THE HONG KONG POLYTECHNIC UNIVERSITY AF5206 HONG KONG TAX FRAMEWORK Unit 14 – Anti-avoidance Provisions

Coverage
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Tax avoidance and Tax evasion Principles of anti-avoidance rules Anti-avoidance provisions in IRO Section 61 Section 61A Doctrine of fiscal nullity Section 20 Section 61B Section 39E Section 9A (Type I service company arrangement) Type II service company arrangement Advance Ruling Tax planning and ethical issues Basic tax planning principles Basic techniques of tax planning

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TAX AVOIDANCE AND TAX EVASION   Tax avoidance - Attempt to obtain tax benefit (i.e. reduction, elimination or postponement of tax) by legal means Tax evasion - Failure on the part of taxpayer to supply full and correct information relevant to an assessment of tax because of deliberate attempt or negligence - An offence punishable by a fine and/or imprisonment

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PRINCIPLES OF ANTI-AVOIDANCE RULES  Westminster principle - “Every man is entitled if he can, to order his affairs so that tax attaching under the appropriate Act is less than it would otherwise be.” [Lord Tomlin in IRC v. Duke of Westminster (1935)] Choice principle - Established in Australian case law

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Taxpayers are free to create favourable situations which will attract tax consequences for which the legislation specifically provides - If the legislature confers a choice on the taxpayer so as to whether or not to do an action, then it could hardly have intended that the exercise of that choice should be attacked under general anti-avoidance provisions Commissioner’s view - “Where a taxpayer could have achieved a particular financial result in two different ways, one of which would have attracted tax and the other not, there being no abnormal features in either event, assistant commissioners will not contend that an assessment should be made on the basis that the taxpayer followed a method which would have attracted tax. In other words, the Department accepts that a taxpayer is not obliged to maximize his tax liability.” [DIPN 15 (rev), paragraph 46(b)]

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ANTI-AVOIDANCE PROVISIONS IN IRO  General provisions - Section 61 - Certain transactions to be disregarded - Section 61A - Transactions designed to avoid liability for tax Specific provisions - Section 9(1)(b) & (c) - Residence provided by employer or associated corporation - Section 9A - Service company “Type I” arrangements - Section 15(1)(ba) – Deemed trading receipt for the use or right to use outside Hong Kong some intellectual property - Section 15(1)(m) & 15A - Transfer of right to receive income - Section 16(2), (2A), (2B), (2C), etc. - Deduction of interest expenses - Section 16E, 16EA, 16EB, 16EC - Purchase and sale of patent rights, etc. between associated corporation, sale and license back arrangement - Section 20 - Liability of certain non-resident persons - Section 21A - Computation of assessable profits under section 15(1)(a), (b) or (ba) - Section 22B - Limited partner loss relief - Section 38B - True value of an asset on sale - Section 39E - Leasing arrangements - Section 61B - Utilization of losses to avoid tax

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SECTION 61 The Law  Where an Assessor is of opinion that any transaction which: i) reduces the amount of tax payable; and ii) is artificial or fictitious, he may disregard the transaction and raise assessment accordingly  Artificial means "not natural or not ordinary"  Fictitious means "not genuine or unreal" Case Discussion (1) CIR v Rico Internationale Ltd (1965) - Part of the payments for service charge and commission to associated companies regarded as artificial and non-deductible - As motivated by non-commercial reasons, not documented or evidenced, and fixed in retrospect - But part of the payments considered as actually incurred in making profit still allowable (2) Kum Hing Land Investment Co Ltd v CIR (1967) - Taxpayer successfully induced the Daimaru Department Store to rent a large shop premises in Causeway Bay and received a commission - Taxpayer paid out a commission to a related party (partner of a partnership) who rendered no services in connection with the transaction - Commission payment was non-deductible as the transaction was both artificial and fictitious - Notwithstanding that payment actually made and properly evidenced (3) CIR v Douglas Henry Howe (1977) - An author in HK established a company in Panama. - Assigned to it the right to receive royalty income for consideration of $1 - Transactions not commercially unreasonable or unrealistic and therefore neither artificial nor fictitious - A fictitious transaction should be one which the parties to it never intended to be carried out - Consequence: section 61 was proved as largely ineffective in attacking tax avoidance schemes afterwards

