shipped directly from the China supplier to the Singapore customers. HK-Co has a wholly-owned subsidiary in Singapore, Goodfit (Singapore) Ltd (Sing-Co), which provides the logistics support services to ensure that the shipped equipment is in good shape. A service fee is charged to HK-Co for these services. The supplier and all of the customers are unrelated to HK-Co and Sing-Co. The shareholding and operational structure is illustrated as follows: Overseas supplier (China) Purchases Goodfit (HK) Ltd HK-Co 100% shareholding Sales Shipment Goodfit (Singapore) Ltd (Singapore) Sing-Co Services Customers (Singapore) At the last group meeting, Sing-Co made the following requests to HK-Co: (1) Sing-Co is in need of two delivery trucks to enhance its logistics services to the customers in Singapore. Sing-Co requested that HK-Co provide these two trucks for its use without charge. The maintenance and petrol costs for the trucks will be borne by Sing-Co. (2) To sustain its operations, Sing-Co also requested a financing loan from HK-Co at an interest rate of 10% above the market rate. It is understood that any loan interest remitted back to HK-Co will be subject to Singapore tax at 15%, and that this tax will be deducted from the gross interest amount upon remittance by Sing-Co. 4

5 As the tax manager of the firm engaged by Goodfit (HK) Ltd, prepare a report for the board addressing each of the following issues from a Hong Kong tax perspective: (i) The chargeability to tax of the profits from the sale of the rehabilitation equipment. You should explain the general principles for determining the source of trading profits in Hong Kong, based on the Departmental Interpretation and Practice Note No. 21 entitled Locality of Profits and other relevant court cases. Where appropriate, briefly suggest any tax planning ideas to improve the tax position. Note: You are NOT required to make reference to the comprehensive double taxation arrangement between the mainland (i.e. PRC) and Hong Kong. (16 marks) (ii) The deductibility (outright deduction or as a tax depreciation allowance) of the cost of the two delivery trucks if they are acquired by Goodfit (HK) Ltd and provided to Goodfit (Singapore) Ltd free of charge for its use in Singapore. Where applicable, you should make reference to relevant court cases. (6 marks) (iii) The tax implications of Goodfit (HK) Ltd providing a financing loan to Goodfit (Singapore) Ltd, in particular: (1) the taxability of the loan interest income earned; (3 marks) (2) any transfer pricing implications in Hong Kong; and (3 marks) (3) the deductibility of the 15% Singapore tax withheld upon remittance of the interest. (3 marks) Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which the advice is communicated. (4 marks) (35 marks) 5 [P.T.O.

6 2 You are the tax adviser in charge of two new clients, Alex and his wife Regina. On 1 June 2018, you attended the first meeting with them and obtained the following information relating to their affairs for the year ended 31 March 2018: (1) Alex is employed by Best Ltd (Best), a Hong Kong company, as production manager in charge of Best s manufacturing operation in Shenzhen, China. His basic salary is $90,000 per month. Alex contributes 5% of his total salary to Best s mandatory provident fund scheme; Best contributes 10% to the scheme. (2) Alex comes back to Hong Kong every Saturday afternoon and returns to China on the following day. He also comes back to Hong Kong during his vacations. During the year ended 31 March 2018, Alex was in Hong Kong for a total of 115 days. Because of the nature of his duties, he is rarely required to perform any duties in Hong Kong. However, in October 2017, when Alex returned to Hong Kong, he was asked to look for and purchase a spare part in Hong Kong which was used for a repair at the Shenzhen factory. (3) Alex is provided with a flat in Shenzhen, and meals are provided for him at the factory. The flat is leased by Best at a monthly rental of $10,000. The cost of his travelling expenses between Hong Kong and Shenzhen of $2,500 per month are paid directly by Best. In addition, Best pays him $18,000 each year so that Alex can travel overseas during his holidays. In August 2017, Alex spent $22,000 on a trip to Korea. (4) Best purchased a medical insurance policy for Alex and his family at an annual cost of $15,000. In January 2018, Alex was hurt in an accident while working in the factory. The insurance company reimbursed the medical expenses of $23,000 which Alex paid for his stay in the hospital in Shenzhen. In addition, Alex was paid $80,000 by Best for the loss of the little finger on his left hand. (5) Alex is provided with a corporate credit card, which he can use for both personal and business expenditure. Although Alex is the cardholder, Best is billed by the credit card company directly and pays all amounts due. The personal and business expenditure charged during the year was $30,000 and $60,000 respectively. The credit card company operates a bonus scheme for its cardholders. Under this scheme, cardholders earn a bonus point for every $100 spent and these bonus points can be used to redeem merchandise. Alex used the bonus points he earned to redeem a tablet which could be bought for $1,600. (6) Regina was employed by Cheer Ltd (Cheer), a Hong Kong-listed company, but her employment was terminated in July Regina received a share option from Cheer in the year of assessment 2015/16. Under the terms of this share option, Cheer would either pay Regina the cash value of her option or provide her with shares. Regina could not insist on receiving shares. The option became exercisable in the year of assessment 2017/18. When Regina exercised her option, Cheer exercised its right to pay her cash instead of providing her with shares; and Regina received $96,000. (7) Regina now sells home products to friends on behalf of a Taiwan company. For this purpose, the company sends her a stock of products each month, and Regina arranges home parties to which she invites friends and demonstrates the products. She earns a commission of 20% of the gross sales proceeds of the goods she sells on behalf of the company. In the year of assessment 2017/18, Regina earned commissions totalling $85,000. (8) Regina and Alex, when he is in Hong Kong, live with Alex s parents in a flat in Kennedy Town. The flat is leased from a relative for a period of four years, at a monthly rental of $16,000, but no tenancy agreement has been prepared. Alex also contributes $3,000 per month to support his parents-in-law, who live in China. Both his parents and his parents-in-law were aged over 60 years during the year ended 31 March (a) Advise Alex and Regina of their respective tax positions for the year of assessment 2017/18. If you need further information to fully determine the tax position, state what information you need and why you need it. (22 marks) (b) Advise Regina of the compliance obligations, if any, imposed on her under the Inland Revenue Ordinance in respect of her sale of home products on behalf of the Taiwan company. (3 marks) (25 marks) 6

