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When a company carries out onshore and offshore business simultaneously, can use tax computation schedule 2 to split the audited financial statements' detailed income statements into onshore portion and offshore portion.

Then use the net profit/loss of onshore income statements to start the tax adjustment to arrive at the assessable profit / adjusted loss.

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If in foreign currencies, need to add original currency and exchange rate columns and then arrive at HKD: 

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A better tax planning may use 2 companies to handle on-shore and off-shore business separately because:

for operating expenses, you may always have difficult to allocate a expenses to on-shore portion and off-shore portion. For example, audit fee, how to split it?

Company should have sound policy to clear cut its on-shore portion with its off-shore portion.

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.’
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Court cases relevant to split of onshore and offshore profits:

Company carrying on business in Hong Kong can earn profits arising outside Hong Kong

  • 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.’

Board of Review cases relevant to split of onshore and offshore profits:

D51/08 [LINK] - Volume 24 (allowed)

  • 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

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")

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

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')

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

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
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