Topics for offshore claim - query letter samples, list of Board of Review cases, discussions, etc.

Question

Relevant DIPN: [DIPN 21 - LOCALITY OF PROFITS]

Sample for service income - on-line games:

Comments

Can ask for Chinese version by:

Date: [DD MMMM YYYY]

File no. : ##/#######

Our ref.: ########

The Assessor, Profits Tax

Inland Revenue Department

G.P.O. Box 132

Hong Kong

 

Attn: [assessor name]

 

Dear Sir/Madam,

 

BCG CO., LIMITED (“Company”)

PROFITS TAX – Year of Assessment 20##/##

 

I refer to your letter dated [DD MMMM YYYY]. I, on behalf of the Company, would like to apply for an English to Chinese translation of the letter dated [DD MMMM YYYY] as the director of the Company are not proficient in English.

Should you have any queries, please do not hesitate to contact me.

Yours faithfully

[Tax Representative name]

Answer 1

Then you may get following Chinese version:

Answer 2

Sample - IRD reply letter for successful offshore claim

Answer 3

Sample for trading

Answer 4

Apply reply extension for offshore claim query letter:

1st time apply can apply for 2 months' extension,

2nd time apply can apply for additional 3 months' extension.

Plus original reply deadline 1 month, totally you may get half year to reply the offshore claim query letter. In our experience, usually you can successfully get this half year to reply. But if you still can not finish the reply letter after half year, we suggest you call assessor's direct line as soon as possible and orally present your difficulty.

Comments

But in some cases, especially for the company having onshore and offshore business simultaneously, the offshore claim query letter may be very short, only 2 or 3 sentences asking the most critical offshore concerns of the offshore business. In such circumstance, the assessor may want the reply very soon, so that should do reply within one month.

Answer 5

Q&A portion:

Question 1: Does having employees and offices located in Hong Kong directly orient to offshore claim failure?

Answer 1: May not. For example, 

a Hong Kong sourcing company, 

• being a subsidiary of a international trading company who providing global sourcing services to a U.S./European supermarket (the supermarket can be related company); 
• getting commission income from the international trading parent company on a proper basis; 
• paying fee to its P.R.C. Mainland subsidiary on cost-mark-up based for sourcing service got in P.R.C. Mainland (the HK company may have representative office in P.R.C. Mainland); and
• having teens of Hong Kong employees but these employees' duties are mainly travelling to P.R.C. Mainland or globally for sourcing

this Hong Kong sourcing company may successfully make offshore claim. Also the group needs to comply with Transfer Pricing rules.

Possible offshore claim query: whether the Company’s own sales/purchases staff were sent overseas to negotiate and conclude sales/purchases and if yes, a full list of all staff involved in the claimed offshore operations, their respective name, Hong Kong Identity Card number, post title and a full set of itinerary of the business trips made during the relevant basis period including the period of each trip, the places visited, the purposes of each visit and the suppliers/customers contacted;

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Question 2: for trading business, what's the tax treatment if only the sales is effective in Hong Kong while the corresponding purchases is effective outside Hong Kong?

Answer 2: the whole trading profit, i.e. 100% profit, will subject to Hong Kong Profits Tax, when either sales or purchases is effective in Hong Kong. There is no treatment of 50% subject to Hong Kong Profits Tax.

But proportion of on-shore and off-shore profit for a trading business is possible but need to satisfy some criteria:

• you need to determine and submit a proportion of on-shore and off-shore profit tax computation at the beginning. You can't submit a 100% offshore tax computation first but after failed the 100% claim, tried to fight for proportion of on-shore and off-shore profit later;
• the tax payer need to provide sound explanation and evidence on the basis of calculation of the proportion of on-shore and off-shore. Remember that burden of proof is on tax payer;
• Following cases providing more information on conditions need to be satisfied (seems very hard to satisfy):
  • The Privy Council in Commissioner of Inland Revenue v HK-TVB International Limited [1992] 2 AC 397 accepted that a company carrying on business in Hong Kong can earn profits which was derived from outside Hong Kong:
    • ‘ It is clear from the Hang Seng Bank case [1991] 1 AC 306 that in appropriate circumstances a company carrying on business in Hong Kong can earn profits which do not arise in or derive from the colony, notwithstanding the fact that those profits are not attributable to an independent overseas branch.’ (at page 410)
  • The Privy Council has also stated at page 409G that:
    • ‘ It can only be in rare cases that a taxpayer with a principal place of business in Hong Kong can earn profits which are not chargeable to profits tax under section 14 of the Inland Revenue Ordinance.’
  • In Kwong Mile Services Limited v Commissioner of Inland Revenue (2004) 7 HKCFAR 275, Bokhary PJ said at 282C to 283F:
    • '... the only constant is the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters.’

