Apple Limited was incorporated in Hong Kong in 2009. It was founded and wholly owned by Jacky Chan, a talented game developer. Apple Limited has a financial year end of 30 June, and plans to list on the Stock Exchange of Hong Kong Limited in the coming years.

License arrangement with Berry Corporation

Apple Limited self-develops and owns all the copyrights of the video games it developed. Fighting with Rocky is a popular video game developed by Apple Limited in 2019, which has been featured by a well-known character Rocky.

On 1 January 2020, Apple Limited entered into a license agreement with Berry Corporation, which is a third party Singaporean mobile application developer for distribution of the Fighting with Rocky series.

Under the license agreement, Apple Limited granted Berry Corporation the right to distribute the Fighting with Rocky series exclusively in Singapore for a license period of two years from 1 January 2020 to 31 December 2022.

In return, Apple Limited would receive royalties at a fixed fee of $2 million in each year of the two-year license period. Payments would be settled on an annual basis during the two-year license period.

The royalties are subject to 10% withholding tax in Singapore for which has to be borne by Apple Limited. The withholding tax is applied on the gross amount of royalties received.

Right to use the character Hulk from Cherry Limited

On 1 April 2019, Apple Limited obtained a license from Cherry Limited, a third party in the United States, to use the images of the latters famous character Hulk in Apple Limiteds video game series for a license period of five years from 1 April 2019 to 31 March 2024.

According to terms of the license agreement, Apple Limited was required to make a non-refundable advance payment of $1 million to Cherry Limited on 1 April 2019 (i.e. upon commencement of the license period). The management of Apple Limited estimated that the advance payment would be fully recouped through royalties payable to Cherry Limited within the license period.

The royalties payable by Apple Limited to Cherry Limited is $50 per copy of any game incorporating "Hulk sold in each year during the license period. During the period from 1 April 2019 to 31 March 2020, 10,000 copies of video games incorporating Hulk were sold.

Question 4 (15 marks approximately 36 minutes)

1. (a) Analyze the taxability of the royalties paid by Berry Corporation to Apple Limited under Hong Kong profits tax.

2. (b) Discuss the deductibility of the Singaporean withholding tax paid by Apple Limited for Hong Kong profits tax purposes. No comprehensive double tax arrangements between Hong Kong and Singapore is in place at the moment.