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1a.

5% method
2014/15
2015/16

1400000 X 5%
1800000 X 5%

Life insurance
70,000
90,000

160,000
1b)
Value of life fund 30.6.2015
Actuarial liability 30.6.2015
Deficit, 30.6.2013

(255,000)
(120,000)
(4,000)
(13,000)
3,053,000

Total insurance income

3,200,000

305300014000003200000
305300018000003200000

106,000

Total Assessable pro


41,000
225,000

266,000

12,800,000
(10,500,000)
1,100,000
3,400,000

Add :
Transfer to reserve
Provision for doubtful debts
Less :
Management expenses(fire insurance)
Depreciation allowances
Profit on sale of FA
Transfer from reserve
adjusted surplus after Management expenses and DA

2014/15
2015/16

fire insurance
(29,000)
135,000

20,000
25,000

Life insurance
1,335,688
1,717,313
3,053,000

fire insurance
(29,000)
135,000
106,000

The adjusted surplus method provided a higher tax payable amount to company.

Total Assessable pro


1,306,688
1,852,313
3,159,000

2a)
Tax avoidance, in a strict sense, is still legal, but it is generally
considered to be overly-aggressive tax planning, to the point of
abusing the original intention of certain provisions of the IRO. When
certain tax avoidance transactions or activities happen frequently,
relevant anti avoidance provisions are typically enacted to
counteract those practices. This is natural because tax authorities
worldwide try to protect their tax revenues.1
Tax evasion, at the other end of the scale, is a criminal offence; it
includes deliberate under-reporting of income, over-claiming of
expenses, falsifying accounting records, deliberate non-filing of
returns, etc. Tax evasion is clearly illegal, and the taxpayer involved
can be subject to penalty and imprisonment.2
Difference 1)
Tax avoidance is using the legal method to reduce tax liabilities, but
tax evasion is using illegal method to reduce tax liabilities. People
who donate money (>$100) to qualified charity is deductible. This
method can reduce taxpayers tax liabilities and legal. These is tax
avoidance. Another taxpayer received a tax return and do not fill the
return. These method also can reduce taxpayers liabilities in short
time. However, IRD will punish the taxpayer further fine on future.
These is tax evasion.
Difference 2)
Tax avoidance is made an arrangement before tax liabilities occur.
Tax evasion is made an arrangement to reduce tax after tax
liabilities occur. Peter has employ a domestic helper. He negotiate
with his company. After negotiation the company signed a new
contract with Peter. Company accept to employ domestic helper to
Peter. Due to this welfare the company decrease Peters salary. This
arrangement is occur before Peters tax liabilities occur. These is tax
avoidance. Another taxpayer Tom make an artificial document. The
artificial document is to proof he has study in this year. Tom use this
document to apply study allowance to reduce his tax. This
arrangement is occur after Peters tax liabilities occur. These is tax
evasion.

2b)
Under the Inland Revenue Ordinance, there are two section about
1 The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.3, Hong Kong: OUHK
2 The Open University of Hong Kong (2010) Profit tax II in ACT B415 Taxation
II,P.3, Hong Kong: OUHK

general anti-avoidance provisions.


Section 61)
Where an assessor is of opinion that any transaction which reduces
or would reduce the amount of tax payable by any person is
artificial or fictitious or that any disposition is not in fact given effect
to, he may disregard any such transaction or disposition and the
person concerned shall be assessable accordingly.3
Case: Kum Hing Land Investment Company Limited v CIR [1967]
In this case, the taxpayer successfully induced the Daimaru
Department Store to rent a large shop premises in Causeway Bay.
The taxpayer received a commission for the service and then paid
out a commission to another company that rendered no service in
connection with the transaction. The payment to another company
was properly recorded and evidenced. Even though the payment
was actually made and was properly evidenced, it was held that the
payment should be disallowed for deduction on the grounds that the
transaction was artificial and fictitious. The rationale is that no
businessman could reasonably be expected to pay a large
commission to another party who provided little or no service in a
transaction or series of transactions. 4
Section 61A)
This section shall apply where any transaction has been entered into
or effected after the commencement* of the Inland Revenue
(Amendment) Ordinance 1986 (7 of 1986) (other than a transaction
in pursuance of a legally enforceable obligation incurred prior to
such commencement) and that transaction has, or would have had
but for this section, the effect of conferring a tax benefit on a person
(in this section referred to as the relevant person), and, having
regard to- (*Commencement date-14 March 1986)
(a) The manner in which the transaction was entered into or carried
out;
(b) The form and substance of the transaction;
(c) The result in relation to the operation of this Ordinance that, but
for this section, would have been achieved by the transaction;
(d) Any change in the financial position of the relevant person that
has resulted, will result, or may reasonably be expected to result,
from the transaction;
(e) Any change in the financial position of any person who has, or
3
HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA94
825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
4 The Open University of Hong Kong (2010) Profit tax II in ACT B415 Taxation
II,P7-8, Hong Kong: OUHK

has had, any connection (whether of a business, family or other


nature) with the relevant person, being a change that has resulted
or may reasonably be expected to result from the transaction;
(f) whether the transaction has created rights or obligations which
would not normally be created between persons dealing with each
other at arm's length under a transaction of the kind in question;
and
(g) the participation in the transaction of a corporation resident or
carrying on business outside Hong Kong, it would be concluded that
the person, or one of the persons, who entered into or carried out
the transaction, did so for the sole or dominant purpose of enabling
the relevant person, either alone or in conjunction with other
persons, to obtain a tax benefit.5
Case: CIR v HIT Finance Ltd and Hong Kong International Terminal
Ltd (HITL) [2007]
This case involved a number of companies within a conglomerate. In
a group reorganization project, a company, Hong Kong International
Terminals Limited (HITL), was formed to purchase port facilities and
related assets from group companies and other parties. HITL wanted
to borrow substantially to finance the acquisitions. Another group
company, HIT Finance Limited (HIF), was formed for the purpose for
borrowing to finance the acquisitions through the issue of loan notes
to be listed on the Luxembourg Exchange. The issue of the loan
notes was not well received by the market, and only one-third of the
issue was subscribed by the public, while the remaining two-thirds
of the issue was subscribed by another subsidiary of the group,
Strategic Investments International Limited (SIL), which was
incorporated outside Hong Kong.6

