2011 Unit 3 Profits tax - Receipt - s.ppt

7/30/2019 2011 Unit 3 Profits tax - Receipt - s.ppt

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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

Documents

2011 Unit 3 Profits tax - Receipt - s.ppt