Question 3 (13 marks)

Zoo Corporation (Zoo) is a company incorporated and carrying on business in Canada engaging in the trading of shoes. In Hong Kong, Zoo set up a wholly-owned subsidiary named namely Cat Limited (Cat), carrying on shoe-trading business in Hong Kong. On 1 July 2016, Zoo granted Cat a 10-year licence to use Zoos trademark for selling shoes in Hong Kong at a licence fee (the Licence Fee) of HK$8 million per year.

To facilitate its trading business, Cat has set up a representative office (Cat RO) in Shanghai, Peoples Republic of China (PRC). Cat RO was established exclusively for liaison and marketing purpose and did not perform any income-generating activities in the PRC. In respect of the 12 months ended 31 March 2018, the relevant PRC tax bureau has deemed the total taxable profits of Cat RO as equivalent to HK$400,000 and respective total PRC Corporate Income Tax (CIT) equivalent to HK$100,000 (at the rate of 25%), which has also been paid accordingly. Without taking into account any of the above-mentioned PRC-deemed profits and tax payments, the assessable profits of Cat for the year ended 31 March 2018 (i.e. year of assessment 2017/18) have been computed by Cat in the amount of HK$6,000,000.

Required:

(a) Discuss whether and, if so, how Zoo is chargeable to profits tax in respect of the Licence Fee. (4 marks)

(b) With reference to the methods for the elimination of double taxation as specified in the Arrangement between the Mainland of China and the Hong Kong SAR for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,

compute

(i) the tax credit for CIT paid by Cat RO and

(ii) the associated profits tax payable by Cat for the year ended 31 March 2018 after taking into account the tax credit available to Cat (i.e. year of assessment 2017/18). Ignore provisional tax and tax reduction for the year, if any, in your computation. (9 marks)

(Total for Question 3: 13 marks)