2011 unit 3 profits tax - receipt - s.ppt
TRANSCRIPT
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Unit 3
Profits Tax: Receipts
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LEARNING OBJECTIVES
After this lecture, you should be able to:
Explain the types of income deemed to be
trading receiptsDetermine the source of interest income
Identify the exempted incomes
Distinguish between capital and revenuereceipts
Explain the treatment of exchange gains/ losses
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Basic Charge S.14(1) 3 conditions:
on every person carrying on trade, profession or
businessin Hong Kong; - Carrying on business inHong Kong?
In respect of his assessable profits from such trade,
profession or business; - assessable profits? Fromthat business?
Profits arising in or derived from Hong Kong
sourced in Hong Kong? (locality/source of profits)
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Deemed trading receipts s.15
A list of receipts are subject to profits tax under
s.15(1) ifnot otherwise chargeable under
s.14(1)
The receipts are deemed to be arising in or
derived from HKfrom a trade, profession or
business carried on in HK
Some are related to non-residents
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S.15(1)(a): royalty income, etc. of
non-residents
Receipts from exhibition or use in Hong Kong
of
Cinematograph ( ) or television film () or tape ( )
Sound recording
Connected advertising material
S.21A applies to s.15(1)(a) sums
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s.15(1)(b): royalty income, etc.
of non-residents Receipts for the use or right to use in Hong
Kong
Patents ( ), design, trademark( )
Copyright material ( ) or secret
process ( ) or formula ( )
S.21A also applies to s.15(1)(b) sum
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s.15(1)(ba): royalty income, etc. of
non-residents
As from 25 June 2004, receipts also includesums for the use or right to use outside HongKong
Patents, design, trademark
Copyright material or secret processorformula
Which are deductible in ascertaining theassessable profits
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Taxation of ss.15(1)(a), (b) & (ba) sums
S.21A applies to non-resident recipientsAssessable profits = 30% x gross receipt (10% for
receipts before 1 April 2003) But if (i) income is received from an associate ( )
AND (ii) the property has been owned, partly or
wholly, by any person carrying onbusiness in HK
then: APs = 100% x gross receipts Associate includes a relative, a partner, a director or
principal officer of a corporation, and an associatedcorporation-over which the person has control, orunder the same control of the same person
See Example 1, p.247.
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Example of s 15(1)(a) & (b)
KK Ltd. an American film production company
received $10M from DD Ltd. a HK film distributor for
the right of use of films in HK for the year of
assessment 2007/08. As KK does not carry on business in HK, s14 is not
applicable in this case
The sum $10M is deemed trading receipts under s15(1)(a)
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Tax payable under s 21A
KK Ltd is liable to pay tax on the sum received: If KK and DD are not associates, the assessable profit
=30% x $10M=$3M
and the profit tax for 2007/08 = $3M x 17.5%
=$0.525M If they are associates and DD has owned this film before,
then the assessable profit will be: 100% x $10M= $10M
and the profit tax for that year = $10M x 17.5%
= $1.75M
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Example
MGM Inc., a foreign film producer and owner, licensed a film to aHong Kong company for the exclusive rights to show the film inHong Kong. The foreign film company will receive 60% of thetakings from showing the film. The foreign film company and the
Hong Kong company are independent parties.
Cinema takings from showing the
foreign film for Y/A 2005/06 $10,000,000
Foreign film company's share (60% as prescribed) $6,000,000 Assessable profits ($6,000,000 x 30%) $1,800,000
Profits tax payable by the foreign film company at 17.5% $315,000
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CIR v Emerson Radio Corporation
(2000)
T was a US incorporated company
T owned in America, HK and elsewhere
valuable trademarks Emerson Radio (Hong Kong) Ltd (S) was
wholly owned subsidiary of HK
S caused goods to be made by 3rd
parties in HK& other countries in the name of T
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Emerson
S purchased the goods from the manufacturers
and sold them to USA
S did not sell any goods to customers in HK T received royalties from S for the use of the
trademarks
CIR taxed all the royalties under s.15(1)(b)
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Emerson
The Court of Final Appeal held that the part of the
royalties relating to goods manufactured in HK is
taxable while the royalty for the goods manufactured
outside Hong Kong was exempt from tax. the judgement was that the use of the trademark was
affixed to the goods during the manufacture of the
goods made in Hong Kong (i.e. not in sale).
Thus, only royalties paid for goods manufactured in
HK is chargeable under s15(1)(b).
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s.15(1)(c) grants & subsidies ofresidents
Sum received by way of:
Grants or
similar financial assistance
in connection with a business carried on inHK, other than
Sums in connection with the personscapital expenditure (ie Capital receipts)
The capital receipt is not taxable but it willreduce the cost of capital expenditure forthe purpose of calculating depreciation
allowances.
