XYZ Ltd. is a corporation, and carries on a business in Hong Kong as a car part distributor. Car parts are purchased by employees of the company from a manufacturer in a foreign country, shipped to Hong Kong, and sold to various car repair centres in Hong Kong.

Question 1 (30 marks) XYZ Ltd. is a corporation, and carries on a business in Hong Kang as a car part distributor. Car parts are purchased by employees of the company from a manufacturer in a foreign country, shipped to Hong Kone, and sold to various car repair centres in Hong Kong 7. Based on an estimate of historical trends of repayment, the company booked bad debt expense of 1 million for its allowance for doubtful accounts against its receivables. The tax assessor agreed with the company that depreciation allowances should be $700,000 9. The company purchased an electric vehicle to make deliveries. 10 The company paid $20,000,000 in salaries and wages for its employees. Required: During the year ended 31 December 2019, the corporation's income statement contained the following items: A Notes Grass revenue from sale of car parts Cost of goods sold Gross profit on sale of car parts $100,000,000 40,000,000 $60,000,000 B Calculate profits tax liability for XYZ Limited for the year of assessment 2019/20. Ignore provisional profits tax, tax rebates, and foreign taxes. Show and label all intermediate steps for the calculation. (20 marks) Explain in detail the correct tax treatment of the item related to nate 6. Include reference to the relevant code section. (5 marks) Explain in detail how the transactions related to note 1 are treated under the contract effected test, and explain the contract effected test. (5 marks) , . 5 ) 1 Interest income Insurance proceeds 300,000 200,000 $60,500,000 2 3 Question 2 (20 marks) 2 Interest expense Repair expense Building refurbishment Bad debt expense Depreciation expense Purchase of environmentally friendly vehide Salaries and wages Net profits 2,000,000 500,000 5,000,000 1,000,000 800,000 1,500,000 20,000,000 $29,700,000 4 4 5 6 7. 8 9 10 ABC Ltd is a company incorporated in Hong Kong, and carries out business in Hong Kong. Mr. Kim is the head of sales for the company. His employment contract was signed in Hong Kong, and his annual salary of $900,000 is deposited into his Hong Kong bank account. In addition to his salary, he is Eiven an annual bonus of $600,000. As part of his job, Mr. Kim performs services for the company both inside and outside of Hong Kong. During the year ended March 31, 2020, Mr. Kim spent 70 days working in Hong Kong, and the rest of the year he worked in various other countries. Mr. Kirn's wife, Mrs. Kim, lives in Hong Kong and takes care of their twa children, aged 14 and 16. Mrs. Kim does not work. Mr. Kim also supports his father, aged 67, who lives in his house in Hong Kong throughout the year. Mr. Kim contributed $40,000 to his traditional MPF account. In addition to his previously mentioned salary, Mr. Kim received ownership of a car from ABC Ltd. with a fair market value of $40,000. Mr. Kim contributed $20,000 as a donation to the local community chest an approved charity). (Assume voluntary contributions to MPF, if any, are nat paid into a TVC account). Notes 1. Required: Z. 3. These car parts were purchased via contracts negotiated and signed in a foreign country by an employee of the company. The parts were sold with contracts that were negotiated and signed in Hong Kong, to companies that are car repair centres in Hong Kone The company earned this interest from a deposit placed into Hang Seng Bank, a Hong Kong bank An electrical fire darnaged several pieces of equipment. No inventory was damaged. The Insurance reimbursed the company $200,000 for these damages. The company paid $2,000,000 in interest on a loan taken out from HSBC, a Hong Kong bank, which was secured by a personal guarantee of a director of the company. The company spent $500,000 to perform maintenance on its delivery vehicles. The company spent $5,000,000 to refurbish its main warehouse. A calculate salaries tax liability for Mr. Kim for the year of assessment 2019/20. Ignore provisional taxes, tax rebates, and foreign taxes. Show and label all intermediate steps for the calculation. (16 marks) B. Mr. Kim heard that if he had stayed in Hong Kong for less than 60 days, he would have been able to avoid paying Hong Kong tax on his salary. Is this true in Mr. Kim's situation? Explain why or why not? (4 marks) 4. 5. 6. Question 3 (10 marks) 2 Page 3 | Page