Assignment File 1

Assignment 2

Due date: 31 December 2013

Important note

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.

(7 marks)

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.

(16 marks)

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.

(14 marks)