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SECTION 61A The Law  Enacted in 1986 and modeled on the equivalent Australian legislation  Effective in respect of transaction entered into or effected after 13 March 1986  Application: - the transaction has the effect of conferring a tax benefit on a person; and - the transaction is concluded to be entered into with the sole or dominant purpose of obtaining a tax benefit  Effect: - Assistant Commissioner may raise an assessment on the basis: i) as if the transaction was not entered into or carried out; or ii) in any other manner that he considers appropriate to counteract the tax benefit  Definition: - Transaction: includes any operation or scheme whether legally enforceable or not - Tax benefit: avoidance or reduction of tax, or postponement of liability to pay tax  Factors to consider: (1) manner in which transaction was entered into; (2) form and substance of transaction; (3) result of transaction; (4) any change in financial position of taxpayer; (5) any change in financial position of connected person; (6) any rights or obligations created; and (7) any participation of a non-resident company  No application if transaction having legitimate commercial purpose  “It should strike down blatant or contrived tax avoidance arrangements but should not cast unnecessary inhibitions on normal commercial transactions by which taxpayers legitimately take advantage of opportunities available for the arrangement of their affairs.” (DIPN 15 Revised, paragraph 30)

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Case Discussion (1) Yick Fung Estates Ltd v CIR (2001) - The taxpayer commenced its business of property development and investment in August 1969 - In the year of assessment 1988/89, the taxpayer changed its accounting date from 30 June to 31 March - Two sets of accounts were prepared: one for the year ended 30 June 1988 and the second for the period of nine months from 1 July 1988 to 31 March 1989 - The Commissioner computed the assessable profits for 1988/89 by reference to the profits made in the 21 month period from 1 July 1987 to 31 March 1989

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The Commissioner opined that the taxpayer’s change in accounting date is a transaction for the sole or dominant purpose of obtaining a tax benefit, which was caught by section 61A The Board of Review held that since the taxpayer’s scheme (i.e. change of accounting date) had no basis in its ordinary business, the taxpayer’s reliance on section 18E was for tax avoidance. Section 61A can be applied to this case which permits an assessment for a period exceeding 12 months (D44/97) The Court of Appeal also found that the taxpayer’s change in accounting year-end constituted a “transaction” and had been for the sole or dominant purpose of enabling it to obtain a tax benefit and that section 61A should therefore apply The Court also held that section 61A has an overriding effect over section 18E

(2) Cheung Wah Keung v CIR (2003) - T/P was an 80% majority stakeholder in and a director of First-Rate Co. Ltd (“First-Rate”) - First-Rate performed sales management services to Sun Ling Motors Co. Ltd, a motor car dealer, and for these services received monthly services fee and sales commissions - The Board held that the interposition of First-Rate between Sun Ling and T/P was for the sole or dominant purpose of enabling T/P to obtain a tax benefit – deduction of expense, which would have not been deductible if First-Rate was not interposed - The Court of First Instance upheld the Board’s decision. Also, section 61 and section 61A should be applied separately, section 61 should be considered first and section 61A applied only if section 61 was found not to be applicable - CFI’s decision was upheld by the Court of Appeal (3) CIR v Tai Hing Cotton Mill (Development) Ltd (2007) - A manufacturer transferred two pieces of land to the taxpayer, a subsidiary company, at the following consideration: - $346 million, - to build a new industrial building, - a further sum of $400 million subject to the taxpayer company realizing profits from the development, and - an additional sum of $50% of the final net profits realized by the taxpayer company from the development - Ultimately, about $1.1 billion was paid as land consideration, where the parent claimed as non-taxable capital receipt while the taxpayer as deductible revenue receipt - CIR only allowed deduction of cost of the land, computed at about $746 million to the taxpayer company and disallowed the payment of the “50% of profits” by invoking section 16 and section 61A - CFI ruled in favour of CIR:

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the purchase consideration, including the $400 million and 50% share of profit, far exceeded the market value of the land - they were an appropriation of profit, not expenses incurred in the production of chargeable profits falling within section 16 - applying Ramsay to a purposive interpretation of section 16, the payment was not for the purpose of producing profits - section 61A was applicable as the dominant purpose was to enable the taxpayer company to obtain a tax benefit albeit there exist other legitimate commercial purposes - CFA upheld the section 61A assessment

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(4) CIR v HIT Finance Ltd and Hongkong International Terminals Ltd (2007) As part of the business reorganization scheme of Hutchison group, Hongkong International Terminals Ltd (HITL) was formed to purchase the container terminal business and related assets in Hong Kong, and HIT Finance Ltd (Finance) was incorporated as the vehicle to borrow US$1.7 billion through issuing loan notes quoted in Luxembourg for the acquisition of additional port facilities on the mainland and elsewhere Due to adverse market conditions, it could raise only US$587 million, and it arranged a subsidiary company, Strategic Investments International Ltd (Strategic), to subscribe for the remaining loan notes HITL deducted the interest it paid to Finance and Finance in turn deducted interest paid to notes holders The Commissioner disallowed the deduction of interest by Finance and HITL on that part of the loan notes acquired by Strategic pursuant to sections 16(1)(a), 17(1), 61 and 61A because in reality Finance did not borrow the money at all; alternatively, the borrowing was an artificial or fictitious transaction or that the transaction had the effect of conferring a tax benefit on Finance and HITL and had been entered into for the sole or predominant purpose of obtaining tax benefit CFA held that the Board was entitled to find that borrowing the larger amount and introducing Strategic as the means of returning two-thirds of it conferred a tax benefit and that the transaction was entered into solely or predominantly for the purpose of obtaining a benefit The Commissioner was entitled to counteract the tax benefit by disallowing the deduction of interest on the borrowing of HITL from Finance in excess of the net proceeds of the loan note issue actually received by the group The decision was made before the enactment of section 16(2A), (2B) and (2C); if the transaction takes place now, the deduction of interest payable by HITL to HIT Finance would be disallowed under section 16(2B) and (2C) respectively

(5) Ngai Lik Electronics Co Ltd v CIR (2009) Taxpayer was engaged in designing, manufacturing and trading of electronic audio products, and all of its profits were returned for profits tax; the manufacturing operations were subcontracted to related

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companies in Mainland China under typical contract processing arrangement Following the group restructuring in 1991/92, three BVI companies were set up to take over the manufacturing operations in the Mainland Although the mode of operations of the group had not been changed after the group restructuring, taxpayer’s profit contribution to the group dropped from 31% to 7%, while profitability of the BVI companies increased Additional assessments from 1991/92 to 1995/96 were raised on the taxpayer to include profits of the BVI companies as the taxpayer's assessable profits from manufacturing operations under section 61A; protective alternative assessments were also raised on each of the BVI companies; the profits assessable were reduced to 50% upon the CIR’s determination BOR found that the goods supplied to the taxpayer were only recorded in quantities in the first instance, with price being fixed retrospectively at the end of a year; furthermore, the year-end bulk purchase discounts were arbitrary and not in line with the master supply agreements BOR held that the sole or dominant purpose of the transaction was for tax avoidance and the CIR was right in additionally assessing the taxpayer under section 61A based on 50% of the combined profits of those relevant companies; for the BVI companies, they carried on businesses outside Hong Kong and their manufacturing profits were offshore in nature Both CFI and CA upheld the Board’s decision CFA overturned the Board's decision and the judgments of the lower courts and unanimously allowed the taxpayer's appeal: purchase prices paid by taxpayer, though excessive and not at arm's length, could not be said as not being incurred in the production of profits and hence is deductible under section 16(1); however, as excessive prices paid has the effect of reducing taxpayer's tax liabilities, section 61A was engaged agreed with the Board’s decision that the annual price-fixing arrangement between taxpayer and BVI companies was entered into for the dominant purpose of obtaining a tax benefit the CIR could exercise her power under section 61A(2)(b) to counteract the tax benefit conferred to taxpayer, but this power must be properly exercised "on the basis of a reasonably postulated hypothetical transaction which produces an assessment designed rationally to counteract the tax benefit" additional assessments were not validly raised because they were based on arbitrary amounts (i.e. treating 50% of the manufacturing profits derived by BVI companies in the PRC as those of the taxpayer) rather than counteracting the tax benefit obtained from the annual price-fixing arrangement CFA annulled all the additional assessments and remitted the case back to the Board for the CIR to raise fresh additional assessments on the basis of a reasonable estimate of the assessable profits that the taxpayer would have derived if it had hypothetically purchased the goods at an arm's length price