Answer 6

Sample for service income - service provided by human resource

Answer 7

List of published Board of Review cases (Brief description from Board of Review's official website. List may not be exhaustive. It's for deep source-of-profit studying):

[D: dismissed; A: allowed]

D2/16 [LINK] - Volume 31 Second Supplement (D)

• locality of profits – double taxation – sections 2, 14 and 68(4) of Inland Revenue Ordinance

D14/15 [LINK] - Volume 31 (D)

• source – sections 2, 14 and 68(4) of the Inland Revenue Ordinance (Corrigendum on the last page of the decision)

D4/15 [LINK] - Volume 30 Third Supplement (D)

• locality of profits –sections 2(1), 14(1) and 68(9) of the Inland Revenue Ordinance (Chapter 112)

D28/14 [LINK] - Volume 30 Second Supplement (D)

• source of profits – sections 2(1) and 14(1) of the Inland Revenue Ordinance

D25/14 [LINK] - Volume 30 First Supplement (D) 

• appellant company acting as ‘middleman’ between two foreign companies – substantial trade activities performed by common staff of the foreign companies outside Hong Kong – whether profits derived assessable to profits tax in Hong Kong – sections 2(1), 14(1) and 68(c) of the Inland Revenue Ordinance (Chapter 112) [Decision in Chinese]

D19/14 [LINK] - Volume 30 (D)

• operation generating profits – whether manufacturing is part of the appellant’s operation – section 14 of the Inland Revenue Ordinance (‘IRO’)
• return of assessment – failure to claim offshore profits – whether assessment excessive because of error or omission – whether relief should be granted – section 70A of the IRO

D32/12 [LINK] - Volume 27 Second Supplement (D)

• source – interest income – gain on trading of offshore securities/derivatives/held-to-maturity debt securities – unrealized gain on overseas investments – gain on disposal of available-for-sale securities – whether long term investment – section 14(1) of the Inland Revenue Ordinance (‘the IRO’).

D1/12 [LINK] - Volume 27

• extension of time – source of profits – deductibility of expenses – sections 2, 14(1), 16(1), 59, 61, 64, 66 and 68 of the Inland Revenue Ordinance (‘the Ordinance’)

D31/11 [LINK] - Volume 26 Third Supplement

• assessable profits – whether Taxpayer carried on business in Hong Kong – whether profits arose in or derived from Hong Kong – sections 2(1) and 14(1) of the Inland Revenue Ordinance (‘IRO’). (Corrigendum on the last page of the decision)

D38/11 [LINK] - Volume 26 Third Supplement

• source of profits – sections 2, 14(1), 59, 66(1), 66(3), 68(4) and 68(7) of the Inland Revenue Ordinance (‘the Ordinance’)

D8/11 [LINK] - Volume 26

• consultancy income – source of profits – sections 14(1) & 68(4) of Inland Revenue Ordinance (‘IRO’)

D19/09 [LINK] - Volume 24 First Supplement

• offshore profits claimed – whether arrangement with Mainland subsidiary one of processing or sale and purchase – 50:50 apportionment – depreciation allowance in respect of offshore plant and machinery – ss 14, 16, 16G, 18, 39B, 39E and 70A of the Inland Revenue Ordinance (‘IRO’) – Departmental Interpretation and Practice Notes No 21 (‘DIPN 21’)

D51/08 [LINK] - Volume 24

• source of profits – Taxpayer paid processing charges to Mainland factory for the manufacture of products – did profits arise partly in Hong Kong and partly in the Mainland – apportionment of profits – deductions for expenditure on prescribed fixed assets – ss 14 and 16G of the Inland Revenue Ordinance (‘IRO’) – Departmental Interpretation and Practice Note (‘DIPN’) Nos. 15 and 21

D42/08 [LINK] - Volume 23 Third Supplement

• source - joint venture factory outside Hong Kong - ss 2, 14(1), 66(1) & (3), 68(4) & (7) of the Inland Revenue Ordinance (‘IRO’)

D18/08 [LINK] - Volume 23 First Supplement

• whether or not "offshore" profits — s 68 (4) of the Inland Revenue Ordinance ("IRO") — guiding principle on whether profits are of Hong Kong source and therefore taxable or of foreign source and therefore not taxable

