问答题
Bex has recently left employment and entered into a business partnership with Amy. Bex requires advice in respect of a loan to the partnership, the calculation of her share of profits and the tax treatment of her redundancy payment.<br>Bex:<br>– Is resident and domiciled in the UK.<br>– Received an annual salary of ￡120,000 from her former employer, Cape Ltd.<br>– Was made redundant by Cape Ltd on 30 September 2015.<br>– Joined Amy, a sole trader, to form. a partnership on 1 January 2016.<br>– Has no other source of income.<br>Amy and Bex partnership:<br>– Will prepare its first set of accounts for the 16-month period to 30 April 2017.<br>– Is expected to make a tax-adjusted profit of ￡255,000 (before deducting interest and capital allowances) for the period ending 30 April 2017.<br>– The tax written down value on its main pool at 1 January 2016 is ￡nil.<br>– Except for the computer referred to below, no further assets will be purchased by either Amy or Bex for use in the partnership in the period ending 30 April 2017.<br>Profit sharing arrangements:<br>– The partnership’s profit sharing agreement is as follows:<br>Bex – loans:<br>– In addition to her capital contribution, Bex will make a ￡20,000 loan to the partnership on 1 August 2016. The partnership will use this money wholly for business purposes.<br>– This loan will be financed by a ￡25,000 personal loan from Bex’s bank, taken out on the same date.<br>– The remaining ￡5,000 of the bank loan will be used to purchase a computer for use in the partnership. Bex will have 20% private use of this computer.<br>– Both the loan from Bex to the partnership and the personal bank loan to Bex will carry interest at the rate of 5% per annum.<br>Bex – redundancy package from Cape Ltd:<br>– The package comprised a ￡22,000 statutory redundancy payment and an additional ex-gratia payment of ￡48,000.<br>– Bex also received three months’ salary in lieu of notice, as specified in her contract of employment.<br>Required:<br>(a) (i) Explain, with the aid of calculations, the tax deductions which will be available in respect of the loan interest payable on both the loan from Bex to the partnership and the personal bank loan to Bex. (7 marks)<br>(ii) In respect of the period ending 30 April 2017, show the allocation between the partners of the taxable trading profit of the partnership. (4 marks)<br>(iii) Calculate Bex’s taxable trading income in respect of her share of the partnership profits for all relevant tax years. Note: Your answer to (a)(iii) should clearly state the tax years and basis periods involved. (3 marks)<br>(b) Explain the income tax implications for Bex of the receipt of the redundancy package from Cape Ltd and calculate her total income tax liability for the tax year 2015/16. (6 marks)
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Section B – TWO questions ONLY to be attempted<br>Your client, Eric, requires advice on the capital gains tax implications arising from the receipt of insurance proceeds and the disposal of some shares, and the inheritance tax reliefs available in respect of assets in his estate at death. His son Zak requires advice regarding the application of the personal service company (IR35) legislation.<br>Eric:<br>– Is UK resident and domiciled.<br>– Is a higher rate taxpayer.<br>– Is in ill health and is expected to die within the next few months.<br>Capital transactions in the tax year 2014/15:<br>– Eric made no disposals for capital gains tax purposes in the tax year 2014/15 other than those detailed below.<br>– Eric received insurance proceeds of ￡10,000 following damage to a valuable painting.<br>– Eric sold half of his shareholding in Malaga plc for ￡11·50 per share.<br>Damaged painting:<br>– Eric purchased the painting for ￡46,000 in July 2012.<br>– The painting was damaged in October 2014 such that immediately afterwards its value fell to ￡38,000.<br>– The insurance proceeds of ￡10,000 were received by Eric on 1 December 2014.<br>– Eric has not had the painting repaired.<br>Malaga plc shares:<br>– Malaga plc is a quoted trading company with 200,000 issued shares.<br>– 80% of Malaga plc’s chargeable assets have always been chargeable business assets.<br>– Eric was given 12,000 shares in Malaga plc by his sister on 1 April 2010, when they were valued at ￡126,000.<br>– Eric’s sister had purchased the shares for ￡96,000 on 1 March 2009.<br>– Gift relief was claimed in respect of the gift of the shares to Eric on 1 April 2010.<br>– Eric paid the inheritance tax arising in respect of this gift following his sister’s death on 1 September 2011.<br>– Eric has never worked for Malaga plc.<br>– Eric sold 6,000 shares in Malaga plc on 1 March 2015.<br>Assets owned by Eric and a previous lifetime gift:<br>– Eric owns farmland in the UK, which has been leased to a tenant farmer for the last ten years.<br>– The farmland has a market value of ￡420,000 and an agricultural value of ￡340,000.<br>– Eric’s other assets, excluding the remaining Malaga plc shares, are valued at ￡408,000.<br>– Eric has made only one previous lifetime gift, of ￡60,000 cash to his son Zak on 1 July 2009.<br>Zak:<br>– Is the sole shareholder, director and employee of Yoyo Ltd, a company which provides consultancy services.<br>– In the year ended 31 March 2016, Yoyo Ltd’s gross fee income from relevant engagements performed by Zak will be ￡110,000.<br>– In the tax year 2015/16, Zak will draw a salary of ￡24,000 and dividends of ￡50,000 from Yoyo Ltd.<br>– Neither Yoyo Ltd nor Zak has any other source of income.<br>Required:<br>(a) Calculate Eric’s total after-tax proceeds in respect of the two capital gains tax disposals in the tax year 2014/15. (6 marks)<br>(b) (i) On the assumption that Eric dies on 31 March 2016, advise on the availability and effect (if any), of agricultural property relief, business property relief and quick succession relief in respect of the farmland and the retained shares in Malaga plc.<br>Note: You are not required to prepare calculations for this part of the question. (6 marks)<br>(ii) Explain, with the aid of calculations, the impact on the inheritance tax liability arising on Eric’s death if Eric does not die until 1 August 2016. (3 marks)<br>(c) Calculate Zak’s taxable income for the tax year 2015/16 if the personal service company (IR35) legislation were to apply to the fee income received by Yoyo Ltd. (5 marks)
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Your firm has been asked to provide advice to Granada Ltd, and one of its shareholders, Maria. Maria wants advice on the tax consequences of selling some of her shares back to Granada Ltd. Granada Ltd wants advice on the corporation tax and value added tax (VAT) implications of the recent acquisition of an unincorporated business.<br>Maria:<br>– Is resident and domiciled in the UK.<br>– Is a higher rate taxpayer and will remain so in the future.<br>– Has already realised chargeable gains of ￡15,000 in the tax year 2015/16.<br>Shares in Granada Ltd:<br>– Maria subscribed for 10,000 ￡1 ordinary shares in Granada Ltd at par in June 2006.<br>– Maria is one of four equal shareholders and directors of Granada Ltd.<br>– Maria intends to sell either 2,700 or 3,200 shares back to the company on 31 March 2016 at their current market value of ￡12·80 per share.<br>– All of the conditions for capital treatment are satisfied, except for, potentially, the condition relating to the reduction in the level of shareholding.<br>Granada Ltd:<br>– Is a UK resident trading company which manufactures knitwear.<br>– Prepares accounts to 31 December each year.<br>– Is registered for VAT.<br>– Acquired the trade and assets of an unincorporated business, Starling Partners, on 1 January 2016.<br>Starling Partners:<br>– Had been trading as a partnership for many years as a wholesaler of handbags within the UK.<br>– Starling Partners’ main assets comprise a freehold commercial building and its ‘Starling’ brand, which were valued on acquisition by Granada Ltd at ￡105,000 and ￡40,000 respectively.<br>– Is registered for VAT.<br>– The transfer of its trade and assets to Granada Ltd qualified as a transfer of a going concern (TOGC) for VAT purposes.<br>– The business is forecast to make a trading loss of ￡130,000 in the year ended 31 December 2016.<br>Granada Ltd – results and proposed expansion:<br>– The knitwear business is expected to continue making a taxable trading profit of around ￡100,000 each year.<br>– Granada Ltd has no non-trading income but realised a chargeable gain of ￡10,000 on 1 March 2016.<br>– Granada Ltd is considering expanding the wholesale handbag trade acquired from Starling Partners into the export market from 1 January 2017.<br>– Granada Ltd anticipates that this expansion will result in the wholesale handbag trade returning a profit of ￡15,000 in the year ended 31 December 2017.<br>Required:<br>(a) (i) Explain, with the aid of calculations, why the capital treatment WILL NOT apply if Maria sells 2,700 of her shares back to Granada Ltd, but WILL apply if, alternatively, she sells back 3,200 shares. (4 marks)<br>(ii) Calculate Maria’s after-tax proceeds per share if she sells:<br>(1) 2,700 shares back to Granada Ltd; and alternatively<br>(2) 3,200 shares back to Granada Ltd. (4 marks)<br>(b) (i) Describe the corporation tax treatment of the acquisition of the ‘Starling’ brand by Granada Ltd, if no charge for amortisation was required in its statement of profit or loss. (3 marks)<br>(ii) Discuss how Granada Ltd could obtain relief for the trading loss expected to be incurred by the trade acquired from Starling Partners, if it does not wish to carry any of the loss back. (5 marks)<br>(c) Explain the value added tax (VAT) implications for Granada Ltd in respect of the acquisition of the business of Starling Partners, and the additional information needed in relation to the building to fully clarify the VAT position. (4 marks)