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RAMSAY PRINCIPLE (Doctrine of Fiscal Nullity)    An English doctrine established in W.T. Ramsay Ltd v IRC (1982) and extended by the House of Lords in IRC v Burmah Oil Co Ltd (1982), Furniss v Dawson (1984) and Craven v White (1988) UK deficiency - no general anti-avoidance provisions (unlike Hong Kong and Australia) When to apply: (1) there must be a pre-ordained series of transactions or a single composite transaction; (2) there must be steps inserted which have no commercial or business purpose apart from the avoidance of a liability to tax; (3) if the above conditions exist, the inserted steps are to be disregarded for fiscal purposes and the court must then look at the end result The courts have held that the doctrine has no application in Australia, Canada and New Zealand because of the presence of a general antiavoidance provision in the tax legislation The Board of Review in D52/86 held that the doctrine has no application in Hong Kong due to the same reason (see “recent developments” below) This doctrine is applicable to Estate Duty and Stamp Duty as there are no general anti-avoidance provisions in the legislation In Arrowtown Assets Limited v CSR (2003) - It was held that the court is entitled, for fiscal purposes, to disregard intermediate steps as having no commercial purpose as a consequence of an orthodox exercise of purposive statutory construction - By applying Ramsay principle, the Court of Final Appeal ruled that the exemption under section 45 of the SDO was not available to the transactions carried out (refer to Unit 14 on stamp duty) Recent developments: - In the CIF’s decision in CIR v Tai Hing Cotton Mill (Development) Ltd (2005) and two Board cases (D94/04 and D97/04), it was ruled that Ramsay principle can be applied side by side with sections 61 and 61A - According to DIPN 15 (revised 2006), in applying the IRO, the CIR is entitled to adopt the purposive interpretation of the statutory provisions to the facts viewed realistically. The Ramsay principle can operate in conjunction with the anti-avoidance provisions, and therefore, the CIR can look at the substance of transactions and not merely their legal forms

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SECTION 20  Where a non-resident person carries on business with a resident person with whom he is closely connected, and the course of such business is so arranged that it produces to the resident person either: - no profits which are sourced in HK, or - less than the ordinary profits which might be expected to arise in or derived from HK Effect: - the business done by the non-resident person in pursuance of his connection with the resident person is deemed to be carried on in HK; and - the non-resident person will be assessed in respect of the profits derived in the name of the resident person as if he were the agent of the nonresident person

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SECTION 61B  Application: - A change in the shareholding of a loss company effected after 13 March 1986; - As a direct or indirect result of the change, profits have arisen to the company; and - The sole or dominant purpose of the change is to enable the loss to be used (by the said company or other person) - ‘Dominant’ means that the tax motive outweighs all other motives put together Effect: - CIR may disallow the set off of such loss b/f against any profits