D16/08 [LINK] - Volume 23 First Supplement

• source of profits — s 14(1) of the Inland Revenue Ordinance ("IRO"). [Decision in Chinese]

D54/06 [LINK] - Volume 21 Third Supplement

• source of income — garment manufacturing — procurement fees — whether artificial and fictitious — whether deductible

D36/06 [LINK] - Volume 21 Second Supplement

• manufacturing profits — locality of service income — concession on apportionment of profits — ss 2, 14(1), 66(1), 66(3) and 68(4) of the Inland Revenue Ordinance ("IRO") — DIPN21

D43/06 [LINK] - Volume 21 Second Supplement

• processing done by wholly owned subsidiary in PRC — agency relationship — contract processing or import processing — apportionment of profits — s 14 of the Inland Revenue Ordinance ("IRO")

D24/06 [LINK] - Volume 21 First Supplement

• whether profits offshore

Comments

D10/06 [LINK] - Volume 21

• sources of the trading profits and commission income — whether the "profits arising in or derived from" Hong Kong - claim for deduction of expenses related to the dismissal of a director — whether the expenditure incurred "in the production of profits" — the validity of additional assessments - whether the additional assessments involve "re-opening of any matter which has been determined on objection or appeal for the year" — application for leave to rely on further grounds — whether the proposed amendments are sufficiently intelligible with adequate particularity - ss 14(1), 16(1), 50, 60, 64(3)&(4), 66(3), 68(4), 68(9) and 70 of the Inland Revenue Ordinance ("IRO").

D79/03 [LINK] - Volume 20 First Supplement

• source of profits — stock brokerage commission earned in overseas market — profits on execution of orders from Hong Kong clients versus overseas clients - s 14 of the Inland Revenue Ordinance ("IRO")

D3/05 [LINK] - Volume 20 First Supplement

• source of profits — whether profits arose in or derived from Hong Kong — focus on the operations or activities of the taxpayer — emphasis on purchase orders as an integral part of a trading transaction

D56/04 [LINK] - Volume 19 Second Supplement

• source of profits — goods manufactured outside Hong Kong by a joint venture company

D111/03 [LINK] - Volume 19

• whether profits arising in or derived from Hong Kong — goods manufactured in the mainland — whether concession under Inland Revenue Departmental Interpretation and Practice Note No 21 (DIPN21) applicable — whether companies within same group of companies can be treated as same entity)

D76/03 [LINK] - Volume 18 Second Supplement

• source of profits — whether profits arising in or derived from Hong Kong — whether transaction artificial or fictitious — s 61 of the Inland Revenue Ordinance ("IRO")

D1/03 [LINK] - Volume 18 First Supplement

• whether or not profits derived from trading were sourced outside Hong Kong - whether profits in question should be apportioned when the profits were derived partly from Hong Kong and partly outside Hong Kong - ss 66(3) and 68 of the Inland Revenue Ordinance ('IRO') - whether or not prejudice to respondent on the additional ground of appeal - burden of proof - frivolous and vexatious and an abuse of the process - order to pay costs

D109/02 [LINK] - Volume 18

• company set up to 'interpose' between Chinese suppliers and a UK company - whether carrying on business in Hong Kong - whether profits derived in Hong Kong - s 68(4) of the Inland Revenue Ordinance ('IRO')

D172/01 [LINK] - Volume 17 First Supplement

• locality of profit - whether the taxpayer was a manufacturer - whether the opening of letters of credit and placing of orders were relevant and crucial factors in determining the source of profits in question - whether the preponderance of activities was concluded outside Hong Kong

D20/02 [LINK] - Volume 17 First Supplement

• whether profits are wholly derived outside Hong Kong - whether profits are derived partly from outside Hong Kong and be apportioned in that only those profits which are derived in Hong Kong should be taxed - the broad guiding principle is that one should look to see what the taxpayer has done to earn the profits in question and where he has done it - focus on what the taxpayer instead of what other person or entity has done - question of source is a practical matter of fact - must have regard to the whole of the circumstances - apportionment is not permissible - s 14 of the Inland Revenue Ordinance ('IRO')

D163/01 [LINK] - Volume 17

• manufacturing business both in Hong Kong and Mainland China - whether tooling income and interest income part and partial to the manufacturing process - apportionment of profits - Departmental Interpretation and Practice Notes No 21 ('DIPN 21')