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SUPPLEMENTARY INSTRUCTIONS<br>1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.<br>2. Calculations and workings should be rounded down to the nearest HK$.<br>3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.<br>4. All workings should be shown.<br>5. Ignore provisional tax and statutory tax reductions, unless specified otherwise.<br>TAX RATES AND ALLOWANCES<br>The following 2014/15 tax rates and allowances are to be used in answering the questions.<br>Section A – BOTH questions are compulsory and MUST be attempted<br>1.<br>Lufer (HK) Ltd (Lufer-HK) carries on a business in Hong Kong as a wholesaler of smart phone accessories. Lufer-HK’s major customers are leading retailers in Hong Kong. Lufer-HK procures its products from Lufer (PRC) Ltd (Lufer-China) which is a wholly-owned foreign enterprise established in Mainland China as a subsidiary of Lufer-HK. Lufer-China operates as a manufacturer and is the sole supplier of products to Lufer-HK. Other than Lufer-HK, Lufer-China also supplies related products to other China customers under different specifications.<br>Lufer-HK is held by Lufer (UK) Ltd through a company incorporated in the British Virgin Islands (BVI), Lufer (BVI) Ltd. The group structure is as follows:<br>Lufer-HK has signed an import processing contract with Lufer-China, under which the following have been arranged:<br>(1) Lufer-HK agrees to provide support to Lufer-China for the manufacture of the required products, in terms of product design, technical know-how, training and quality control. Special machinery together with moulds will also be provided for use by Lufer-China for manufacturing the products solely for sale by Lufer-HK. If Lufer-HK is required to send technical staff to support Lufer-China, a service fee will be charged to Lufer-China on a cost-plus-10% basis. However, no charge will be made to Lufer-China for the use of the machinery and moulds.<br>(2) Lufer-China agrees to be responsible for the provision of workers and a factory including utilities and facilities for the manufacture of the required products. In order to finance the renovation of the factory, Lufer-China received a loan from Lufer-HK at an interest rate of 4% per annum.<br>(3) Lufer-China will acquire raw materials from Lufer-HK at cost, and sell the finished products to Lufer-HK based on the selling price of similar products in the China market.<br>In the accounts of Lufer-HK, an interest cost of 3% per annum is recorded as payable to Lufer-UK in respect of a borrowing obtained to finance the loan to Lufer-China. The interest income receivable from Lufer-China at 4% per annum is also recorded as income by Lufer-HK. On the remittance of the interest from China to Hong Kong, China withholding tax at the rate of 7% is deducted by Lufer-China and recorded as an expense in the accounts of Lufer-HK.<br>Required:<br>As the tax consultant engaged by Lufer-HK, prepare a report for the company’s directors, addressing each of the following issues from a Hong Kong tax perspective.<br>(a) Profits earned from the sale of smart phone accessories:<br>(i) Whether the profits earned from the sale of smart phone accessories by Lufer (HK) Ltd to retailers in Hong Kong should be subject to, or exempt from, profits tax. Include an explanation of the general principles for determining the source of manufacturing profits and trading profits in Hong Kong, based on the Departmental Interpretation and Practice Note No. 21 entitled ‘Locality of Profits’ and other relevant court cases. (14 marks)<br>(ii) Whether Lufer (HK) Ltd is entitled to any deduction (including depreciation allowance) in respect of the cost of the special machinery and moulds provided to Lufer (PRC) Ltd for use in China. (8 marks)<br>(b) Funding of the loan made to Lufer (PRC) Ltd:<br>(i) The profits tax treatment of the 1% margin earned by Lufer (HK) Ltd on the borrowing obtained from Lufer (UK) Ltd at 3% per annum, and the loan extended to Lufer (PRC) Ltd at 4% per annum. Include an explanation of the taxability of the interest income received from Lufer (PRC) Ltd, and the deductibility of the interest expense to Lufer (UK) Ltd and comment on whether the loan arrangement is tax effective. (7 marks)<br>(ii) Whether the China withholding tax on the interest income earned from Lufer (PRC) Ltd is tax deductible to Lufer (HK) Ltd for Hong Kong profits tax purposes. (2 marks)<br>Note: You are NOT required to discuss the Arrangement between the Mainland of China and HKSAR for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.<br>Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which its advice is communicated. (4 marks)<br>2.<br>John and Mary are married to each other and are permanent residents of Hong Kong. Each of them currently has full-time employment working for organisations in Hong Kong. Last year, Mary’s father passed away, leaving her a boutique business. Also, Mary is pregnant and expecting twin babies in two months’ time. John and Mary recently met with a local tax consultant to discuss their future Hong Kong tax positions. A summary of the major points discussed during the meeting is as follows:<br>(1) Based on the information from her late father’s lawyer, the boutique business is currently held through a company incorporated in the British Virgin Islands (BVI). The BVI company is cash-rich without any debt or liability, and does not own any asset other than the boutique business. The boutique is operated at a leased retail shop located in Hong Kong. Mary has been given a choice by the lawyer either to take over the shares in the BVI company or to own the boutique business directly. It is Mary’s intention to continue to run the boutique by herself.<br>(2) Mary has been invited by her brother to participate in an established partnership business following the recent retirement of one of the partners. Mary expects that in addition to her share of profits, she will draw a monthly salary from the partnership. If this is not tax effective, the partnership may engage John as an employee and pay the salary to him instead. On the other hand, Mary’s sister has recently graduated and is interested in being engaged as an employee of the partnership.<br>(3) John has recently signed a new employment contract with an organisation based in Mainland China (China Co). This new employment will commence in three weeks’ time. Under the new employment contract, John will be responsible for looking after both China Co’s Shenzhen factory and its Hong Kong operations, and thus is expected to travel extensively between China and Hong Kong. The tentative schedule shows that John will stay in Hong Kong for about eight months each year and spend the remaining four months in China. John negotiated his new employment terms during visits to China Co’s premises in China, and he also signed the contract there. The major items in the remuneration package include:<br>(i) A monthly salary of $100,000 (the take-home amount payable to John is $90,000 after withholding 10% for China’s individual income tax).<br>(ii) A lump sum incentive of $80,000 to encourage John to resign from his current employment.<br>(iii) A housing allowance of $30,000 to compensate for John’s mortgage loan repayment for his residence in Hong Kong.<br>(iv) Reimbursement of any additional China tax liability arising from his employment after adjusting for the 10% amount withheld from the monthly salary.<br>(v) A holiday package (flight tickets plus hotel) for John’s family up to a maximum of $60,000 per annum.<br>(4) The couple’s existing apartment is too small to accommodate themselves and the two babies, and the couple are planning to move into the residence currently owned and occupied by John’s parents. John’s parents will then move into the couple’s existing apartment. The couple jointly owns their current apartment and will continue to pay their mortgage loan instalments after the swap. The residence owned by John’s parents is free from any mortgage. John intends to pay a nominal rental to his parents each month for the use of their residence.<br>(5) The couple are financially independent. Each spouse files their individual tax return each year and pays their salaries tax according to the assessment issued in their own name. Their tax positions in the previous years have been simple and straightforward with their respective employment income as the only item in their tax calculations. After the birth of the twins, each spouse intends to claim one child allowance for Hong Kong tax purposes.<br>Required:<br>(a) Discuss the implications for Mary’s Hong Kong tax position in respect of the potential income earned (or losses incurred) by the boutique business in the event that Mary takes over the shares in the BVI company as compared to the alternative that Mary takes over the boutique business directly. You should also address the potential differences in the implications, if any, depending on whether or not Mary elects for personal assessment. (5 marks)<br>(b) Explain how a partnership is assessed for Hong Kong tax purposes, and the Hong Kong tax implications for Mary in respect of the partnership profit or loss shared by her and the salary drawn from the partnership. You should also discuss whether it will make any difference to the tax treatment of the partnership and/or the partners if the salary is received by John or Mary’s sister rather than by Mary. (4 marks)<br>(c) Explain whether John is assessable to Hong Kong salaries tax in respect of the income from his new employment, and if so, state on what basis and explain the Hong Kong tax treatment of the major remuneration items specified in the question. Note: You are NOT required to discuss the Arrangement between the Mainland of China and HKSAR for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. (9 marks)<br>(d) Analyse the major impact on the couple’s Hong Kong tax position arising from the proposed swap of residences between themselves and John’s parents. State any assumptions which you deem necessary. (3 marks)<br>(e) Comment on the proposed action intended to be taken by the couple with regard to their claiming the child allowance in respect of the twins, and advise on the amount of allowance for which they will be eligible. (4 marks)<br>Section B – TWO questions ONLY to be attempted<br>3.<br>Metoo (HK) Ltd (Metoo-HK) carries on business in Hong Kong as a trader. Metoo-HK purchases its products from its wholly-owned subsidiary in Mainland China, Metoo (PRC) Ltd (Metoo-China), as follows:<br>Metoo-HK provides management support to Metoo-China and is responsible for promoting the products in Asian markets including Hong Kong. In recognition of Metoo-HK’s contribution, Metoo-China grants a 10% discount from the market selling price in respect of the products it sells to Metoo-HK. Metoo-HK files its profits tax returns in Hong Kong reporting all of its profits as assessable in Hong Kong.<br>During the year ended 31 December 2013, Metoo-China was investigated by the China tax bureau, as a result of which a transfer pricing adjustment was made to adjust the sales made from Metoo-China to Metoo-HK based on the market selling price. The sales income reported in the 2013 accounts of Metoo-China was $900,000. This amount was adjusted to $1,000,000 by the China tax bureau by removing the discount element, which it considered was not at arm’s length. Metoo-China was required to pay additional China corporate income tax of $25,000 as a consequence of this adjustment.<br>The management of Metoo-HK considers that the price adjustment in China is not fair to Metoo-HK and wants to know whether it is possible to revise its Hong Kong profits tax assessment for the year of assessment 2013/14.