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s.15(1)(d) hire income of non-
residents
S.15(1)(d)
Income from hire charges( )
for: the use or
a right to use
movable property in HK e.g. plant, machinery etc
S15(1)(e) was repealed
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S.15(1)(f) interest income of
resident corporations
Interest:
received by or accrued ( ) to a corporation
carrying on a trade, profession or business inHK
derived from HK
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Source of Interest income
Test:: Provision of Credit i.e.What is the place where the credit is 1 st
made available to the borrower? [CIR v.Lever Brothers & Unilever Ltd.; CIR (NZ)
vs. N.V. Philips Gloeilampenfabrieken]i.e. the place where the funds in respect of
which interest is receivable are providedCurrency of loan, place of residence of
borrower, and place of use of funds are allirrelevant (see DIPN 13)
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S.15(1)(g): interest income of
resident sole proprietor &
partnership Interest:
received by a person, other than corporation,
carrying on trade, profession or business inHK
derived from HK (provision of credit test
applies) &in respect of the funds of the trade, professionor business
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Interest Exemption Order1998
On/after 22 June 1998, any interest income received
by or accrued to:
A corporation or
A person other than a corporation (e.g. a soleproprietor or a partnership)
From any deposit placed in HK with an authorised
institutions (e.g. a bank or deposit taking company)
Is exempt from profits tax
not applicable to interest received by or accrued to a
financial institution
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Interest Exemption Order1998
The exemption is not available to:
Interest on deposits used to secure /
guarantee money borrowed referred where
the conditions specified in s 16(2)(c), (d) or
(e) are satisfied; &
Interest received by or accrued to a
Financial Institution.
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S.15(1)(h): refunds of contributions
to resident employers
Refund to employer of
contributions to a recognized occupational
retirement scheme; or
Voluntary contributions made to a MPF scheme;
where
the recipient employer previously obtained a
deduction for such contributions
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S.15(1)(i): interest income of
financial institutions
Interest income arising through or from HK
from the carrying on by a financial institution of
its business in HK
even if the moneys are made available outside
HK
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S.15(1)(j): resident corporations
Gains/profits derived from HK by acorporation carrying on a trade, profession orbusiness in HK
from sale/disposal/redemption onmaturity/presentation ofcertificates of deposits (
) orbills of exchange ( )
acquisition/sale of the certificates is made in HK
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S.15(1)(k): resident sole proprietors
& partnerships
gains/profits earned by a person other than a
corporation carrying on a trade, profession or
business in HK
From sale/disposal/redemption on
maturity/presentation ofCDs and BEs
Related to the funds of the trade, profession or
business
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S.15(1)(l): financial institutions
gains/profits arising through or from the
carrying on by a FI in HK
From sale/disposal of a CD orBE Even if
the place of the provision of credit is outside HK or
the place of disposal is outside HK.
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S.15(1)(m): resident persons
Sums received/receivable by a person from
transferring of a right to receive income (
) from property (e.g. right to receive rent,
interest income, royalties & profits) unless
- The property is also sold to the transferee
before/at the same time of such transfer.
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S.15(2): release of trade debts ()
Trade debt previously allowed and deducted(e.g. purchases)
The whole or part of the that debtsubsequently released is
Deemed as trading receipt upon release inthe basis period of that year of
assessment
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s.16(1)(d): Recovery of bad debts
Bad Debts which have been
previously allowed and subsequently
recovered are taxable in the year ofrecovery
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S.16B(3)(a)--sale proceeds of
scientific research plant andmachinery,
If the cost of scientific researchplant & machinery has been
previously deducted, the sale
proceeds thereof are taxable
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S.16B(3)(A)--Sale proceeds of
rights ( ) arising out of scientificresearch
Sale proceeds arising from anyrights arising out of scientific
research for which a deduction has
been allowed is taxable
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S.16E(3)--Sale proceeds of patent
rights ( ) or the right to anyknowhow ( )
Sale proceeds from the disposal of patent rights orknow-how are taxable if a deduction has beenallowed on the purchase of patent rights or theright to knowhow
Sale amount shall be treated as a trading receipt ofthe trade, profession or business accruing at thetime of sale.
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S.16G(3)(ii) sale proceeds of
prescribed fixed assets ( )
Sale proceeds from the disposal of
prescribed fixed assets, cost of which
has been specifically deducted.