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SECTION 39E  Lease – section 2: - An arrangement under which a right to use machinery or plant is granted by the owner (lessor) to another person (lessee) - Excludes hire-purchase agreement and conditional sale agreement

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Sale and Leaseback - Section 39E(1)(a)  Circumstances: - Prior to acquisition by lessor, asset had been owned and used by the current lessee or any person associated with the lessee (“end-user”); and - The asset was now leased back to the end-user

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Effect: - Denial of I.A. and A.A. to lessor Exception (section 39E(2)): - Lessor's acquisition price paid to the lessee or lessee’s associated person was not more than the price paid by the lessee or lessee’s associated person to the supplier; and - No I.A. or A.A. have been granted to the lessee in respect of his initial acquisition (a notice of disclaimer is required to be made in writing to CIR within 3 months of the date of initial acquisition)

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Leverage Leasing  Circumstances: - Usually involves the setting up of a limited partnership (lessor) who finances the acquisition of P & M substantially by way of loan - The loan creditor has recourse only to the asset itself or the related lease income - The lessee's use of the asset is principally outside HK, i.e. has no economic benefit to HK  Tax advantage: - Limited partners may claim the substantial losses sustained in the partnership (arising due to depreciation allowances and interest payment) to set-off their own taxable profits and yet, are not effectively at risk  Section 39E(1)(b) - Machinery or Plant (other than Ship or Aircraft): - For capital expenditure incurred after 12 March 1992 - Application: o Asset used wholly or principally outside HK; or o Whole or predominant part of the cost of acquisition of asset was financed directly or indirectly by non-recourse debt - Effect: Denial of I.A. and A.A. to lessor - ‘Non-recourse debt’: Rights of the creditor in the event of default in repayment are wholly or predominantly limited to: - right to asset or use of it - right to products produced or services provided by it - right to proceeds (or insurance recovery) of its disposal (or loss) - right to mortgage or security over it - Financing is regarded as ‘not predominantly by non-recourse debt’ if the lessor actually contributes or is fully at risk for at least 51% of the cost of asset - For contract processing arrangement with Mainland enterprise where the HK company is required to provide machinery or plant for the use of the Mainland party, as a concession, IRD is prepared to allow 50% of DA on the leased machinery or plant if profits from manufacturing activities of the HK company are assessed on a 50:50 basis (DIPN 15) - For import processing arrangement, the IRD adopts a strict interpretation of section 39E, and this was endorsed in a BOR decision (D61/08)

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section 39E(1)(c) - Ship or Aircraft - For capital expenditure contracted for on or after 15 November 1990 - Application: o Lessee is not an operator of HK ship or aircraft; or o Whole or predominant part of the cost of acquisition of asset was directly or indirectly financed by non-recourse debt - Effect: Denial of I.A. and A.A. to lessor

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SECTION 9A – SERVICE COMPANY (TYPE I) ARRANGEMENT  Application: - a “relevant person” carrying on a trade, profession or business or prescribed activity - entered into an agreement - for services carried out by a “relevant individual” - under which remuneration is paid/credited to - a corporation controlled by the “relevant individual” or his associates; - a trustee of a trust estate under which the “relevant individual” or his associates are beneficiaries; or - a corporation controlled by such trustee Consequences: - the “relevant individual” shall be treated as: - having an employment of profit with the “relevant person”; and - an employee of the “relevant person” - the remuneration treated as: - income derived from an employment; and - received by/accrued to the “relevant individual” - the corporation is not chargeable to tax on the remuneration and no deduction or DA granted, nor the individual be taxed on any remuneration received from the corporation See Cheung Wah Keung v CIR (2003) NOT treated as an employment if satisfying all the 6 specified criteria under section 9A(3): - Employment-type benefits not provided for in the agreement or related undertaking - Services not exclusive to the relevant person - The individual is not subject to the control and supervision of the relevant person - Remuneration not paid/credited or calculated in an employment-like manner - The relevant person has no right to dismiss the individual as if he is an employee - The individual is not held out to the public to be an officer or EE of the relevant person CIR has discretionary power under section 9A(4) to exclude a case if he is satisfied that the relevant individual is not in substance holding an office or employment of profit