7 Section B TWO questions ONLY to be attempted 3 IIL (HK) Ltd (IIL) was incorporated and is carrying on business in Hong Kong. IIL operates three trademarks, T1, T2 and T3 as detailed below. T1 was created and developed by IIL itself, through RDH, a professional research and development house in Hong Kong. T1 is licensed to a People s Republic of China (PRC) manufacturer at a royalty. T2 was acquired from an Australian company and is used by IIL in its packaging business in Hong Kong. T3 is licensed by IIL from a Japanese company at a royalty, and is sub-licensed to an associated company of IIL in Malaysia. For each of the three trademarks, T1, T2 and T3, analyse and discuss the Hong Kong tax implications for IIL (HK) Ltd arising from the related gross income earned and costs incurred during the year Note: The following mark allocation is provided as guidance for this question: T1 6 marks T2 7 marks T3 7 marks (20 marks) 4 (a) Michael is a Hong Kong permanent resident. He is in the course of negotiating with a potential seller in respect of a property which he intends to acquire as his family home. The property will be the first property Michael has acquired in Hong Kong. The offered price is $18 million. The seller is a company incorporated in Hong Kong, whose only asset is the residential property which it wholly owns. It has proposed to Michael that he could save substantial stamp duty costs if he acquires all of the shares in the company instead of the property itself. (i) Advise Michael on the Hong Kong stamp duty implications: (1) if he acquires the property; and (7 marks) (2) if he acquires all the shares in the company. (3 marks) (ii) Identify the potential tax risks to Michael if he acquires all the shares in the company, and the course(s) of action he might take to protect his interests. (3 marks) (b) Kenny carries on a trading business in Hong Kong. He closes his accounts on 30 April each year. In the course of preparing his profits tax computation for the year ended 30 April 2018, Kenny discovered that an expense of $120,000, being the cost of hiring his sister as a part-time accountant during the year ended 30 April 2012, had been omitted from his business accounts and thus this expense had not been claimed in the relevant tax return. Advise Kenny whether he is likely to be able to make a successful claim to revise the relevant profits tax assessment in respect of the omitted staff expense for the year ended 30 April (7 marks) (20 marks) 7 [P.T.O.

8 5 The HS Group carries on business in Hong Kong and Singapore. The group structure and country of residence of the respective group companies is shown below. None of the HS Group companies is involved in any partnership. HS Holding (Country X) HS (HK) Ltd HS (Singapore) Pte Ltd (Singapore) HS (HK East) Ltd HS (HK North) Ltd HS (Singapore East) Pte Ltd (Singapore) All the companies in the HS Group are profitable except for HS (HK East) Ltd (as shaded above) where a substantial tax loss was incurred over the last year. Two years ago, a tax loss was incurred in HS (Singapore East) Pte Ltd, and this loss was successfully transferred to HS (Singapore) Pte Ltd to offset the latter s assessable income, hence reducing the overall Singapore tax payable. Before the end of this financial year, the HS Group proposes to submit an application to the Hong Kong Inland Revenue Department for an advance ruling confirming the HS Group may similarly transfer the tax losses in HS (HK East) Ltd to offset the assessable profits generated in HS (HK North) Ltd so that the tax liability of the latter is reduced. Should the above application not be granted, the HS Group may consider transferring its shareholding in HS (HK East) Ltd to an independent third party, who may be able to generate sufficient profits to utilise the tax benefit arising from the carry-forward of the tax losses. The consideration for such a transfer would take into account the amount of the tax benefit realisable. Alternatively, the HS Group may make a loan at the market interest rate to HS (HK East) Ltd in order to finance the latter s continued operation. The loan would be financed from the HS Group s internal funds. (a) Based on the Inland Revenue Ordinance, set out the general rules governing the treatment of tax losses for corporations carrying on businesses in Hong Kong, and comment on HS Group s proposal to transfer HS (HK East) Ltd s tax loss to HS (HK North) Ltd. (6 marks) (b) Discuss the Hong Kong tax implications for the independent third party arising from the proposed transfer by the HS Group of the shares in HS (HK East) Ltd to the independent third party, in particular the eligibility to carry forward the tax loss after the change in shareholding. (7 marks) (c) Discuss the Hong Kong tax provisions which will need to be taken into account when determining whether the loan interest payable by HS (HK East) Ltd on the proposed loan from the HS Group will be tax deductible. (7 marks) (20 marks) End of Question Paper 8