5
HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA94
825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
6 The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P11, Hong Kong: OUHK

3a)
Under salary tax the deduction expenses need to fulfill section 12 of
the IRO wholly, exclusively and necessarily incurred in the
production of the assessable income7. It is very difficult to proof that
expenses is fulfill section 12.
Under profit tax the deduction expenses need to fulfill section 16 of
the IRO there shall be deducted all outgoings and expenses to the
extent to which they are incurred during the basis period for that
year of assessment by such person in the production of profits in
respect of which he is chargeable to tax under this Part for any
period, including8.
Wholly, exclusively and necessarily concept is stricter than incurred
during the basis period for that year of assessment by such person
in the production. Therefore Mr Leung can deduct more expenses
under profit tax than salaries tax. When Mr Leung transferred his
income from salaries tax to profit tax, he can deduct more outgoing
expenses.
3b)
Commissioner may challenging Mr Leung is contract of service. If Mr
Leung cannot proof he is provide contract for service, he also
subject to salary tax. Under DIPN 25 it has three test to test people
who are contract of service or contract for service. The three tests
are control text, the integration or organization test and the
economic test.
Under control test and integration or organization test, more no
answers in the test
more likely that this is considered contract for service. Under
economic test more Yes answers in the test more likely that this is
considered contract for service.
Mr Leung need to pass these test and proof he is contract for service
IRO also has section 9A to against these tax avoidance, if section 9A
applicable to Mr Leung, he also subject to salary tax. Section 9A
mentioned Type I service companies are used to disguise employeremployee relationships in order to avoid taxes, while Type II service
companies are companies (or trusts) controlled by the proprietor or
partners of a business and to which inflated management fees are
7 HKSA,
http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B348256
4840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
8 HKSA,
http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B348256
4840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument

paid (by the business) to avoid taxes.9


4a)
Income from members
Members subscription
receipts from bar and canteen: Members
Entrance fee

Income from non-members


receipts from bar and canteen: Non-Members
Rent

Total income
%income from member

13/14
$
170000
108000
200000
478000

14/15
$
160000
132000

242000
100000
342000

279000
100000
379000

820000
58.3%

671000
43.5%

292000

According to section 24(1), the Baseball Promotion Club Limited was


deemed to be carrying on a business for the 2014/15 year of
assessment, but not for the 2013/14 year of assessment.
Accordingly, there would be profits tax liability for the year of
assessment 2014/15.
Property tax:
Rent
20%statutory deduction
Net assessable value
Property tax at 15% rate

13/14
100000
20000
80000
12000

14/15
100000
20000
80000
12000

9 The Open University of Hong Kong (2010) Profit tax II in ACT


B415 Taxation II,P.25Hong Kong: OUHK

Baseball Promotion Club Ltd. Profits tax computations


Year of assessment 14/15:
31/3/2014 surplus
16.5%Profits tax

65000

Net assessable value


15%Property tax
profit tax

80000

10725

12000
22725

On 2013/14 Baseball Promotion Club Limited only need to paid


$12000 property tax. On 2014/15 Baseball Promotion Club Limited is
deeded carrying on business, so it need paid profit tax
(65000X16.5%) $10725 and property tax $12000
4b)
Section 24 point out that when where a person carries on a club or
similar institution which receives from its members not less than
half of its gross receipts on revenue account such person shall be
deemed not to carry on a business 10 .
The members are defined in section 24 as persons entitled to vote
at a general meeting of the club, or similar institution, or trade,
professional or business association11
If the club income is less than 50% income is come from member
and it is carry on in Hong Kong, such club is deeded carry on
business. Therefor such clubs profit is subject to Hong Kong profit
tax.

4c)
Assuming that approximately 30% of Baseball Promotion Clubs
members are corporate members, Baseball Promotion Clubs income
is less than 50% come from members. Baseball Promotion Club is
deeded carry on business in Hong Kong.
10
HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B3
482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument
11
HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B3
482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument

The club carry on business in Hong Kong need to pay profit tax and
other tax. When the club suffer a loss, the loss can set off to another
tax. Such, Baseball Promotion Club in 2014/2015s assessable profit
is -$100000, assessable vale is $50000, the loss off assessable profit
can be set off the assessable vale. Therefore Baseball Promotion
Club need not pay any tax in 2014/2015.
If Baseball Promotion Club deeded as not carry on business in Hong
Kong it also need to pay property tax.

Reference
1: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.3, Hong Kong: OUHK
2: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.3, Hong Kong: OUHK
3:HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA
94825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
4: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P7-8, Hong Kong: OUHK
5:HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA
94825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
6: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P11, Hong Kong: OUHK
7: HKSA,
http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B348256
4840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
8:HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B
3482564840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
9: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.25Hong Kong: OUHK
10:HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47
B3482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument
11:HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47
B3482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument