Hong Kong Tax Planning

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1. the Hong Kong profits tax implications to STPL in respect of its arrangement with STPCL (15 marks)

• Section 14(1) of Inland Revenue Ordinance (IRO) imposes three conditions for profits to be chargeable to Hong Kong profits tax. • There is no doubt that STPL has been carrying on a business in Hong Kong. • For manufacturing profit, the profit making activity is the manufacturing operation (see Hang Seng Bank case). • For import processing, where the Hong Kong company’s involvement in the Mainland production process is minimum, with the support from Datatronic case, the IRD takes the position that the manufacturing operations of the Mainland enterprise are not performed on behalf of , or for the account of, the Hong Kong
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• The DTA also contains a Mutual Agreement Procedure Article that provides for the resolution of cases where a taxpayer is faced with double taxation.

• A relief for economic double taxation can only be sought by way of a corresponding adjustment, but not for a retrospective price adjustment.

• A claim for a corresponding adjustment must be made by the taxpayer (STPL) within six years after the end of the relevant year of assessment under section 79 of the IRO, which allows tax paid in excess to be refunded under certain conditions.

• A retrospective price adjustment would not represent outgoings or expenses incurred in the production of chargeable profits and hence deductible under section 16.

• The assessment, for those years where transfer pricing adjustments have been made, cannot be re-opened under section 70A as the retrospective price adjustment constitutes neither an error nor omission made in the taxpayer’s return or statement filed with the IRD for the year concerned.

• The CIR would only be obligated to make corresponding adjustments up to the extent to which the CIR agrees that the tax adjustments made by the other side (the Mainland) represent the arm’s length principle.

• If the Commissioner does not fully agree with the adjustments of the other side, it is expected that the two authorities would communicate with each other so as to resolve the issue.

• STPL can formally invoke the
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