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Income Exempt from Profits Tax
Profits from the sale of capital assets (s.14(1)) Offshore profits not sourced in Hong Kong
(s.14(1))
Dividends received from corporations (s.26(a)) Profits that are already assessed (s.26(b)), e.g.
share partnership profits of a corporation which
has already been assessed in the partnershipfile
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Exempt income
Interest on tax reserve certificates (s.26A(1)) Interest or gain/profit arising from agovernment bond ( ) : ss.26A(1)(b) &(c)
Interest or gain/profit arising from an exchangefund instrument ( ) : ss.26A(10(d) &(e)
From 3 April 1992, interest or gain/profitarising from a HK$ denominated multilateralagency debt instrument ( ) :ss.26A(1)(f) & (g)
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Exempt income: miscellaneous
(a) Sums by way of gains/profits fromsecurities;
(b) Sums by way of gains/profits from aforeign exchange contract or futurecontract
(c) Interest which is received / accrued to:
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An authorised mutual fund corporation ();
Trustees of an authorised unit trust ( );
A mutual fund corporation established outsideHK which has complied with certain
requirementsA trustees of a unit trust established outside
HK which has complied with certain
requirementsAny other similar collective investmentscheme ( ) which has compliedwith certain requirements
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Capital v Revenue Receipts
Receipts from the sale / disposal of a fixedasset is capital in nature
Receipts from the sale / disposal of a
current asset is revenue in nature A person uses a fixed asset to produce
profit by keeping it and uses a current asset
by parting with it (Ammonia Soda Co Ltd vChamberlain (1918) 1 Ch D 266)
Whether a receipt is capital in nature is amatter of fact
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Permanent loss of fixed assets
Receipts for the permanent loss of a fixed assetare capital receipts
In Glenboig Union Fireclay Co Ltd v CIR
(1922)), the compensation received for notoperating the fireclay mines are capital in natureas the loss was permanent even though the
compensation was computed by reference toprofits lost due to the destruction
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Compensation for Temporary
loss of fixed assets
Receipts for compensating the loss of
profits due to temporary loss of fixedassets are revenue in nature
i f
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Compensation for Temporary
loss of fixed assets InBurmah Steamship Co v CIR (1930) 16 TC
67, a shipping company placed a ship with a
repairer to be overhauled. The delay by the
repairer resulted in a claim for damages by the
shipping company. The compensation is
calculated by ref to the estimated loss of profit
due to the delay. The compensation was held tobe taxable.
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Compensation for the loss of
trading stock
Compensation for the loss is revenue in nature
(Green v J Gliksten & Son Ltd(1920 14 TC
364)
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Compensation for Loss of Contract
If the contract constitutes a material part orall the business of the taxpayer, thecompensation for the loss of the contractwill be capital in nature (Van Der Berghs
LTd v Clark(1935) 19 TC 390,Barr,Crombie & Co Ltd v CIR (1945).
If the contract is merely one of many
contracts of a taxpayer, the compensationfor cancellation of the contract is likely tobe revenue in nature (Kelsall Parsons & Cov CIR (1938); Short Brothers Ltd v CIR
(1927)).
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Compensation for restrictive
covenant / restraint of trade
The receipts are likely to be capital in nature
InHiggs v Olivier(1952), an actor agreed not to
work on any film for any other person for a
period of 18 months. The receipt was held
capital in nature.
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Exchange gain / loss capital or
revenue Profits tax is assessed on profits expressed in HK$
(CIR v Malaysian Airline Systems Berhad(1993)).
Accounts in foreign currencies must be converted to
HK$ for ascertaining the assessable profits Exchange gain / loss of a capital nature is not taxable /
not allowable
Exchange gain / loss of a revenue nature is taxable /allowable
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Exchange gain / loss
If arising from trading transactions (e.g.settlement of trade debts, acquisition of tradingstock, etc) --> revenue in nature
If arising from acquisition / disposal of fixedassets -> capital in nature
If arising from raising capital, raising /
repayment of long-term loan --> capital in nature
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Taxation of Foreign Exchange
IRD issued DIPN 42 (Part 2) "Taxation of Foreign
Exchange Differences". The new IRD practice is that:
2006/07" ...... all taxpayers, including financial
institutions, should treat exchange gains or lossesrecognised in the profit and loss account, whether
realised or not, as taxable receipts or deductible
expenses. An adjustment in the tax computation on
the ground that an exchange difference has not yet
realised will not be accepted (para.58)."
Fi i / M
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Finance companies / Money
lenders
Borrowing & lending form an integral part of
the profit-making activities of a finance
companies / money lenders , the exchangeprofits / losses arising from its loans or deposits
are likely to be revenue in nature.
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Cash in hand / cash at bank
Cash at bank of a trading company has been held
to be a capital asset: CIR v Li & Fung(1980)
Cash at bank of a financial institution has been
held to be trading stock: CIR v Hang Seng Bank(1972)
Exchange gains / losses offoreign currencies of
a forex trader are revenue in nature
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Sale of Quota ( )
Receipts for the sale of a permanent quota are
capital in nature
Receipts for the sale of a temporary quota are
revenue in nature
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Post-cessation receipts
Sums received after cessation shall be included
in the assessable profits of the final year of
assessment if the sums are taxable.
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Conclusion
Deemed trading receipts
Taxation of interest income
Exempt income Capital v revenue