IRD clarifies certain profits tax issues in its annual meeting with the HKICPA

In its 2021 annual meeting with the Hong Kong Institute of Certified Public Accountants (HKICPA), the Inland Revenue Department (IRD) indicated that:

(i) where the server permanent establishment located outside Hong Kong of a Hong Kong resident enterprise forms an essential and significant part of its e-commerce business, then part or all the profits of the enterprise could be regarded as being non-taxable offshore Hong Kong profits; 

(ii) the transfer of trading stock at below market value, whether upon cessation of business or not, would not be subject to tax adjustments under the arm’s length transfer price rules under certain conditions; 

(iii) while taxation based on fair value accounting would not affect the chargeability to tax of a financial instrument held for trading purposes under the source principles, taxpayers would have to predict the onshore-versus-offshore nature of the ultimate profits before such an instrument is sold or realized;

(iv) charter hire income in respect of an ocean-going voyage of a ship that would fall under section 23B of the Inland Revenue Ordinance, and therefore would not be chargeable to tax in Hong Kong, would not then be deemed to be taxable under section 15(1)(o), i.e., section 23B operates to the exclusion of section 15(1)(o); and

(v) genuine businesses established in Hong Kong with a view to enjoying the tax concessions under the preferential tax regimes and the tax treaty network of Hong Kong would be most unlikely to fall foul of the anti-avoidance provisions of the “main purpose test”.

This alert discusses the issues involved.