Assignment File 1
Due date: 31 December 2013
You must use word processing software (such as Microsoft Word) to prepare the
TMAs, and submit the TMAs via the Online Learning Environment (OLE). All
assignments must be uploaded to the OLE by the due date.
Failure to upload a TMA in the required format to the OLE may result in the score
of the TMA being adjusted to zero.
According to the University’s policy, no extension of the due date will be allowed
for the final TMA. This policy will be strictly enforced. Any late submission of the
final TMA will result in the score of the TMA being adjusted to zero.
Question 1 (35 marks)
You are an independent tax advisor and one of your clients, Triceratops
Toys Manufacturing Limited, has provided you with the following
Triceratops Toys Manufacturing Limited was incorporated in Hong Kong
in 2002. The company was formed to take over the partnership business
owned by the Cheung brothers, Albert Cheung and Bernard Cheung.
Albert and Bernard each own 40% of the shares of the company and the
remaining 20% of the shares are owned by their sister, Crystal. The
original board of directors consists of the Cheung brothers and their
sister, Crystal. In addition to being directors of the company, Albert and
Bernard are responsible for the running of the company. Albert is the
managing director and is responsible for the sales operations. Bernard
holds the title of finance manager and is in charge of the company’s
finances. Their brother-in-law, Dickson Tang, is employed as the
production manager to oversee the manufacturing operations.
The company has been profitable with an annual turnover of over HK$20
million. The profits of the company have mainly been derived from
exporting toys to overseas countries. The manufacturing operations had
been carried out in Hong Kong until 31 July 2012, when the company
moved its manufacturing operations to mainland China.
The manufacturing operations in China began in August 2012. Although
the manufacturing operations are now in China, the company maintains
its purchase, sales and other administrative functions in Hong Kong.
Materials for production are either purchased in Hong Kong or imported
from overseas. They are stored in Hong Kong until they are required for
production. Then the required materials will be delivered to the factory in
China. Workers for the manufacturing operations are employed in China
except for two supervisors who have been employed by the company in
Hong Kong since 2009. Dickson Tang, as the production manager,
2 ACT B415 Taxation II
supervises the China operations. The production machines were
transferred from Hong Kong. Finished products are shipped to Hong
Kong where they are put into bags and boxes. Usually they are stored in
Hong Kong for one to two weeks before they are loaded into containers
for shipment. The shipping arrangements are made in Hong Kong. Credit
arrangement is made with a Hong Kong bank to finance the working
Being in charge of the manufacturing operations, Dickson and his wife,
Crystal, have lived in China since January 2012. Dickson was given the
responsibility of looking for an appropriate location for the new factory
in China and of arranging the necessary registrations for the company to
operate in China. A Chinese resident, Liu Chang, was appointed as a
director of the company in January 2012, assisting the company to
establish its China operations. A fee of $100,000 was paid to Liu Chang
as remuneration for the year ended 31 March 2012. Because two of the
directors, Crystal Cheung and Liu Chang, lived in China, meetings of the
board of directors have been held in China for ease of administration.
Dickson Tang has been in charge of the China production operations
since July 2012 and seldom returns to Hong Kong. He communicates
with the Hong Kong office via telephone or email. Occasionally he
returns to Hong Kong to report to Albert and was in Hong Kong for 45
days for business purposes and another 20 days for holidays during the
year ended 31 March 2013. His salaries and bonus for the year ended 31
March 2013 amount to $800,000. The company rented a flat in China for
his family to stay in and purchased medical insurance for his family. The
costs to the company of providing him with a flat and medical insurance
were $50,000 and $10,000 respectively.
a Discuss whether Triceratops Toys Manufacturing Limited’s profits
are subject to Hong Kong profits tax for the year of assessment
2012/13. The financial year of Triceratops Toys Manufacturing
Limited ends on 31 March each year. (12 marks)
b Is Dickson Tang liable to salaries tax for the year of assessment
2012/13? Discuss with reference to the relevant tax exemptions and
tax cases where appropriate. (8 marks)
c Assume that Dickson Tang’s income from Triceratops Toys
Manufacturing Limited is fully taxable under Hong Kong salaries tax
for the year of assessment 2012/13, determine his assessable income.