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SERVICE COMPANY (TYPE II) ARRANGEMENT  Typically involves an agreement under which management fees are paid by a professional firm to a service company which is controlled directly or indirectly by the proprietor or partners of the firm in return for the supply of certain operations required by the firm DIPN 24 sets out the minimum requirements which must be satisfied to support the deduction of management fees by the firm: - the service company to function as a separate business operating on an arm’s length basis - proper documentation, including the service agreement setting out the basis on which fees are to be paid, invoices, working papers, bank records, employment contracts, etc. - amount involved should reflect: - costs directly attributable to the relevant services (e.g. salary paid to a staff), plus - an appropriate mark-up for operating expenses (e.g. rent of premises occupied), and - reasonable profit margin (not exceeding 12.5% of the cost element) - the firm and the service company should adopt the same accounting date “Qualifying services” encompasses non-professional services which are required to provide the infrastructure in which the firm operates and to cater for its day to day operations, e.g. provision of premises, staff, plant and equipment and miscellaneous supplies It excludes the provision of any services to a firm by its proprietor or partners as employees of a service company

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ADVANCE RULING
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Taxpayer may apply to the CIR, subject to the payment of a fee and certain regulations, for a ruling on how any provision of the IRO applies to him or the arrangement specified in the application Objectives: - provide taxpayers with a degree of certainty - promote consistency in the application of the IRO - minimise disputes between the IRD and taxpayers Advance ruling will be provided on: - application of territorial source principle - section 9A Type I service companies - section 15E stock borrowing and lending - section 21A royalty payments - section 61A general anti-avoidance - section 61B sale of loss companies - cases where IRD has, in appropriate circumstances, been prepared to offer informal opinion on tax consequences of particular matter Ruling will not be provided for: - matter involving imposition or remission of penalty

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- correctness of a return or other information supplied by taxpayer - prosecution of any taxpayer - recovery of any debt owing by taxpayer A ruling will only be given for a seriously contemplated transaction, and will not be provided for transactions that are hypothetical or where the profits tax is due and payable Ruling is not binding in law

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TAX PLANNING AND ETHICAL ISSUES    Tax planning is the legitimate arrangement of a person's affairs in a legal and commercially realistic manner so as to reduce or defer his tax liability Technique of selecting the method which is least costly in tax Process of taking into consideration all relevant tax factors, in the light of the material non-tax factors, for the purpose of determining when, how and with whom, to enter into and conduct transactions, operations and relationships, with the object of keeping minimum tax burden falling on taxable events and persons while attaining the desired business, personal and other objectives Tax planners' maxim in IRC v Duke of Westminster (1936) - tax planning is legitimate and sensible An efficient tax planning inevitably includes to a certain extent 'tax avoidance" as its outcome Though tax planning can be legitimate, an overly aggressively tax avoidance scheme can amount to tax evasion (DIPN 11)

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Ethical Issues  Every citizen has the legal and social responsibility to pay tax to the government on time  Hong Kong has a simple tax regime which can function effectively only if the taxpayer report the income and deductions on a tax return that is true, correct and complete  Accountants have a duty to the tax system as well as to their clients  It is well-established that a taxpayer has no obligation to pay more tax than one legally owes, and a tax accountant has a duty to client to assist in achieving that result

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Ethics in Tax Practice (HKICPA Code of Ethics Section 430)  A tax practitioner is entitled to put forward the best position in favour of his client, provided that: - he can render the service with professional competence; - it does not impair his standard of integrity and objectivity; and - it is consistent with the law  Doubt can be resolved in favour of his client if there is reasonable support for his position

