ACCT 4410 Taxation

Preparation Stage – get ready to master the subject matters

Key areas: Taxation, relevant topics, learning approach

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 ACCT 4410 Taxation
Preparation Stage – get ready to master the subject matters

Key areas & page reference to prescribed textbook

Chapter 1

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 Textbook page reference
• Learning approach (iii – iv)

• Source of tax law (3 – 4)

• Summary of authority of sources of law (4 – 8

• Characteristics of HK taxation system (8 – 9)

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 Textbook page reference
• Essence of salaries tax (10 – 12)

• Essence of profits tax (12)

• Essence of property tax (12 – 13)

• Essence of personal assessment (13)

• Essence of stamp duty (14 – 16)

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 ACCT 4410 Taxation
Preparation Stage – get ready to master the subject matters

Agenda

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Agenda How to learn tax Tax & Business Conclusion
 Agenda
1. How to learn taxation for ACCT 4410 purpose?
a. What is taxation?
b. Core skills to master the subject matters
c. Sources of tax (revenue) law & the authority

2. What is the relationship between taxation & commercial

activities?
a. Types of commercial activities
b. Categories of tax
c. Key characteristics of HK taxation
d. Essence of different direct taxes & indirect tax

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Agenda How to learn tax Tax & Business Conclusion
 ACCT 4410 Taxation
Preparation Stage – get ready to master the subject matters

1. How to learn taxation for ACCT 4410 purpose?

a. What is taxation?
b. Core skills to master the subject matters
c. Sources of tax (revenue) law & the authority

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Agenda How to learn tax Tax & Business Conclusion
 1. How to learn taxation
a. What is taxation?
i. Public revenue
ii. Fiscal policy tool – e.g.
• HK tax breaks on profits tax and R&D expenditure;
• China VAT ( 增值稅 ) reform, fully replaced BT in 2016
• Japan increased consumption tax to 10% (eff. 1 Oct 2019)
• Australia GST 10% on sales of goods to its consumers by non-resident (NR) e-
Commerce companies (e.g., Netflix; eBay; AWS etc.)

b. Core skills involved?

i. Numerical – tax liabilities from tax computation (compliance, i.e., tax reporting)
ii. Analytical – assess tax exposure & often present argument(s) to support a tax
position (advisory & tax planning, i.e., how to manage the tax position)
iii. Research – when there is no precedent to follow
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Agenda How to learn tax Tax & Business Conclusion
 1. How to learn taxation
c. Authority of tax law & reference

i. Legislation – the statute Highest authority

ii. Case law – judicial precedence Legally binding

iii. Board of review cases

Not legally binding; all
iv. Practice notes serve as a reference only

v. Advance ruling cases

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Agenda How to learn tax Tax & Business Conclusion
 ACCT 4410 Taxation
Preparation Stage – get ready to master the subject matters

2. What is the relationship between taxation & commercial activities?

a. Types of commercial activities
b. Types of taxes
c. Key characteristics of HK taxation
d. Essence of different direct taxes & indirect tax

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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
a. Types of commercial transactions

i. Operating (income taxable; expenses deductible)

• Manufacturing; trading; provision of services
ii. Investing (related expense deductible?; tax implications on subsequent
disposal)
• Acquisition of long-lived assets; share investment; merger & acquisition
iii. Financing (related expenses deductible?)
• Borrowing; issuing bonds; shares transactions
iv. Recruitment and employment (salaries tax issues)
• Remunerations; incentive schemes; special payments; treatment of expenses
• Income taxable or not to employees; employees’ expense deductible?

