Summer Ltd (SUMMER), a Hong Kong incorporated company, carries on trading business in Hong Kong in womens T-shirts under the brand-name Superwoman. SUMMERs sole shareholder is JAPAN Ltd (JAPAN), a company incorporated in Japan that does not carry on business in Hong Kong. SUMMER imports products from Japan and sells them in its retail outlets in Hong Kong. Below are the detailed financial results for SUMMER for the year ended 31 March 2020:

Required: (a) Determine the profits tax liabilities for SUMMER for the year ended 31 March 2020. (Ignore provisional tax and any tax waiver or tax reductions in your calculation. Assume the taxpayer would be qualified for the 2-tiered profits tax rates.) (12 marks) (b) Explain your treatment of the interest deductibility for note (6) above in respect of borrowing from JAPAN. (13 marks)

Notes: (1) Interest income included the following items: S 320,000 18,000 Interest on HK dollar deposit with a bank in Hong Kong Interest on YEN deposit with a bank in Hong Kong Interest on a HKS loan made to an individual director (the loan amount was remitted to the director's bank account in Japan) Interest on a staff loan in Hong Kong 31,000 52,000 Total per accounts 421,000 (2) Investment income included the following items: S Dividends from Hong Kong listed shares Dividends from Japan listed shares Rental Income Exchange gain (realized) from the settlement of accounts payables 150,000 105,000 600,000 80,000 Total per accounts 935,000 (3) The company contributes 20% of salary to each employee's annual remuneration, (4) During the previous year (i.e. year of assessment 2018/19), a special contribution of $250,000 was paid into the pension fund. (5) Legal and professional fees comprise: Audit and tax filing fees Tax penalty for late filing 20,000 7,000 Total per accounts 27,000 (6) Interest expense For a loan from JAPAN exclusively for purchase of trading stocks of "Super-women" brand. For overdraft interest of HSBC in Hong Kong 34,500 17,500 52,000 (7) Donation for the year: Cash donation to Community Chest Gift donation to Red Cross S 250,000 8,000 258,000 (8) Capital Expenditure and Depreciation: The depreciation allowance for the year agreed with Inland Revenue Department was $250,300 Required: (a) Determine the profits tax liabilities for SUMMER for the year ended 31 March 2020. (Ignore provisional tax and any tax waiver or tax reductions in your calculation. Assume the taxpayer would be qualified for the 2-tiered profits tax rates.) (12 marks) (b) Explain your treatment of the interest deductibility for note (6) above in respect of borrowing from JAPAN (13 marks) Summer Ltd (SUMMER), a Hong Kong incorporated company, carries on trading business in Hong Kong in women's T-shirts under the brand-name "Superwoman'. SUMMER's sole shareholder is JAPAN Ltd (JAPAN), a company incorporated in Japan that does not carry on business in Hong Kong. SUMMER imports products from Japan and sells them in its retail outlets in Hong Kong. Below are the detailed financial results for SUMMER for the year ended 31 March 2020: Notes Sales Cost of goods sold 21,030,000 (8,154,000) 12,876,000 Gross profit Interest income Investment income 421,000 935,000 2 1,356,000 14,232,000 1,275,000 142,500 2,190,000 438,000 4 300,000 450,000 Directors' remuneration Salaries tax paid for directors Salaries and wages Regular contribution to a registered pension fund Special contribution to a registered pension fund as required by the actuary Refurbishment for retail stores Refurbishment for the company's director's residence Selling and advertising expenses Office rent and rates Legal and professional fees Interest expenses Donation Depreciation Property Tax paid Office consumables 5 6 100,000 600,000 3,000,000 27,000 52,000 258,000 175,000 81,000 12,000 7 8 (9,100,500) Profit for the year 5,131,500 Notes: (1) Interest income included the following items: S 320,000 18,000 Interest on HK dollar deposit with a bank in Hong Kong Interest on YEN deposit with a bank in Hong Kong Interest on a HKS loan made to an individual director (the loan amount was remitted to the director's bank account in Japan) Interest on a staff loan in Hong Kong 31,000 52,000 Total per accounts 421,000 (2) Investment income included the following items: S Dividends from Hong Kong listed shares Dividends from Japan listed shares Rental Income Exchange gain (realized) from the settlement of accounts payables 150,000 105,000 600,000 80,000 Total per accounts 935,000 (3) The company contributes 20% of salary to each employee's annual remuneration, (4) During the previous year (i.e. year of assessment 2018/19), a special contribution of $250,000 was paid into the pension fund. (5) Legal and professional fees comprise: Audit and tax filing fees Tax penalty for late filing 20,000 7,000 Total per accounts 27,000 (6) Interest expense For a loan from JAPAN exclusively for purchase of trading stocks of "Super-women" brand. For overdraft interest of HSBC in Hong Kong 34,500 17,500 52,000 (7) Donation for the year: Cash donation to Community Chest Gift donation to Red Cross S 250,000 8,000 258,000 (8) Capital Expenditure and Depreciation: The depreciation allowance for the year agreed with Inland Revenue Department was $250,300 Required: (a) Determine the profits tax liabilities for SUMMER for the year ended 31 March 2020. (Ignore provisional tax and any tax waiver or tax reductions in your calculation. Assume the taxpayer would be qualified for the 2-tiered profits tax rates.) (12 marks) (b) Explain your treatment of the interest deductibility for note (6) above in respect of borrowing from JAPAN (13 marks) Summer Ltd (SUMMER), a Hong Kong incorporated company, carries on trading business in Hong Kong in women's T-shirts under the brand-name "Superwoman'. SUMMER's sole shareholder is JAPAN Ltd (JAPAN), a company incorporated in Japan that does not carry on business in Hong Kong. SUMMER imports products from Japan and sells them in its retail outlets in Hong Kong. Below are the detailed financial results for SUMMER for the year ended 31 March 2020: Notes Sales Cost of goods sold 21,030,000 (8,154,000) 12,876,000 Gross profit Interest income Investment income 421,000 935,000 2 1,356,000 14,232,000 1,275,000 142,500 2,190,000 438,000 4 300,000 450,000 Directors' remuneration Salaries tax paid for directors Salaries and wages Regular contribution to a registered pension fund Special contribution to a registered pension fund as required by the actuary Refurbishment for retail stores Refurbishment for the company's director's residence Selling and advertising expenses Office rent and rates Legal and professional fees Interest expenses Donation Depreciation Property Tax paid Office consumables 5 6 100,000 600,000 3,000,000 27,000 52,000 258,000 175,000 81,000 12,000 7 8 (9,100,500) Profit for the year 5,131,500