<br>Required:<br>(a) Based on the facts as stated and making reference to the Arrangement between the Mainland of China and HKSAR for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (the DTA), explain the relationship between Metoo (HK) Ltd and Metoo (PRC) Ltd, and analyse the impact on the whole Metoo group arising from the pricing adjustment made by the China tax bureau to Metoo (PRC) Ltd. (4 marks)<br>(b) Explain the relevant Hong Kong tax law governing the circumstances in which a taxpayer is given the right to revise its tax assessment, and give an opinion as to whether Metoo (HK) Ltd can make a successful revision claim. (4 marks)<br>(c) (i) Making reference to the Departmental Interpretation and Practice Note No. 45 ‘Relief from double taxation due to transfer pricing or profit reallocation adjustments’ and the DTA, explain the different types of double taxation in the context of the DTA, and identify the type of double taxation to which the pricing adjustment made by the China tax bureau belongs. (7 marks)<br>(ii) Advise whether, and if so how, in terms of the DTA, Metoo (HK) Ltd may be able to apply for its Hong Kong profits tax assessment for 2013/14 to be revised. (5 marks)<br>Happy Club (the Club) operates as a recreational club in Hong Kong. The Club owns a clubhouse which provides basic catering and spa services to its members. All members are voting members, and all club facilities are restricted to members’ use only.<br>During the year ended 31 March 2015, the Club had the following receipts and payments:<br>In view of the unfavourable financial position of the Club, the Club’s management has made the following proposals:<br>(1) The catering services will be opened to non-members during lunch and dinner hours.<br>(2) The Club will acquire the car park adjacent to the clubhouse and lease it out for rental purposes. The acquisition will be financed by a loan from the Club’s founders. It is intended that the car park will be used by both Club members and the public.<br>Required:<br>(a) Explain the current Hong Kong tax position of Happy Club based on the information given for the year ended 31 March 2015. Note: Calculations are not required. (3 marks)<br>(b) Discuss the implications for and potential changes to Happy Club’s Hong Kong tax position if both of the proposals are implemented. Note: Calculations are not required. (10 marks)<br>(c) Explain the stamp duty implication, if any, to Happy Club arising from proposal 2. (7 marks)<br>5.<br>(a) Joyce Ltd owns a commercial property (shop) in a major shopping mall. The market rent of the shop is $200,000 per month. On 1 January 2014, Joyce Ltd agreed to lease the shop to Fun Ltd for three years. The lease provides that Fun Ltd will pay to Joyce Ltd $100,000 per month plus 2% of Fun Ltd’s gross turnover each month from the business conducted in the shop. In addition, Fun Ltd agreed to pay Joyce Ltd a lump sum of $2,400,000 at the commencement of the lease in consideration for Joyce Ltd agreeing to accept a lower rent. The lump sum is not refundable.<br>In preparing its financial statements for the year ended 31 December 2014, Joyce Ltd apportioned the upfront payment of $2,400,000 over the term of the lease, and brought only $800,000 into its statement of profit or loss. However, the Inland Revenue Department (IRD) assessed Joyce Ltd on the full upfront payment of $2,400,000 in the year of assessment 2014/15. Joyce Ltd disputes the decision of the IRD.<br>Required:<br>(i) Explain the profits tax and stamp duty implications of the lease arrangements for Joyce Ltd. (9 marks)<br>(ii) State, giving reasons, whether and if so, how your answer to part (a) above would differ if the lease also provided that under no circumstances would the rent payable each month exceed $200,000. (2 marks)<br>(b) Assuming that Joyce Ltd’s tax dispute with the IRD proceeds to litigation, list the advantages of having the case heard before the Board of Review, rather than in the Court of First Instance. (4 marks)<br>(c) Instead of leasing the property to Fun Ltd for three years, Joyce Ltd decided to grant a licence to Fun Ltd to occupy the premises for ten years. In consideration, Fun Ltd paid Joyce Ltd a lump sum of $20 million. This receipt was recorded in Joyce Ltd’s statement of profit or loss as arising from the ‘disposal of a fixed asset’.<br>Required:<br>Discuss the tax treatment of the $20 million received by Joyce Ltd from Fun Ltd. (5 marks)<br>请帮忙给出每个问题的正确答案和分析，谢谢！
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SUPPLEMENTARY INSTRUCTIONS<br>1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.<br>2. Calculations and workings should be rounded down to the nearest HK$.<br>3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.<br>4. All workings should be shown.<br>5. Ignore provisional tax and statutory tax reductions, unless specified otherwise.<br>TAX RATES AND ALLOWANCES<br>The following 2013/14 tax rates and allowances are to be used in answering the questions.<br>Section A – BOTH questions are compulsory and MUST be attempted<br>1.<br>Tee-fashion Ltd (T-fashion) is a company incorporated and carrying on business in England, engaged in the manufacture and sale of top-brand fashion. In a recent business strategy meeting, the directors of T-fashion have expressed an interest in developing the Mainland China (PRC) market, and have engaged a business consultant to draft a proposal for review.<br>The following is the proposed structure of the investment and other details:<br>(a) T-fashion will incorporate a wholly-owned subsidiary in Hong Kong, HK-Co Ltd (HK-Co), as the investment holding vehicle for the operating company in the PRC, PRC-Co Ltd (PRC-Co).<br>(b) HK-Co will also be the regional support service centre which will hire staff to provide accounting and other support services to the group including PRC-Co.<br>(c) HK-Co will receive subsidy income from T-fashion to finance its operations. The subsidy will be determined on the basis of 110% of the total annual operating cost before interest and royalty. The 10% premium is intended to be remuneration for HK-Co’s services in Hong Kong.<br>(d) HK-Co will borrow an interest-bearing loan from T-fashion to partly fund its own operation in Hong Kong, and to partly enable HK-Co to extend another loan to PRC-Co to finance the operations within the PRC. Both loans are interest bearing, allowing HK-Co to earn a small interest spread from PRC-Co. The two loan agreements are separate and independent.<br>(e) HK-Co will pay a royalty of $50,000 to Media-fashion Ltd (Media-fashion), which is another wholly-owned subsidiary of T-fashion in England. Media-fashion produces and owns a series of fashion show videos/films in support of the latest fashion trends promoted by T-fashion. Pursuant to the licence agreement signed with Media-fashion, HK-Co will pay a royalty in return for the right to use and exhibit some of these videos/films in the PRC.<br>The following structure chart demonstrates the basic mechanism:<br>The directors of T-fashion have approached a tax consultancy firm in Hong Kong to obtain tax advice on the major Hong Kong tax implications arising from the proposed structure.<br>Required:<br>As the tax manager of the consultancy firm approached by the directors of Tee-fashion Ltd (T-fashion), prepare a report for the directors, addressing each of the following issues from a Hong Kong tax perspective:<br>(a) Subsidy income received by HK-Co Ltd (HK-Co) from T-fashion:<br>(i) Discuss the Hong Kong tax implications of the subsidy income received by HK-Co from T-fashion. (3 marks)<br>(ii) Based on the prevailing transfer pricing principles and practice, discuss the issues surrounding the determination of the amount of the intra-group service fee, and comment on the cost-plus basis used to determine the subsidy income as remuneration for HK-Co’s services. (5 marks)<br>(b) Loan from HK-Co to PRC-Co Ltd (PRC-Co); and loan from T-fashion to HK-Co:<br>(i) Discuss the Hong Kong tax implications of the loan interest income received by HK-Co from PRC-Co of $66,000. (3 marks)<br>(ii) Discuss the Hong Kong tax implications of the loan interest payment made by HK-Co to T-fashion of $60,000. Based on your analysis, briefly comment on whether you consider that the proposed funding arrangements are tax effective. (3 marks)<br>(c) Royalty income received by Media-fashion Ltd (Media-fashion): Assuming that Media-fashion is not carrying on a business in Hong Kong, discuss whether the royalty income of $50,000 received from HK-Co will be subject to Hong Kong profits tax and if so, why. (5 marks)<br>(d) Based on the projected management accounts of HK-Co for its first year of operation:<br>Explain the Hong Kong tax treatment of the following items, including the relevant tax principles underlying their tax treatment:<br>(i) Depreciation of the computer system of $30,000; (3 marks)<br>(ii) Incorporation fee of $50,000; (2 marks)<br>(iii) Mandatory provident fund (MPF) contribution of $30,000. (3 marks)<br>(iv) Give an estimated calculation of HK Co’s Hong Kong profits tax liability, if any, stating any assumptions which you have made. (4 marks)<br>Note: You should ignore overseas tax and any double-taxation arrangements throughout this question.<br>Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which its advice is communicated. (4 marks)<br>2.<br>You should assume that today’s date is 1 January 2014.<br>Mr Lee is a Hong Kong permanent resident earning salary income under a Hong Kong employment. In planning for his marriage in March 2014, Mr Lee is in the course of negotiating with a potential seller in respect of a property which he intends to acquire as the home for himself and his wife.<br>The property will be the first property Mr Lee has acquired in Hong Kong. The offered price is $21 million including a car parking space which is worth around $1·5 million. The seller is a company incorporated in Hong Kong which wholly owns the property (including the car parking space), and Mr Lee is only interested in acquiring the property and the car parking space, not the company. It has been proposed to Mr Lee that he could enter into two separate conveyances, one for the property and the other one for the car parking space, as this would minimise his total stamp duty costs.<br>In order to finance the acquisition, Mr Lee is considering the following proposals:<br>(1) Obtaining a mortgage loan from a local bank of up to 50% of the property value. The approximate annual interest cost of this loan is $400,000. Mr Lee has not yet determined whether the property and the bank loan would be held solely in his name or jointly with his wife.<br>(2) Selling shares in Mr Lee’s employer company. Mr Lee currently holds 100,000 shares in his employer company and an option to acquire another 200,000 shares. The 100,000 shares were awarded to him directly by his employer in 2010/11 as part of his performance bonus. These shares were registered in the name of Mr Lee at the time when the shares were awarded to him. The option for 200,000 shares was granted to him in 2012/13. By exercising the option, Mr Lee will have a total of 300,000 shares on hand. By selling them all on the market, he will be able to realise an amount which can finance up to 30% of the property value.