Hong Kong Taxation

ABC Co. (the Company) is incorporated and carrying on a retailing business through various retail in the US and does not maintain any management or control in Hong Kong. To be in line with the groups long-term strategy, the Company is considering expanding into the Hong Kong market. There are two expansion proposals:

Proposal 1: To set up a subsidiary in Hong Kong, which will buy the goods from the Company and sell them in Hong Kong via retail outlets. All transactions are conducted at arms length. Proposal 2: To set up a branch in Hong Kong (HK Branch) to liaise directly with the potential customers in Hong Kong. HK Branch will be responsible to negotiate with customers on the terms of purchase based on a set of prescribed policy from the Company. Customers orders will be accepted and signed by the HK Branch, following which goods will be shipped directly from the US to the buyers in Hong Kong. The Branch will remain as a cost center without making any profits.

Required:

(a) Based on the Inland Revenue Ordinance and Rules, discuss the circumstances in which a non-resident company can be assessable to profits tax in Hong Kong. (6 marks)

(b) For each of the two proposals described, discuss the Hong Kong profits tax implications for ABC Co., including whether ABC Co. would be considered as carrying on business in Hong Kong, and if so, how assessable profits could be determined. (Note: Transfer pricing issue is not required to be discussed.) (8 marks)