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One should not hold out to clients that the tax return he prepares or tax advice he offers are beyond challenge; instead, clients should be informed of the limitations attaching to such advice and services In preparing a tax return for the client: - reliance can be made on information furnished by the client provided that the information appears reasonable - examination or review of documents/evidence in support of client’s information is not required, but client should be encouraged to provide such supporting data - reference should be made to clients’ returns for prior years - reasonable enquires are required where the information presented appears incorrect or incomplete Where it comes to notice a material error or omission in a client's tax return, or of the failure of a client to file a required tax return: - he should promptly advise his client of the error or omission and recommend the client making full disclosure to the IRD - if the client refuse to correct the error, he should consider whether continued association with the client in any capacity is consistent with his professional responsibilities; if the answer is affirmative, he should take all reasonable steps to assure himself that the error is not repeated in subsequent tax returns - if he ceases to act for the client in these circumstances, he should advise the client of the position before informing the authorities of his having ceased to act - he is normally not obligated to inform the IRD of the error/ omission, nor may he do so without his client's permission, unless required to do so by law

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BASIC TAX PLANNING PRINCIPLES   Lawfulness - Tax planning must be within the boundaries of law - The extent of tax planning may be limited by legal constraints Pre-arrangement - Planning and arrangement must take place before transactions are carried out - ‘Operation review’ is usually performed to identify background information such as nature of business, group structure and flow of transactions within the group, current tax positions and exchange of information with tax authority in the past, management policy, financial positions, etc. Selectivity - Evaluate alternative ways and methods - Consider feasibility both financially and technically All-roundedness - Consider the financial implications and overall result

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- Sole or dominant purpose should not be minimization of tax - Keeping proper books and records Cost effectiveness - Consider both sides of the coin, the potential tax benefits and the additional cost of implementation - Consider other opportunity costs/benefits Timeliness - Potential difference in the timing of financial benefits or costs - Risk of retrospective legislation

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BASIC TECHNIQUES OF TAX PLANNING  Splitting income and profits: - Splitting between two individuals to gain the benefit of progressive tax rates and allowance - Splitting between a corporation and an individual to gain benefit of the tax rate differential - Splitting between corporations to utilize trading losses - Splitting between territories to gain benefit from differences in territorial tax rates - Splitting between years of assessment to reduce or postpone tax Arrange income be received in a non-taxable or less-taxable form: - Off-shore income (e.g. set up tax haven company) - Making use of loss-carrying company - Exempt income (e.g. dividends, capital gains) - Less-taxable income (e.g. royalties) Increasing allowable deductions: - Service charges to a service company to provide management and technical services - Creating factoring charges by forming an in-house discounting company in a low tax jurisdiction Match income with deductions: - Use interest bearing fund to finance income earning activities, and vice versa Defer tax payments and retain use of tax money: - Deferring the time when income is derived - Advance receipts (e.g. advance service fees, sales of properties on an installment basis) Exploiting the allowances and loopholes in the IRO: - Provision of credit test - Changing of accounting date of old business - Accelerating depreciation allowance of plant and machinery

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Possible Ideas in Profits Tax Planning  Make use of the territorial source principle  Transfer pricing to siphon profit to a loss company or company located in low tax jurisdiction  Re-invoicing transaction to book “profits” in Hong Kong  Profit apportionment claim for manufacturing operations or servicing income  Dual contracts arrangement for services rendered both in Hong Kong and overseas  Newly acquired assets – purchase vs hire?  Restructuring business expenses especially groupwise  Arranging loan finance to maximise interest deduction  If interest expenses are to be capitalised initially, consider to arrange loan at escalating interest rates  In business acquisition, allocate some consideration to any patent right, know-how or trademark (instead of goodwill)  Change of intention for real properties?  Allocation of purchase consideration in business acquisition

Reading
CCH: Chapter 13 Lee: Chapter 22 and 24 Ho: Chapter 24 and 35 Macpherson & Laird: Sections 3.8.1, 10.4 – 10.5 DIPN No. 15, 24, 25 and 31

Self-assessment Question Question 29 – 30

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