<br>(3) Borrowing from his parents up to 40% of the property value. This loan represents the idle funds which his parents have placed on bank deposit to earn interest income. To compensate for their loss of interest income, Mr Lee would promise to give his parents $10,000 per month. Currently, Mr Lee lives with his parents but they receive no regular contribution from him. After Mr Lee gets married and moves out, his parents will continue living in their own, existing property.<br>(4) Borrowing from his employer up to 40% of the property value under the employees’ low-interest loan scheme. The preferential loan interest rate is much lower than that offered by the bank. The approximate annual interest cost will be $150,000, payable by monthly instalments by way of deduction from Mr Lee’s monthly gross salary. Mr Lee estimates that his monthly salary will be reduced to $52,000. The estimated benefit from the saving in interest cost is around $80,000 per annum.<br>Required:<br>(a) In respect of the proposed acquisition of property, set out all of the potential Hong Kong stamp duty implications for Mr Lee, including the proposal to minimise the duty payable by splitting the conveyances. If the information provided is not sufficient, state what other information relevant to Mr Lee is required. (12 marks)<br>(b) With reference to proposal (1), advise on all the possible Hong Kong tax implications for Mr Lee in respect of the bank mortgage loan interest payment. (4 marks)<br>(c) With reference to proposal (2), advise on all the possible Hong Kong tax implications for Mr Lee arising from the proposed exercise of the share option, and the sale of all 300,000 shares. Where applicable, you should also discuss in which year(s) of assessment any benefit would be assessed. (4 marks)<br>(d) With reference to proposal (3), advise on all the possible Hong Kong tax implications for Mr Lee arising from the proposed course of action, including the monthly payment of $10,000 to his parents and his eligibility for dependent parent allowance both before and after his marriage. (3 marks)<br>(e) With reference to proposal (4), advise on all the possible Hong Kong tax implications for Mr Lee arising from the proposed course of action, including the loan interest payable to his employer, the reduced monthly salary income and the estimated saving in interest cost. (2 marks)<br>Section B – TWO questions ONLY to be attempted<br>3.<br>AB Co, a company resident only in Hong Kong, has several subsidiaries operating in Asia. AB Co is developing a new financial reporting system and intends to send its IT manager, Paul, to its Malaysian subsidiary for a period of four months to monitor and oversee the implementation of this new system.<br>Paul is a resident of Hong Kong holding a HKSAR passport. His remuneration will remain the same during his time in Malaysia and it will continue to be paid into his bank account in Hong Kong. All his travel and hotel accommodation costs in Malaysia will be reimbursed by AB Co. AB Co has also agreed to bear any additional personal income tax arising from the assignment. However, AB Co has not yet decided whether it will recharge Paul’s remuneration to the Malaysian subsidiary, though the assignment is initiated by AB Co.<br>Required:<br>(a) Advise AB Co whether it can claim a tax deduction in respect of Paul’s remuneration representing the four-month period of service rendered in Malaysia. (6 marks)<br>(b) Advise Paul whether his remuneration for the four-month period of service rendered in Malaysia and the travel and hotel accommodation costs reimbursed by AB Co will be chargeable to Hong Kong salaries tax. (7 marks)<br>(c) Based on Article 16 of the Double Tax Agreement (DTA) between Hong Kong and Malaysia (as extracted below), explain how the DTA may protect Paul’s remuneration from Malaysian personal income tax.<br>Hong Kong–Malaysia DTA Article 16 Dependent Personal Services, paragraph 2:<br>‘‘Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting Party in respect of an employment exercised in the other Contracting Party shall be taxable only in the first-mentioned Party if:<br>(a) the recipient is present in the other Party for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxable period concerned; and<br>(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other Party; and<br>(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other Party.’ (7 marks)<br>4.<br>Red Ltd, a furniture manufacturer carrying on business in Hong Kong, makes up accounts to 31 March each year. In May 2005, Red Ltd purchased a two-storey factory building from a property development company at a price of $3,600,000 (including land cost). Details of the costs incurred by the developer of the building are as follows:<br>Each floor of the building has an area of 8,000 sq ft. Red Ltd immediately used the ground floor as a factory, and the first floor as a warehouse.<br>Red Ltd has decided to relocate its production to Dongguan, China in September 2014. It is now considering two alternative proposals for disposing of the two-storey building:<br>(1) Selling the building for its market value.<br>(2) Demolishing the building and redeveloping the site by constructing a 20-storey factory building for letting. A bank loan will be obtained to finance the redevelopment.<br>Required:<br>(a) Discuss whether Red Ltd is entitled to a depreciation allowance in respect of each floor of the two-storey building; and calculate the allowance for all relevant years of assessment. (7 marks)<br>(b) Advise on the Hong Kong profits tax implications to Red Ltd of:<br>(i) selling the building; and (4 marks)<br>(ii) demolishing the building and redeveloping the site. (9 marks)<br>5.<br>You should assume that today’s date is 31 May 2014.<br>Derek Chan has been working as the group product director of Joyce Ltd (JL), a company resident in Hong Kong, for over ten years. As a result of a change in product line, Derek has been asked to leave his employment with JL as of 30 June 2014, and to agree not to join any competitor within the next two years.<br>JL has negotiated and agreed a termination package with Derek, which includes the following amounts:<br>(1) his last month’s salary of $70,000;<br>(2) accrued vacation pay of $105,000 (including some leave days brought forward from 2013); and<br>(3) a lump sum gratuity of $840,000.<br>Derek plans to move to Canada to live with his family on 15 July 2014. At Derek’s request, JL will pay the termination payment after his cessation of employment on 30 June 2014 but before he leaves Hong Kong on 15 July 2014. JL will also give Derek a letter stating that, ‘A lump sum amount of $1,015,000 is being paid to you in consideration of your agreeing to release the company from all claims you may have against the company arising from the termination of your employment.’ By doing so, Derek has been advised by a friend that he may have a good chance to avoid paying any tax on the payment because it will be treated as a tax-free capital receipt; and/or it is received after cessation of employment.<br>Required:<br>(a) Advise Derek Chan on the taxability of the termination payment under salaries tax. Where appropriate, suggest any tax planning ideas which may help minimise his salaries tax liability. (14 marks)<br>(b) Advise Joyce Ltd of its compliance obligations under the Inland Revenue Ordinance in respect of the termination of Derek Chan’s employment. (3 marks)<br>(c) Explain to Derek Chan the steps the Inland Revenue Department can take without instituting court proceedings, to recover the salaries tax payable by him for 2014/15. (3 marks)<br>请帮忙给出每个问题的正确答案和分析，谢谢！
问答题
SUPPLEMENTARY INSTRUCTIONS<br>1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.<br>2. Calculations and workings should be rounded down to the nearest HK$.<br>3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.<br>4. All workings should be shown.<br>TAX RATES AND ALLOWANCES<br>The following 2011/12 tax rates and allowances are to be used in answering the questions.<br>Section A – BOTH questions are compulsory and MUST be attempted<br>1.<br>Organic World Inc (the Parent), a company incorporated in the US, has since September 2006 wholly-owned a subsidiary in Hong Kong, Green HK Ltd (Green-HK). Green-HK operates a retail store in Hong Kong and imports organic goods from the Parent and sells the goods in the store. It closes its accounts on 31 December.<br>Starting from January 2010, the Parent also has another wholly-owned subsidiary in China, Green China Ltd (Green-China), which operates a similar retail store in Mainland China but not in Hong Kong. Green-China has been performing very well in these two years, showing continuous increases in profitability, but Green-HK’s business has been declining significantly.<br>The Chief Executive Officer (CEO) of Green-HK called a meeting at which the following was discussed:<br>(1) The following extract of management accounts as at 30 November 2011 was presented:<br>(2) The Parent decided to cease the business in Hong Kong with effect from 1 January 2012. Before the store is closed on 31 December 2011, all the assets and liabilities of Green-HK would need to be cleared according to the following proposal:<br>(i) The land and store building would be sold to a potential purchaser, and the offer is still under negotiation. The tentative sale consideration is $12,000,000 comprising $11,000,000 for the land and $1,000,000 for the store building. The purchaser has counter-offered that if Green-HK were to demolish the building and sell the land site only, a higher offer might be considered. Based on Green-HK’s tax records, the land and building were acquired in July 2006 directly from the property developer at $10,000,000, 50% of which was attributed to the building. The CEO is wondering how the different modes of sale would impact the tax position of Green-HK. Moreover, the CEO is interested to know how much annual depreciation allowance the purchaser, who makes up his accounts to 31 March, might be entitled to claim if he continued to use the store as it is.<br>(ii) All the store equipment would be donated to a charitable organisation in Hong Kong. Any remaining minor furniture and fixtures not accepted by the charity would be scrapped. The CEO is wondering if the net book value of the equipment would be eligible for a tax deduction as a charitable donation, and whether it would be better if the equipment was sold first and then the sale money was donated to the charity.