TUTORIAL 5 SUGGESTED ANSWERS

Answer to Question 1

The gain will be considered as a trading profit if it can be established that she has
carried on a trade or business or an adventure in the nature of trade. Relevant factors
of badges of trade are:
(a) whether the assets being acquired were likely to be subjects of speculation or
long term investment or own personal enjoyment or use;
(b) the frequency of similar transactions;
(c) the period of holding;
(d) the motive of acquisition — whether profits making by resale or otherwise;
(e) the circumstances responsible for disposal;
(f) any supplementary work done on the assets; and
(g) how the acquisition was financed.
Commodity futures are likely to be acquired for speculation. One Board of Review case
distinguished between trading and speculation and ruled that mere speculation did not
necessarily prove that a trade or an adventure in the nature of trade has been carried out.
Ultimately, whether a trade is carried on is a question of fact to be determined by
reference to all circumstances of the particular case.

Answer to Question 2

a) Taxable-trading income
b) Not taxable-offshore income
c) Not taxable-capital gain
d) Not taxable-profit already taxed exempted in the IRO, s26
e) Not taxable-no permanent establishment in HK

Answer to Question 3

The manufacturing in Shanghai has been contracted by ABC to a sub-contractor (whether

a related party or not) and paid its subcontracting fees on an arm’s length basis, and the
involvement of ABC in the manufacturing process is minimal, the profits will not be
apportioned. Taxability of such profits will be determined on the same basis as a
commodities or goods trading business.
Answer to Question 4

a)
 The sales contract is effected in Hong Kong as the purchase order is accepted in
Hong Kong by faxing the sales confirmation in Hong Kong.
 The sales profits are taxable in Hong Kong.
b)
 ABC Co has received and accepted US Customer B’s order in Hong Kong.
 It also issues purchase order in Hong Kong to the Chinese factory.
 The sale is taxable in Hong Kong
c)
 the sales agreement is negotiated & concluded in Hong Kong
 the sales profits are taxable in Hong Kong.
d)
 Both the purchase and sales contracts are negotiated and concluded outside Hong
Kong (in China and US)
 the sales profits are not subject to tax in Hong Kong.
e)
 The sales profits have a foreign source as both the purchase and sales contracts
are negotiated and concluded outside Hong Kong.
 Care should be taken where “the agent” is a related company.
 Refer to ING Baring Case.