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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
b. Types of taxes – a discussion of tax base

i. Turnover taxes
• Revenue
• Profit or loss largely irrelevant
ii. Income taxes
• Assessable profit, i.e., adjusted from net profit per book
• Taxable income less allowable deductions
iii. Other taxes or duties – vary according to its own tax base, e.g.,
• air passenger departure tax – on individual ($120 per person);
• stamp duty – on documents connected with lease, transfer of immovable property in
Hong Kong; & the sale of HK shares;
• first registration tax – on first registration of a motor vehicles, on the basis of the
published retail price of the vehicle
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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
c. Key characteristics of HK tax

i. Schedular tax system

• Property tax, salaries tax & profits tax separately assessed under the law
• Each kind of tax bears its own features & tax rates
• No tax consolidation

ii. Territorial source principle

• Income tax is imposed on income with a HK source
• Place of incorporation; residence are not relevant

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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
c. Key characteristics of HK tax (continued)

iii. Absence of capital gain tax

• Profit made from sale of capital asset is exempt from HK profits tax; while
capital loss is not allowable
• Motive or intention of asset acquisition matters
• It’s difficult to prove one’s intention

iv. No dividend tax

• No tax imposed on dividend income payable to HK resident or non-resident
persons

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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
c. Key characteristics of HK tax (continued)

v. Depreciation allowances on plant & machinery (P&M)

• Generous depreciation rates for tax purpose
• Initial allowance 60%; annual allowances: 10%; 20% or 30% depends on types of
P&M
• Special deductions of 100% in the year of acquisition, e.g., prescribed fixed assets,
environmental protection facilities

vi. Enhanced tax deduction on R&D (eff. 1 April 2018)

• “super deductions” on qualified R&D expenditure
• “Type B” – mainly natural & applied science: 3X for the first $2m; and 2X for the
remaining
• “Type A” – not “Type B”: 1X of R&D expenditure
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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
c. Key characteristics of HK tax (continued)

vii. Taxation to certain non-residents (NR) with income derived from HK

• Deemed 30% of the sum received by or accrued to the NR concerning the use or
right to use certain intellectual properties (IP) in or outside HK
• Consignment income – not more than 1% on the goods sold
• NR entertainers or sportsperson performing in HK – deemed 2/3 of gross
income

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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
c. Key characteristics of HK tax (continued)

viii. OECD BEPS Action Plans

• Transfer pricing rule 1: arm’s length principle (eff. 2018/19)
• Transfer pricing rule 2: separate enterprises principle for allocating profit/loss to
a PE of a non-Hong Kong resident person (eff. 2019/20)
• Country-by-country (CbC) reporting
• Income from intellectual property – s.15F (eff. 2019/20) on DEMPE function
considerations

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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
d. Essence of direct taxes & indirect tax

i. Salaries tax
• On individuals
• HK source income from employment, office & pension
• Personal allowances & concessionary deductions available; while progressive tax rates applied

ii. Profits tax

• On persons who carry on a trade, a business or a profession in HK
• Has a HK source income from that trade, business or profession
• Capital gains are excluded from profits tax
• Corporate tax rate: 16.5%; tax rate of unincorporated business: 15%
• Effective 1 April 2018, profits tax rate for the first $2M of assessable profits will be cut by
half (8.25% for corporate and 7.5% for sole-owner / partnership) – the two-tiered tax rates
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Agenda How to learn tax Tax & Business Conclusion
2. Relation between tax & commercial transaction
d. Essence of direct taxes & indirect tax (continued)

iii. Property tax

• On owner of immovable property situated in HK
• Has income accrued therefrom
• At standard rate: 15%

iv. Stamp duty (indirect tax)

• A duty (tax) levied on documents
• Regarding purchase & sale; lease of immovable property situated in HK
• Purchase & sale of HK stock
• Ad valorem and/or fixed duty rates

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Agenda How to learn tax Tax & Business Conclusion
 ACCT 4410 Taxation
Preparation Stage – get ready to master the subject matters

Conclusion & summary

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Agenda How to learn tax Tax & Business Conclusion
 Conclusion & summary
a. Taxation is a source of public (government) revenue; also a fiscal tool to
achieve fiscal objectives, e.g., special deductions to promote certain capital
expenditure, special stamp duty, buyers’ stamp duty to curb speculation on
property market

b. Taxation is a branch of legal study (revenue law). Always keep in mind of

sources of tax law, and the authority of each of them

c. Taxation never exists in a vacuum. It often comes with commercial

transactions.

d. Appreciate how HK taxation system gives incentives and/or disincentives to

investment
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Agenda How to learn tax Tax & Business Conclusion