<br>(iii) To clear the trading stock on hand, Green-HK would sell it to Green-China at a price to be mutually agreed. Discussions with Green-China so far indicate that the deal would not be made unless the price was fixed at 30% below the usual market price. Although this is not desirable to Green-HK, it was expected that the Parent would consent to this deal. The CEO is concerned about the impact of the deal on Green-HK, especially in the light of the recent development of the transfer pricing principle in Hong Kong.<br>(iv) The amount due to the Parent of $15,000,000 would be waived by the Parent since Green-HK would not be likely to have the ability to pay. Green-HK’s records indicated that most of the amount represents the purchase cost of goods imported from the Parent for sale in the store in previous years but which remained unsettled.<br>(3) All staff members would be made redundant. On top of the statutory amount of redundancy payment, Green-HK was considering paying an additional gratuity representing two months’ salary. Before making the decision, the CEO wants to assess whether these payments would be tax deductible to Green-HK.<br>(4) Based on the tax records, Green-HK has brought forward tax losses of around $2,000,000 from 2010/11. The tax written down values for the plant and machinery pools are insignificant.<br>Required:<br>As the tax advisor to Green HK Ltd (Green-HK), prepare a report for the Chief Executive Officer (CEO) addressing the tax issues raised in the meeting as follows, providing supporting calculations where appropriate.<br>(a) Sale of land and store building (per item (2)<br>(i) of the meeting notes): (i) The tax implication to Green-HK arising from the sale of the land and store building, including a computation of the applicable depreciation allowance for each year of ownership and in the year of disposal; (4 marks)<br>(ii) The impact of the potential purchaser’s counter-offer on the tax position of Green-HK; (4 marks)<br>(iii) The annual depreciation allowance that might be available to the purchaser upon his acquisition of the land and store building, assuming that the store continued to be used as it was. (3 marks)<br>(b) Donation of equipment (per item (2)<br>(ii) of the meeting notes): (i) Whether, and if so how, the donation would qualify as a tax deduction for Green-HK; (4 marks)<br>(ii) Whether, and if so how, the alternative suggested by the CEO would help Green-HK get the tax deduction. (3 marks)<br>(c) Sale of trading stock (per item (2)(iii) of the meeting notes):<br>(i) The tax implication to Green-HK arising from the sale of trading stock to Green China Ltd (Green-China) at the price suggested by Green-China;<br>Note: You are not required to discuss the transfer pricing implications in this part. (4 marks)<br>(ii) The impact of the current development of transfer pricing principles in Hong Kong on the suggested sale transaction. (5 marks)<br>(d) Waiver of inter-company balance by Organic Worldwide Inc (the Parent) (per item (2)(iv) of the meeting notes):<br>Whether, and if so to what extent, the waiver would be tax effective for Green-HK. If you consider it not tax effective, give suggestions. (4 marks)<br>(e) Redundancy payment and additional gratuity (per item (3) of the meeting notes):<br>Whether, and if so how, the redundancy payment and additional gratuity would be tax deductible to Green-HK. If applicable, give an alternative suggestion. (4 marks)<br>Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which its advice is communicated. (4 marks)<br>2.<br>Antony and Rebecca are a married couple who are seeking professional tax advice on their tax positions. The following information relates to their affairs for the year ended 31 March 2012:<br>(1) Antony was previously employed by Mix and Match Ltd, a Hong Kong-listed company. On 1 March 2011, he was offered a lump sum payment of $300,000 to join Modern Home Ltd (MHL), an interior decoration firm resident in Hong Kong, as head designer. On 1 April 2011 he accepted the offer, received the payment and started working for MHL.<br>(2) His salary with MHL is $100,000 per month. Antony contributed 5% of his total salary to MHL’s Mandatory Provident Fund Scheme; MHL contributed 10% to the Scheme.<br>(3) Antony received a ‘housing allowance’ of $30,000 per month. However, he only spent $25,000 per month on rent, government rates and management fees associated with his rented flat. His employment contract states that his rental allowance is designed to enable him to afford accommodation in Hong Kong, and that it may be applied by him towards rent or a home purchase. MHL requires Antony to provide a copy of his lease and monthly rental receipts, but has never queried the fact that he does not spend the whole of his housing allowance on accommodation.<br>(4) MHL provided Antony with a new car (cost $500,000) which he could, and did, use for private (50%) as well as business (50%) purposes. MHL also provided him with a petrol station card taken out in the name of MHL. Antony charged all his expenditure on petrol, totalling $48,000, to this card.<br>(5) MHL paid a club membership for Antony at the Hong Kong Designers Club. The annual membership fee was $32,000 and the membership was in Antony’s name. Antony regularly used the club for entertaining MHL’s clients. His total entertainment expenditure at the club was $38,000, of which MHL reimbursed him $28,000 upon production of vouchers showing client entertainment and promotion.<br>(6) Antony received a share option in the year of assessment 2009/10 while he was working for Mix and Match Ltd. Under the terms of his share option, Mix and Match Ltd would either pay him the cash value of his option or provide him with shares. Antony could not insist on receiving shares. The option became exercisable in the year of assessment 2011/12. When Antony exercised his option, Mix and Match Ltd exercised its right to pay cash instead of providing shares; and Antony received $100,000.<br>(7) After work hours, Antony devoted his time to writing numerous articles on interior design for magazines and newspapers. From this activity, he earned $90,000 in the year 2011/12.<br>(8) Antony earned $15,000 in royalties in 2011/12 from a book on interior design that he had written the previous year. The publisher who paid him the royalties is based in Singapore, and the book was published and sold only in Singapore.<br>(9) Rebecca is a housewife. In her spare time, she 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 Rebecca 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 2011/12, Rebecca earned commissions totalling $80,000.<br>Required:<br>(a) Advise Antony and Rebecca of their respective tax positions for the year of assessment 2011/12. Support your advice with a computation of Antony’s salaries tax liability. (25 marks)<br>(b) Advise Rebecca 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. (4 marks)<br>Section B – TWO questions ONLY to be attempted<br>3.<br>(a) Below is the group structure of P Ltd and its subsidiaries:<br>Under the current structure, P Ltd owns all the shares in A Ltd and B Ltd. A Ltd, in turn, owns all the shares in C Ltd. P Ltd is incorporated in Bermuda. A Ltd, B Ltd and C Ltd are all incorporated in Hong Kong. C Ltd owns a commercial property in Hong Kong, which is mortgaged in favour of the Citibank for an amount of $70 million.<br>It is proposed to restructure the group in January 2013 as follows:<br>Step 1: A Ltd will transfer 100% of the shares in C Ltd to B Ltd. The consideration will be $30 million payable to A Ltd, plus another $70 million payable direct to the Citibank on behalf of C Ltd.<br>Step 2: B Ltd will issue shares equivalent to 10% of its total new shareholdings to an unrelated third party for $4 million. The amount so raised will not be used in Step 1.<br>Step 3: A Ltd will then be liquidated.<br>Required:<br>Explain the stamp duty implications arising from the transfer of the shares in C Ltd (Step 1). Clearly identify any available exemptions and analyse the extent to which these exemptions may be affected by Steps 2 and 3 in the restructuring proposal. (11 marks)<br>(b) After the restructuring, C Ltd will lease the commercial property to B Ltd for four years. Under the lease agreement, B Ltd will pay C Ltd $50,000 per month plus 3% of B Ltd’s gross turnover each month from the business conducted in the property. The market rental of the property is $80,000 per month.<br>Required:<br>Explain the stamp duty implications of this leasing arrangement. (5 marks)<br>4.<br>Home Design Inc (HDI) is a US corporation which is engaged in the business of purchasing furniture from factories in Mainland China and reselling them to customers around Asia, including Hong Kong.<br>HDI has engaged the services of an unrelated buying agent in Hong Kong, Buyer Ltd, to deal with suppliers on its behalf. Buyer Ltd is responsible for negotiating terms (as dictated by HDI) and placing purchase orders with suppliers’ representatives in Hong Kong, performing quality control services, and arranging shipment of the furniture either to HDI in the USA or directly to customers outside the USA according to the directions given by HDI.<br>In addition, Buyer Ltd maintains a showroom in Hong Kong, which potential customers visit from time to time to view samples. If buyers wish to place orders during such visits, they complete a purchase order form. which Buyer Ltd faxes to HDI’s office in the USA. HDI then follows up with customers out of its office in the USA. Buyer Ltd does not negotiate the terms of such sales. About 20% of all sales are made to customers in Hong Kong.<br>Required:<br>(a) Based on the Departmental Interpretation and Practice Note No. 21 entitled ‘Locality of Profits’, explain the practice adopted by the Commissioner of Inland Revenue for determining the source of trading profits. (4 marks)<br>(b) Discuss whether Home Design Inc’s profits from the trading transactions should be subject to, or exempt from, profits tax. If you consider that the profits are subject to profits tax, advise how Home Design Inc could restructure its activities to ensure that the profits would be exempt from tax. (12 marks)<br>5.<br>Auto Ltd is a company incorporated and carrying on business in Hong Kong. Despite continuous profitability since the commencement of its business, in the last year Auto Ltd has experienced a tremendous market downturn and incurred significant accounting losses. The sole shareholder of Auto Ltd, Mr Tan, is a non-Hong Kong resident. He understands that under his tax jurisdiction, tax losses incurred by a corporation can be carried back and applied to offset a corporation’s profits in the preceding year. Moreover, tax losses of a corporation resident in his tax jurisdiction can be transferred to another profitable corporation within the same group.<br>Required:<br>(a) Based on the Inland Revenue Ordinance, state the general rules governing the treatment of tax losses for corporations carrying on businesses in Hong Kong, assuming the corporations are not involved in any partnership. (4 marks)<br>(b) Mr Tan is considering disposing of the shares in Auto Ltd in order to capitalise the tax benefit arising from the tax losses carried forward by Auto Ltd.<br>Required:<br>Advise Mr Tan on the Hong Kong tax implications arising from the share disposal for the ability of Auto Ltd to carry forward its tax losses. (6 marks)<br>(c) If he does not sell the shares in Auto Ltd, Mr Tan intends to make a loan to Auto Ltd with interest in order to finance the company’s future operations.<br>Required:<br>Advise Mr Tan on the Hong Kong tax implications to Auto Ltd in respect of the interest incurred on this loan as currently proposed and, if appropriate, suggest a structure which will ensure that the loan interest will be deductible.<br>Note: You may assume that Mr Tan is not carrying on a money lending business when and by virtue of making the loan. (6 marks)<br>请帮忙给出每个问题的正确答案和分析，谢谢！
