Unit 6 Tutorial Questions

Question 1

AAC Services Ltd, a Hong Kong incorporated company, provides accounting services in
Hong Kong and China. It has engaged a team of accountants who are required to travel
between Hong Kong and China. For the year ended 31 May 2019, AAC has the following
operation results:

Income
Service fees (1) 1,200,000
Investment income
– dividend from securities (2) 21,000
– profit from sale of securities (2) 400,000
– bank interest income (3) 1,000
– currency trading gain (4) 50,000
Total income 1,672,000

(1) Included in the service fees of $1,200,000 is a billing of $400,000 derived from services
fully rendered by the accountants in China.
(2) AAC was involved in holding and trading in listed securities in Hong Kong. Apart from
the dividend, AAC made a gain of $550,000 and a loss of $150,000 from trading in these
securities. The net gain is $400,000.
(3) Bank interest income comprises the following:
Interest on RMB deposit with a bank in Hong Kong 400
Interest on RMB deposit with a bank in China 600
(4) During the year, AAC made a net profit of $50,000 from the buying and selling of foreign
currencies. Part of the fund used for foreign currency trading was sourced from AAC’s
bank loan.

What is the amount of taxable income of AAC Service Ltd in the respect of the year ended
31 May 2019? Briefly explain.

Question 2
In 2018/2019 Box Ltd., a European film distributor, received copyright amounting to
$800,000 from APM Ltd., a Hong Kong film distributor. What is the amount of the
assessable profit for Box Ltd. for the year if:
a) they are associates
b) they are not associates
Question 3

Triangle (HK) Ltd. is a Hong Kong company. In 2018/19, arrangement has been made that
Triangle (HK) Ltd. will pay Triangle (Bermuda) Inc., a trust company incorporated in Bermuda,
an annual fee of$150,000 for the use of the "Triangle" logo in the garments manufactured by this
Hong Kong company. Assume that the IRD has no objection to such an arrangement and will
apply section 21A to assess the logo payment accordingly. What will be the profit tax for such
arrangement? What will be the tax saving amount by arranging a patent expense?

Triangle (HK) Ltd. Without Patents Payment

Sales $1,000,000
Cost of Goods Sold $800,000
Profits $200,000
Profit Tax @17.5% $35,000

Question 4

X-mas Ltd (X-mas) carries on business in Hong Kong as a manufacturer and trader of toys.
During the year ended 31 March 2019, X-mas incurred a royalty expense of $400,000 in respect
of the trademark ‘TnMe’. ‘TnMe’ is owned by a US incorporated company, Toys-n-Me Inc, and
has been developed by its in-house research team.
Under the trademark license agreement, X-mas is granted the right to use ‘TnMe’ in its
manufacturing process in Mainland China. All of these manufactured products are then sold by
X-mas in Hong Kong, and all the profits arising from their sale are returned as taxable profits by
X-mas for Hong Kong tax purposes. The royalty cost for the use of the trademark is payable to
Toys-n-Me at the rate of 1% of the gross sales of the products bearing the trademark. Toys-n-Me
Inc does not carry on a business in Hong Kong and has no relationship to X-mas, except for the
trademark licence agreement.

Required:
(a) Discuss whether or not Toys-n-Me Inc will be subject to tax in Hong Kong in respect of the
income received from X-mas Ltd.

(b) Assuming that Toys-n-Me Inc is subject to tax in Hong Kong, calculate its estimated profits
tax liability for the year of assessment 2018/19.