Explain your calculation and treatment of significant items.
d Is Liu Chang liable to Hong Kong salaries tax for the year of
assessment 2011/12? Discuss with reference to the relevant tax
provision and/or tax case where appropriate. (8 marks)
Assignment File 3
Question 2 (25 marks)
a Tax avoidance and tax evasion are two very different concepts.
Compare and contrast the differences between tax avoidance and tax
evasion. Give two examples of each to support your discussion.
b Under the Inland Revenue Ordinance, there are many provisions
targeting anti-avoidance activities. While specific anti-avoidance
provisions tackle specific situations or industries, there are the
general anti-avoidance provisions that have wide application in
different situations. Briefly explain the general anti-avoidance
provisions and cite examples or cases where the general antiavoidance
provisions are applicable. (9 marks)
Question 3 (20 marks)
A Korean Company is considering selling certain electronic gadgets to
Hong Kong in an effort to develop its overseas market. His business
consultant has advised him of the following options from a commercial
• Option 1: Sell the products to a wholesaler in Hong Kong who would
then market the product and sell to the consumers in Hong Kong
• Option 2: Set up a wholly owned subsidiary in Hong Kong, who
would then sell products to consumers in Hong Kong
• Option 3: Set up a branch in Hong Kong for the purpose of selling to
Hong Kong consumers
• Option 4: Engage a consignment agent in Hong Kong to sell the
products through this consignment agent.
In evaluating the options, the directors of this company would like to take
into account the taxation implications of the various options as well and
come to you, a tax consultant, for advice.
Advise the directors as to the Hong Kong profits tax implications in
relation to the taxability of profits of the Korean Company, as well as the
profits accruing to the Hong Kong entity involved. You are not required
to conclude which option is the best option, as the information provided
at this stage is not detailed enough to do a thorough comparison and
Question 4 (20 marks)
For many years Mr Leung has been employed as a sales representative of
a real estate company, Hit and Run Limited (‘HAR’). At all relevant
times, he has paid salaries tax on his earnings at the standard rate. His
earnings consist of a basic salary (which must be repaid if his sales
4 ACT B415 Taxation II
results do not reach a prescribed minimum level) plus commission. His
commission earned over the past two years has been very high. He has a
wife who operates a trading business. The couple has two young children
attending schools in Hong Kong.
Mr Leung has been told that the test of deductibility for outgoings and
expenses for salaries tax purposes is ‘notoriously rigid, narrow and
restrictive.’ Mr Leung thinks that if he were subject to profits tax instead
of salaries tax he would be able to claim many deductions for outgoings
and expenses that are presently not allowable to him for salaries tax
Mr Leung therefore approached the accountant of HAR for advice. The
accountant advised him to resign from his job with the company,
incorporate a new company, Leung Fun Limited (‘LFL’), and arrange for
LFL to enter into a new contract with HAR to provide Mr Leung’s
services as a sales representative. Under this arrangement, LFL would
receive income from HAR and claim against this all allowable expenses.
LFL would employ Mr Leung at a reasonable salary to provide the
agreed sales services on its behalf to HAR.
A few days ago, HAR’s accountant informed Mr Leung that the company
will agree to enter into the proposed arrangement on basically the same
terms as it now employs Mr Leung, but without any obligation to pay any
minimum monthly sum to LFL.
a Evaluate the comment by the accountant of HAR in respect of the
deductibility of expenses and outgoings under Hong Kong salaries
tax and profits tax. (6 marks)
b Explain in detail to Mr Leung whether there is any danger of the
Commissioner challenging the suggested arrangement and the
possible consequences, quoting the relevant sections of the Inland
Revenue Ordinance where appropriate. Further, advise Mr Leung on
what he can do to lessen the chance of the application of the relevant
Inland Revenue Ordinance provisions in a situation like this.