TVN Company (TVN) is an independent TV production company incorporated and listed on Hong Kong Stock Exchange. TVN together with its subsidiaries as a group (the Group) is principally engaged in making TV program related media services commissioned by various channels in Asia. The Groups principal source of income are fees and commissions earned from advertising agencies and TV program production houses and the relevant income is treated as onshore in nature and full chargeable to Hong Kong profits tax.

In order to increase the profitability of the group, in January 2019, TVN has recently purchased the broadcasting right and re-production right from ABC Inc. (a company incorporated in the United States of America), for 2 concerts performed in Hong Kong by a famous pop-star. ABC Inc. is a well-known overseas production company which does not have any permanent establishment in Hong Kong. TVN will then license the right of the broadcasting to different broadcasting company in Hong Kong and in overseas.

TVN will establish an R&D division with a team of in-house technicians to self-develop the unique and specialized production skills. The expenditure incurred by the R&D division will include both staff costs and capital expenditure on plant and machinery. TVN also believes that significant profits may be earned from licensing its self-developed specialized production skills in return for a royalty fee and ultimately selling the self-developed production skills via a well-established B2B online trading platform.

Required:

As the tax manager of the firm engaged by TVN group, prepare a report for the management addressing each of the following issues from a Hong Kong tax perspective:

(a) Whether the income earned by ABC Inc. is subject to Hong Kong Profits Tax. (7 marks)

(b) Whether the income earned by TVN from licensing the broadcasting rights to different broadcasting company in Hong Kong and in overseas is taxable. (5 marks)

(c) Discuss the tax implication in respect of the income earned from licensing the self-developed production skills to customers in Hong Kong and in overseas. (5 marks)

Professional marks will be awarded in Question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which the advice is communicated. (3 marks)

(Total for Question 1: 20 marks)