问答题
SUPPLEMENTARY INSTRUCTIONS<br>1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.<br>2. Calculations and workings should be rounded down to the nearest HK$.<br>3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.<br>4. All workings should be shown.<br>TAX RATES AND ALLOWANCES<br>The following 2010/11 tax rates and allowances are to be used in answering the questions.<br>Section A – BOTH questions are compulsory and MUST be attempted<br>1.<br>Ms Mi (Mi) is the sole shareholder of H Ltd, which was incorporated in Hong Kong during December 2010 for the purpose of acquiring the shares in K Ltd at the cost of $50 million. K Ltd is a Hong Kong incorporated company holding ten properties in Hong Kong. These properties are classified as ‘trading stock’ in K Ltd’s accounts on the basis that they are held for sale at a profit. The acquisition cost was financed by a bank loan which was secured by a personal guarantee given by Mi’s husband (Hubby). The current structure is illustrated on the left hand side of the diagram below:<br>You recently met Mi who advised you that she was going to divorce her husband. Thereafter, her husband will withdraw his personal guarantee on the bank loan, leading to the loan to be called back by the bank. Mi has sought help from her father (Papa), who has given two proposals for her consideration. These two proposals, as illustrated in the diagrams above, have the following details:<br>Proposal 1: A new bank loan will be extended from the bank to K Ltd, which is secured by a deposit placed by Papa with the Bank’s associate in China. K Ltd will on-lend the bank loan money to H Ltd interest free, to enable H Ltd to repay the old bank loan. Papa’s deposit will earn interest at the same rate that K Ltd pays on the new bank loan minus a 0.5% bank fee.<br>Proposal 2: Papa will invest, via P Ltd, a company incorporated in China, into H Ltd as a 50% shareholder. H Ltd could use the additional fund to repay the bank loan. However, he is neutral as to whether the 50% shareholding is acquired by way of new shares issued by H Ltd to him directly, or the sale of shares in H Ltd from Mi to him. If Mi sells her 50% shareholding to Papa, she will lend the money, interest-free, to H Ltd. Mi anticipates that she will make a significant profit on the sale and since K Ltd is trading in properties, she is concerned that her profit from the sale of the shares will also be taxed. Moreover, under this proposal, Papa also requests that after the shareholding change, K Ltd will sell two properties to P Ltd at cost, which is about 30% below the current market price.<br>Apart from the above two proposals from Papa, Mi also discussed with you the following alternative:<br>Proposal 3: K Ltd will change the strategy for holding the properties from trading to investment. These properties will be leased out to earn rental income. K Ltd will then assign its income rights under these leases to an independent party for a lump sum consideration. The lump sum will either be paid up as dividend or lent to H Ltd interest-free, to enable H Ltd to repay the existing bank loan.<br>As a friend of Mi as well as a professional tax consultant, you have promised Mi to review the above proposals from a Hong Kong tax perspective, and write a report to her.<br>Required:<br>Prepare a report for Ms Mi addressing the tax issues set out below, including supporting calculations where appropriate.<br>(a) Current structure – Comment on the tax effectiveness of the current funding structure in terms of the funding cost incurred by H Ltd. (2 marks)<br>(b) Proposal 1 – As compared with the current funding structure, advise whether there are any profits tax implications arising from Proposal 1 for:<br>(i) H Ltd; and (1 mark)<br>(ii) K Ltd. (4 marks)<br>(c) Proposal 2 – Advise on:<br>(i) The profits tax and stamp duty implications for H Ltd and P Ltd, if P Ltd subscribes for new shares to be issued by H Ltd directly to P Ltd; (2 marks)<br>(ii) The profits tax and stamp duty implications for Ms Mi if she sells 50% of her shareholding in H Ltd to P Ltd. Discuss also whether Ms Mi’s concern that her tax position will be affected by K Ltd’s property trading business is valid; and (15 marks)<br>(iii) The profits tax and stamp duty implications for K Ltd if it sells the two properties to P Ltd at cost. (8 marks)<br>(d) Proposal 3 – Advise on the profits tax implications for K Ltd arising from the change of holding strategy for the properties and the subsequent assignment of its income rights under the leases. (4 marks)<br>Notes:<br>1. Where appropriate, the effect of the HK–China Double Tax Arrangement (the DTA) on the transactions should be mentioned, but you are not required to discuss the detailed provisions in the DTA.<br>2. You should ignore provisional tax and overseas tax throughout this question.<br>3. You are not required to discuss any accounting treatments, and their relevant standards or principles in relation to the transactions in this case.<br>Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which its advice is communicated. (2 marks)<br>2.<br>Kelvin King, a Canadian resident, has been offered a new job in a Hong Kong resident company (the Company) under a two-year contract from 1 April 2012 to 31 March 2014. The following draft total remuneration package has been offered for his consideration:<br>Other major terms of the contract include:<br>(1) Kelvin is not allowed to work for another company engaged in the same business or industry for 12 months after the cessation or expiration of his contract with the Company.<br>(2) Subject to application by Kelvin and approval by the Company, a staff quarter can be provided by the Company at a rent equivalent to 5% of Kelvin’s monthly salary. Details of the choices of quarters are available in the Personnel Department upon request.<br>(3) Kelvin is entitled to benefit from the Company’s medical insurance scheme, which allows him to receive outpatient services at no cost. The annual premium per employee paid by the Company under the scheme is $6,000.<br>(4) Kelvin is entitled to annual leave of three weeks.<br>(5) Kelvin is given an option to choose one of two share-based benefits under the Company’s Staff Incentive Scheme:<br>(i) Share option benefit – Kelvin will be granted an option to purchase 30,000 shares in the Company at a favourable option price. The options are unconditional.<br>(ii) Share award benefit – Kelvin will be granted 25,000 shares in the Company. Half of the share award has no vesting period, while the other half has a vesting period of 18 months during which Kelvin is required to remain in employment with the Company; and he is only entitled to these shares at the end of the vesting period.<br>Kelvin does not own a property in Hong Kong, nor does he have any plan to buy one in the short term. It is likely that he will rent a furnished apartment near his workplace as he has been advised that the Company quarter is unfurnished and has no club facilities.<br>Kelvin plans to return to Canada after the contract expires on 31 March 2014. He is thinking of choosing the share option benefit as he believes that if he exercises the share option after he returns to Canada, no Hong Kong tax will be payable.<br>The Company will allow Kelvin to restructure his two-year remuneration package as long as the total remuneration package (other than the share-based benefits) at the end of the contract does not exceed $3,120,000.<br>Required:<br>As tax consultant to Kelvin King, write a letter to him giving advice on the following:<br>(a) The Hong Kong salaries tax position of the draft package. Note: you are NOT required to calculate his assessable/chargeable income or tax payable. (20 marks)<br>(b) How Kelvin should restructure his remuneration package so as to minimise the amount of salaries tax he will have to pay in Hong Kong. (6 marks)<br>Professional marks will be awarded in question 2 for the appropriateness of the format and presentation of the letter and the effectiveness with which its advice is communicated. (2 marks)<br>Section B – TWO questions ONLY to be attempted<br>3.<br>(a) AB Ltd, a Hong Kong resident company, is organising a pop music concert to be staged in Hong Kong in January 2012. AB Ltd has appointed another Hong Kong resident company, CD Ltd, to procure performances by various overseas artists at the concert. CD Ltd has entered into an agreement with Mr X, the US resident manager of a US resident pop star, for the performance of that pop star at the concert for a fee of $3,000,000. AB Ltd will pay $3,300,000 to CD Ltd, which will then pay $3,000,000 to Mr X. The fee payable by Mr X to the US pop star is $2,700,000.<br>Required:<br>Explain the withholding obligations, if any, imposed under the Inland Revenue Ordinance on each of the parties concerned and compute, with explanations, the amount of tax to be withheld. (8 marks)<br>(b) KK Ltd is carrying on a trading business in Hong Kong, preparing accounts to 31 March each year. On 1 February 2011, it entered into a lease agreement to lease a motor vehicle, which has since been used in KK Ltd’s business, from an unrelated leasing company. The lease agreement is for a term of 24 months, with a monthly lease payment of $45,000 commencing from 1 February 2011. The cash cost of the motor vehicle was $840,000. The agreement provides KK Ltd with an option to acquire the motor vehicle at the end of the lease period upon payment of a small residual amount; and it is expected that the residual value will be higher than the exercise price.<br>Required:<br>Explain the tax implications of the lease agreement to KK Ltd, clearly identifying the expenditures it is entitled to claim with respect to the motor vehicle for the year of assessment 2010/11. (9 marks)<br>4.