D152/01 [LINK] - Volume 17

• source of income - securities trades

D55/00 [LINK] - Volume 15 Second Supplement

• source of profits - within or outside Hong Kong - Departmental Interpretation Practice Note 21 ('DIPN 21') - whether profits arose in or were derived from Hong Kong from a trade, profession or business - ss 2, 14 of the Inland Revenue Ordinance ('IRO')

D8/00 [LINK] - Volume 15 First Supplement

• principal place of business in Hong Kong - certain business operations outside Hong Kong - source of profits - whether liable to profits tax - section 14 of the Inland Revenue Ordinance ('IRO')

D145/99 [LINK] - Volume 15

• nature of business - whether 'profits arising in or derived from Hong Kong' - agency - s 14 of the Inland Revenue Ordinance ('IRO')

D132/99 [LINK] - Volume 15

• principal place of business in Hong Kong - certain business operations outside Hong Kong - source of profits - whether liable to profits tax - s 14 of the Inland Revenue Ordinance ('IRO')

D20/99 [LINK] - Volume 14 First Supplement

• interest income - whether the taxpayer took part in the transaction as trader or as agent - whether the business carried on in Hong Kong - s 15(1)(f) of the Inland Revenue Ordinance - whether the interest income has accrued to the taxpayer

D89/98 [LINK] - Volume 13 Second Supplement

• whether taxpayer entitled to exclude from its declared assessable profits a sum as being offshore profits derived from services rendered outside Hong Kong - whether the income was in truth income wholly arising in Hong Kong - s 14 of the Inland Revenue Ordinance

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D51/97 [LINK] - Volume 12 Second Supplement

• source of profit - import/export business - purchase of goods in Hong Kong with sale of goods to overseas customer negotiated by overseas agent - related sales activities, including processing of customer's order, carried out both in and outside Hong Kong - Inland Revenue Ordinance s 14(1)

D71/97 [LINK] - Volume 12 Second Supplement

• source of profit - rebates/discounts in respect of trades executed by overseas brokers on foreign stock exchange - s 16 - whether interest on subordinated loan redeposited offshore is deductible expense

D107/96 [LINK] - Volume 12

• whether business carried on in Hong Kong and whether profits arose in or derived from Hong Kong - decisions made by persons abroad and implemented in Hong Kong

D14/96 [LINK] - Volume 11 Second Supplement

• source of profit - travel agent selling outbound tours through its retail outlets in Hong Kong and performing its obligations to its customers predominantly overseas through its employees and land operators - whether land operators agents - Inland Revenue Ordinance s 14

D2/96 [LINK] - Volume 11 First Supplement

• garment trading - taxpayer as a link between manufacturers and companies outside Hong Kong - source of profit - s 14 of Inland Revenue Ordinance

D37/95 [LINK] - Volume 10 Third Supplement

• profit arising in or derived from Hong Kong

D10/95 [LINK] - Volume 10

• source of profit - whether arising in or derived from Hong Kong

D66/93 [LINK] - Volume 9

• jewellery manufacturer and trader selling its products overseas - whether taxable in Hong Kong

D64/93 [LINK] - Volume 9

• source of income - whether arising in or derived from Hong Kong

D47/93 [LINK] - Volume 8 Second Supplement

• trading or document handling company - whether profit arises in or is derived from Hong Kong

D27/93 [LINK] - Volume 8 First Supplement

• whether taxpayer carried on business in Hong Kong - whether profits subject to assessment to profits tax

D59/92 [LINK] - Volume 8

• subsidiary of overseas company - whether profits arising in and derived from Hong Kong

D17/93 [LINK] - Volume 8

• whether taxpayer carrying on business in Hong Kong - s 14 of the Inland Revenue Ordinance

D21/92 [LINK] - Volume 7 First Supplement

• whether taxpayer was carrying on business in Hong Kong and whether profits arose in or were derived from Hong Kong - whether taxpayer was a financial institution and whether interest received arose through or from the carrying on by the taxpayer of its business in Hong Kong - ss 14 and 15 of the Inland Revenue Ordinance

D64/91 [LINK] - Volume 6 Third Supplement

• garment trading - goods manufactured in the PRC - whether profits arise in or derive from Hong Kong

D32/91 [LINK] - Volume 6

• commission income - whether income arose in Hong Kong from the carrying on of business or trade in Hong Kong

D33/91 [LINK] - Volume 6

• whether company carrying on business or dormant - whether carrying on business in Hong Kong

D26/90 [LINK] - Volume 5 First Supplement

• arising in or derived from Hong Kong trading profits - s 14 of the Inland Revenue Ordinance