<br>MRS (HK) Ltd (MRS-HK) is a Hong Kong-incorporated company, which is resident and carrying on business in Hong Kong. During the month of July 2011, MRS-HK sent a team of five specialist staff to its associated company in China, MRS (China) Ltd (MRS-China), to work for them on a China project for a period of two weeks. All the associated costs including accommodation and meals were settled by MRS-China.<br>After the assignment, MRS-HK intended to issue a debit note to MRS-China seeking to recover the related employment costs of the five specialist staff on this project in the amount of HK$50,000. However, MRS-HK was subsequently advised by MRS-China that recharging these employment costs would result in China individual income tax being payable by the five specialist staff. All five of the specialist staff members are resident in Hong Kong.<br>Required:<br>(a) Discuss the Hong Kong salaries tax positions of the five specialist staff of MRS (HK) Ltd in respect of their services performed in China during July 2011.<br>Note: For the purpose of this part of the question only, you should answer based on the Hong Kong Inland Revenue Ordinance, and ignore the application of the double tax arrangement between Hong Kong and the PRC. (6 marks)<br>(b) Based on Article 14 of the double taxation agreement (DTA) signed between Hong Kong and the PRC, which is extracted below, explain how the recharge by MRS (HK) Ltd to recover the employment costs from MRS (China) Ltd may affect the exemption from China tax available to the five specialist staff members. You should clearly identify the crucial factors necessary for the DTA exemption to be available.<br>‘Article 14 Income from Employment<br>1. Subject to the provisions of Articles 15, 17, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of One Side in respect of an employment shall be taxable only in that Side unless the employment is exercised in the Other Side. If the employment is exercised in the Other Side, such remuneration as is derived therefrom may be taxed in that Other Side.<br>2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of One Side in respect of an employment exercised in the Other Side shall be taxable only in the first-mentioned Side if all the following conditions are satisfied:<br>(a) the recipient is present in the Other Side for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned, and<br>(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the Other Side, and<br>(c) the remuneration is not borne by a permanent establishment which the employer has in the Other Side.’ (6 marks)<br>(c) Assuming that both Hong Kong salaries tax and China individual income tax will be imposed on the five specialist staff in relation to the services rendered in China, advise on the possible relief or measures that are available to them to avoid double taxation, based on the Hong Kong Inland Revenue Ordinance and Article 21 of the double taxation agreement signed between Hong Kong and the PRC as extracted below.<br>‘Article 21 Methods for Elimination of Double Taxation<br>2. In the Hong Kong Special Administrative Region, double taxation shall be avoided as follows:<br>Subject to the provisions of the tax laws of the Hong Kong Special Administrative Region … Mainland tax paid in the Mainland of China in accordance with the provisions of this Arrangement in respect of any item of income derived from sources in the Mainland of China by a resident of the Hong Kong Special Administrative Region shall be allowed as a credit against Hong Kong Special Administrative Region tax imposed on that resident. However, the amount of the credit shall not exceed the amount of Hong Kong Special Administrative Region tax in respect of that item of income computed in accordance with the tax laws and regulations of the Hong Kong Special Administrative Region.’ (5 marks)<br>5.<br>(a) Mr Look carries on a consultancy business in the form. of a sole proprietorship in Hong Kong. He closes his accounts on 31 December each year. In the course of preparing his profits tax computation for the year of assessment 2010/11, Mr Look discovered that an expense of $10,000, being the cost of hiring a member of temporary staff for a special project during the year ended 31 December 2005, had been omitted from his business accounts and thus this deduction was not claimed in the tax return for 2005/06. He wonders whether he can now ask the Inland Revenue Department to revise the assessment for 2005/06.<br>Required:<br>Advise Mr Look of his right of action, if any, to revise the assessment for 2005/06 to take into account the cost of hiring the temporary member of staff during the year 2005. (9 marks)<br>(b) David Pang owns a flat in Regent Court, a residential building in Causeway Bay. The residential building has 150 flats in total. According to the deed of mutual covenants, the roof of the residential building is part of the building common area, and each owner of an individual flat is entitled to the same number of undivided shares in the building common area.<br>On 1 June 2010, David Pang, as the chairman of the Incorporated Owner of Regent Court, entered into an agreement with a company, granting it the right to erect a neon advertising sign on the roof for a licence fee of $100,000 per annum. The licence fee is to be used to meet the building management expenses.<br>Recently, David Pang received from the Inland Revenue Department a property tax return for the year of assessment 2010/11. The return was addressed to ‘The Incorporated Owner of Regent Court’. As David Pang considers that the roof is not a flat, the Incorporated Owner of Regent Court is not the owner and the fee is not directly paid to the owners of the flats, he believes that they should not be liable to property tax.<br>Required:<br>Advise David Pang whether the Inland Revenue Department is empowered under the Inland Revenue Ordinance to issue a 2010/11 property tax return in the name of ‘The Incorporated Owner of Regent Court’; and whether it is liable to property tax. (8 marks)<br>请帮忙给出每个问题的正确答案和分析，谢谢！
问答题
SUPPLEMENTARY INSTRUCTIONS<br>1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.<br>2. Calculations and workings should be rounded down to the nearest HK$.<br>3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.<br>4. All workings should be shown.<br>TAX RATES AND ALLOWANCES<br>The following 2010/11 tax rates and allowances are to be used in answering the questions.<br>1.<br>HK Engineering Co Ltd (HK Co), a Hong Kong-incorporated company carrying on business in Hong Kong, was successfully awarded a contract in Vietnam to help the Vietnam government with a new water plant project. A meeting has been scheduled with the Vietnam government’s representatives to discuss the details of the main contract. Prior to the meeting, the project manager, Mr Man, called for a meeting with other senior management staff, the details of which are as minuted below. All amounts are in HK$.<br>Minutes of Meeting on 1 June 2010 on Project Victory<br>Attendance:<br>Man (Project Manager)<br>FF (Finance Director)<br>TT (Treasurer)<br>EE (Chief Engineer)<br>1. Man briefly explained the scope of the work as required, including:<br>(a) the contract comprises two elements: supply of heavy equipment and the installation of the equipment on site;<br>(b) the total contract value is equivalent to $20 million covering both elements; and<br>(c) the duration of the project is estimated to be six months.<br>2. EE suggested that the equipment be purchased from one of their existing suppliers in Mainland China. Due to their long established relationship with this supplier, EE has confidence in negotiating the best terms and deal, with all the purchase orders and shipping documentation being dealt with directly in Hong Kong. The purchase cost is estimated to be around $8 million.<br>However, for the installation services, apart from employing local Vietnamese workers to perform. the on-site work, EE would need to send a team of experienced engineers from Hong Kong to Vietnam to supervise the work. As a result, the total staff costs for the project are estimated to be $4 million.<br>3. TT suggested that the $8 million purchase cost of the equipment be funded by the company’s current bank loan facility with interest at the rate of 5% per annum.<br>4. FF proposed the following structure using another member of the HK Co group, incorporated in the British Virgin Islands, BVI Co, in order to maximise the after-tax profit of the group:<br>5. Man appreciated the proposal explained by FF but questioned whether the structure would be challenged by the Inland Revenue Department as tax avoidance. Moreover, he is considering establishing a local subsidiary in Vietnam to sign the contract, as a start-up to expand HK Co’s business into the Vietnam market. FF agreed to solicit professional tax opinion on these aspects.<br>Required:<br>As the tax advisor of HK Engineering Co Ltd (HK Co), prepare a report for Mr Man addressing the tax issues set out below, including supporting calculations where appropriate.<br>(a) Assuming that a Vietnam subsidiary, wholly owned by HK Co, is established, the contract is to be signed by the Vietnam subsidiary and the equipment and staff are supplied by HK Co as outlined in point 2 of the minutes, advise on:<br>(i) The Hong Kong profits tax implications for HK Co with respect to the profits arising from the contract, together with any other matters on which you would recommend HK Co to obtain further advice; (4 marks)<br>(ii) How the supply of the equipment and staff should be dealt with in view of the current transfer pricing practice in Hong Kong. (8 marks)<br>Note: You are NOT required to comment on the Hong Kong-Vietnam tax treaty.<br>(b) Assuming that no Vietnam subsidiary is set up, and the structure proposed by the Finance Director (FF) as outlined in point 4 of the minutes is adopted, advise on:<br>(i) The Hong Kong profits tax implications for HK Co arising from the contract. You should specifically consider both the taxability of the contract value of $20 million, and the deductibility of the equipment purchase cost, staff costs and loan interest; (17 marks)<br>(ii) What the Hong Kong profits tax implications will be for BVI Co arising from the sale of the equipment to HK Co. (9 marks)<br>Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which its advice is communicated. (2 marks)<br>2.<br>Mr and Mrs Kwok are a married couple with no children. Mr Kwok has been working for a Hong Kong-listed company (the Company) since 1 August 2002. He had the intention to resign on 1 August 2010 but the Company had requested that he stay on for one more year. In recognition of his agreement to stay, the Company agreed to pay him an extra incentive of $50,000 on 1 August 2011. As the time is approaching, Mr Kwok is seeking professional tax advice on his tax position if he resigns effective from 1 August 2011 based on the following information:<br>Upon ceasing employment on 1 August 2011, Mr Kwok expects to receive the following final payments:<br>(1) A lump sum incentive payment of $50,000, as agreed in 2010, for Mr Kwok’s agreeing to extend his services for one year.<br>(2) An estimated amount of $100,000 representing his bonus entitlement in respect of the financial year 2011. This amount is estimated based on last year’s payment. The final figure will only be available in April 2012. Should the final figure exceed the payment of $100,000, the top-up will be paid to him in mid-April 2012. The Company has agreed that if the final figure is lower than $100,000 he will not be asked to pay anything back.<br>(3) Payment for leave not taken amounting to $20,000, including some leave days brought forward from 2010.<br>(4) Retirement benefit calculated in accordance with the rules governing the Company’s retirement plan which is duly registered under the Occupational Retirement Schemes Ordinance. Mr Kwok has met with the Company’s personnel manager, and he was asked to make a choice amongst the following options:<br>(i) leaving the Company by way of resignation (i.e. termination of service) and withdrawing his ‘leaving service benefit’ in the lump sum of $1,000,000;<br>(ii) leaving the Company by way of early retirement (subject to his supervisor’s consent) and withdrawing his ‘retirement benefit’ in the lump sum of $1,000,000 (same as the ‘leaving service benefit’ under (i) above);<br>(iii) leaving the Company by way of early retirement (subject to his supervisor’s consent) and withdrawing his ‘retirement benefit’ as a periodic pension in the amount of $10,000 per month commencing 1 August 2011 until his death.<br>Following his retirement, Mr Kwok will continue to serve the Company in the capacity of an independent consultant for a tenure of two years under the following terms:<br>(5) Mr Kwok will be obliged to provide services as and when required by the Company at an hourly rate of $1,000; but will be given advance notice of not less than 24 hours.<br>(6) Mr and Mrs Kwok are allowed to continue to occupy the Company’s staff quarters, subject to him continuing to pay the same rental contribution of $5,000 per month (see (10) below).<br>(7) At the expiry of the tenure, subject to the Company’s satisfaction with Mr Kwok’s service, Mr Kwok may be entitled to a gratuity of $10,000. Mr Kwok has also provided the following additional information:<br>(8) His annual taxable income reported in the tax return for the year of assessment 2010/11 is $1,000,000. He understands that when he is demanded to pay tax on his income for 2010/11, he will also be required to pay the provisional tax for 2011/12 based on the full-year income for 2010/11. He is concerned about the additional cash burden in meeting the provisional tax liability after ceasing employment.<br>(9) His monthly salary is $80,000 but he only receives $76,000 each month after deducting 5% as his contribution to the Company’s retirement plan. He understands that the Company is also obliged to contribute the same amount into the plan.<br>(10) He and his wife have been living in the Company’s quarter since August 2002. A monthly rental contribution of $5,000 has been deducted from his salary. The market rental of the quarter is $8,000 per month. Mr Kwok understands that he has been paying tax on this housing benefit but he has no idea about how the taxable value is calculated.<br>(11) His annual bonus for the financial year 2010 in the amount of $100,000 was received in April 2011.<br>(12) Mrs Kwok owns a property in Hong Kong and has been leasing it out for a monthly rental of $6,000. The property is still under mortgage and the monthly mortgage payment is $3,000, including $1,000 as interest. For tax reporting purposes, Mrs Kwok has each year declared the rental income of $3,000 per month and paid property tax thereon.<br>Required:<br>As his tax consultant, write a letter to Mr Kwok giving advice on the following:<br>(a) The general principles for determining the taxability of each item of final payment received by Mr Kwok upon his cessation of employment on 1 August 2011, assuming that he leaves the Company’s employment by way of resignation; that is, he chooses option (4)(i) above.<br>Note: You are NOT required to calculate the assessable/chargeable income or tax payable. (11 marks)<br>(b) The tax consequences, if any, to Mr Kwok if he chooses to leave the Company’s employment by way of retirement; and in this respect, whether his tax position would be different under the options of (4)(ii) and (4)(iii) above.<br>Note: You are NOT required to calculate the assessable/chargeable income or tax payable. (5 marks)<br>(c) The estimated tax positions of Mr and Mrs Kwok for the year of assessment 2011/12, and future years if applicable, based on the information available, together with any suggested actions available for Mr and Mrs Kwok’s consideration to help ease the cash burden required to meet their provisional tax liability for 2011/12 and/or improve their overall tax position in future years.<br>Notes:<br>(1) You should support your advice with calculations of assessable/chargeable income in so far as the information provided permits but are NOT required to calculate the tax payable.<br>(2) You should assume that Mr Kwok will keep 31 March as the ending date of his basis period. (12 marks)<br>Professional marks will be awarded in question 2 for the appropriateness of the format and presentation of the letter and the effectiveness with which its advice is communicated. (2 marks)<br>Section B – TWO questions ONLY to be attempted<br>3.<br>John Yuan is a PRC citizen working in the PRC. His brother, Peter Yuan, is a tax resident living and working in Hong Kong as a registered stockbroker under Part VI of the Securities Ordinance. Since 2008, Peter has been engaged in buying and selling shares listed in both Hong Kong and the US via internet banking. The share-trading is operated through two securities accounts, one in the name of Peter Yuan and the other in the name of John Yuan. Peter usually receives instructions or guidance from John through emails or telephone calls with regard to the identities of shares to buy or sell, the acceptable price range, the period of holding etc. However, at critical moments, he will exercise his discretion to maximise his brother’s interests or minimise his loss. Peter regularly collects updated market news and analysts’ reports and sends them to John. At the end of each month, Peter prepares a transaction summary for John showing the details of the transactions done on John’s account during the month. The average size of John’s portfolio per annum is around $20 million, and the average holding period for the shares is between 10 and 30 days. Since 2008, John’s portfolio has made a profit of around $2 million.<br>Required:<br>(a) Discuss whether or not John Yuan is liable to Hong Kong tax in respect of the profits arising from the trading of shares listed in Hong Kong and the US.<br>Note:<br>(1) For this part only, you are NOT required to discuss court case decisions in detail. Where applicable, only Departmental Interpretation and Practice Notes issued by the Inland Revenue Department should be relied upon.<br>(2) You are NOT required to examine in detail the impact of electronic commerce on the determination of source of profits. (10 marks)<br>(b) Assuming that Hong Kong tax is payable by John Yuan, advise whether the Inland Revenue Department can collect tax from Peter Yuan on behalf of John Yuan, and whether Peter Yuan is protected by the Inland Revenue Ordinance from any claims by John Yuan in respect of any tax paid on his behalf. (5 marks)<br>4.<br>(a) ‘It is a fundamental principle that stamp duty is charged on instruments, not on transactions.’<br>Required:<br>Comment on the effect of this statement, outlining the ways in which Hong Kong law ensures that certain transactions must be evidenced by a document in writing and giving a concrete example of how this principle can be used to avoid liability to Hong Kong stamp duty. (4 marks)<br>(b) The management of Tai Cheong Ltd (TCL) is considering acquiring all of the shares in Sun Cheong Ltd (SCL) for $500,000, which is the fair market value of these shares. SCL is a business competitor of TCL that is in financial difficulties; and has a substantial tax loss brought forward. Upon obtaining control of SCL, TCL will transfer part of its profitable retail business to TCL. SCL will then lease TCL’s retail shop in Mongkok from TCL. The term of the lease will be for six years and, under the lease agreement, SCL will pay 1% of the gross revenue from its retail business to TCL as the lease rental, subject to a maximum of $800,000 per annum. The gross revenue from the retail business is expected to be around $9 million per annum for the next few years.<br>Required:<br>(i) State the general rules governing the treatment of tax losses for corporations in Hong Kong; (3 marks)<br>(ii) Advise on the profits tax implications and stamp duty implications for Tai Cheong Ltd and Sun Cheong Ltd if Tai Cheong Ltd decides to acquire the shares of Sun Cheong Ltd and to lease the retail shop to Sun Cheong Ltd. (8 marks)<br>5.<br>Buying Co Ltd (Buying Co) is interested in acquiring all the shares in Selling Co Ltd (Selling Co) from its current shareholder, Mr Shum. The consideration will be based on Selling Co’s financial position as at 30 June 2011. In the course of conducting the tax due diligence on Selling Co, the finance director of Buying Co obtained the following extracted information:<br>In drafting the share sale and purchase agreement, the lawyer of Buying Co requested a tax indemnity from Mr Shum to the effect that, after the shareholding change, any extra tax cost suffered by Selling Co in relation to any transactions or events that occurred prior to the shareholding change would be indemnified by Mr Shum. However, this was not agreed to by Mr Shum’s lawyer. Instead, Mr Shum sent a letter to Buying Co advising that he guaranteed that all tax assessments have been finalised and Selling Co has no outstanding tax disputes with the Inland Revenue Department (IRD); and in case any tax queries were raised by the IRD in respect of the years prior to the shareholding change, he was prepared to take full responsibility to deal with the disputes with the IRD on behalf of Selling Co.<br>Required:<br>Advise the directors of Buying Co Ltd on any potential tax risks that may be faced by Buying Co Ltd in respect of the acquisition of Selling Co Ltd in terms of tax compliance and whether the guarantee letter from Mr Shum is sufficient and effective to protect Buying Co Ltd in the event of a tax challenge being raised for any prior year.<br>请帮忙给出每个问题的正确答案和分析，谢谢！
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