D57/89 [LINK] - Volume 5

• interest income - whether interest arose from carrying on business in Hong Kong - s 15(1)(f) of the Inland Revenue Ordinance

D59,60&61/89 [LINK] - Volume 5

• source of profits - trading profits - whether arising in or derived from Hong Kong

D40/89 [LINK] - Volume 4 Third Supplement

• source of profits - application of Sinolink case - section 14 of the Inland Revenue Ordinance

D9/89 [LINK] - Volume 4 First Supplement

• source of profits - agents abroad effecting operations on taxpayer's behalf - whether it is possible to infer agency of a director or shareholder - s 14 of the Inland Revenue Ordinance
• source of profits - trading company - factor: administrative facilities in Hong Kong - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance
• source of profits - trading company - factor: administrative facilities in Hong Kong - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance

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D71/88 [LINK] - Volume 4 First Supplement

• source of profits - reinvoicing company - application of 'operations test' to trading income - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance

D12/89 [LINK] - Volume 4 First Supplement

• source of profits - trading company - factors: place of making sales contracts and locality of operations - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance

D52/88 [LINK] - Volume 4

• source of profits - fees from offshore licensing activities - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance

D58/88 [LINK] - Volume 4

• source of profits - trading in goods - discussion of appropriate tests for determining source - taxpayer based in Hong Kong but performing activities outside Hong Kong - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance

D51/88 [LINK] - Volume 3 Third Supplement

• insurance company (non-life) - interest received from offshore deposits - whether subject to profits tax - s 23A of the Inland Revenue Ordinance
• insurance company (non-life) - treatment of profits derived from non-insurance business - whether interest derived by an insurance company is derived from its insurance business - s 23A of the Inland Revenue Ordinance

D17/88 [LINK] - Volume 3 Second Supplement

• interest - whether arising 'through or from the carrying on by [a] corporation or its business in [ Hong Kong ]' - relevant factors -s 15(1)(f) of the Inland Revenue Ordinance

D18/88 [LINK] - Volume 3 Second Supplement

• source of profits - apportionment of profits between two jurisdictions - whether possible - s 14 of the Inland Revenue Ordinance

D26/88 [LINK] - Volume 3 Second Supplement

• source of profits - interest - whether arising in or derived from Hong Kong - application of 'operations test' to interest income - 'provision of credit' test - s 14 of the Inland Revenue Ordinance

D21/88 [LINK] - Volume 3 Second Supplement

• source of profits - trading company - 'operations test' - significance of place of concluding contracts - other relevant factors -s 14 of the Inland Revenue Ordinance

D18/88 [LINK] - Volume 3 Second Supplement

• source of profits - trading in goods - discussion of appropriate tests for determining source - status of the 'operations test' - s 14 of the Inland Revenue Ordinance

D29/84 [LINK] - Volume 3 First Supplement

• source - reinvoicing scheme - whether profits were sourced in Hong Kong - s 14 of the Inland Revenue Ordinance

D9/88 [LINK] - Volume 3 First Supplement

• source of profits - film distribution overseas - taxpayer carried on all his activities in Hong Kong - whether profits arose in or derived from Hong Kong - s 14 of the Inland Revenue Ordinance  

D50/87 [LINK] - Volume 2 Eight Supplement

• Whether profits generated from goods purchased overseas had its source in Hong Kong 

D38/86 [LINK] - Volume 2 Fifth Supplement

• Profits Tax—whether the profits from the sale and purchase of timber arising in or derived from Hong Kong 

D19/84 [LINK] - Volume 2 Third Supplement

• Inland Revenue Ordinance, Section 14—profits arising in or derived from Hong Kong—source of profits—trading operations in Hong Kong— manufacturing operations overseas

D7/84 [LINK] - Volume 2 Second Supplement

• Financial institution—s. 14 of the Inland Revenue Ordinance— whether interest on offshore syndicated loans derived from Hong Kong

D15/82 [LINK] - Volume 2 First Supplement

• Sale of denim and the sale of shipment quotas outside Hong Kong—s. 14 of the Inland Revenue Ordinance—source of profits—whether arising in or derived from Hong Kong

BR2/75 [LINK] - Volume 1 Third Supplement

• taxpayer agent of foreign company under terms of agreement made in Hong Kong—whether operations giving rise to profits took place wholly outside Hong Kong—place where contract made and place where operations undertaken of important consideration but each case should be judged by its particular circumstances—Inland Revenue Ordinance, section 14