AC 4080 Contemporary Issues in Accounting

1
AC 4080Contemporary Issues in Accounting

• Taxation of E-commerce in Hong Kong

2
2001-2002 Budget

• Operating Statement Forecast ( General Revenue
  Account )
• 2001-02 2002-03
  2003-04 2004-05
• m m m
  m
• Revenue 196,990 215,630 232,070
  249,750
• Less
• Expenditure 210,930 222,880
  236,520 252,850
• ---------- ----------
  ----------- ----------
• (Deficit) for the year (13,940) (7,250)
  (4,450) (3,100)
  

3
Definition

• IRO - S.14
• A person carries on a trade, a profession or a
  business in Hong Kong,
• There are profits arising in or derived from such
  a trade, a profession or a business, and
• The profits must be arising in or derived in Hong
  Kong.
• Trading within in Hong Kong ( Taxable )
• Trading with Hong Kong ( non-taxable )
• Tax liability of E-transactions
• Is the party doing business in Hong Kong ? ( The
  Doing Business Question )
• Is the income derived by the company sourced in
  Hong Kong ? ( The source question )

4
The Doing Business question

• IRO S.2 - Trade as including every trade and
  manufacture and concern in the nature of trade.
  It usually relies on the six badges of trade
• 1.) Subject matter of realization
• 2.) Length of period of ownership
• 3.) Frequency of similar transactions carried out
  by the taxpayer
• 4.) Supplementary work done on the asset disposed
• 5.) Circumstances leading to the disposal and
• 6.) Profit-seeking motive

5
OECD has a definition on PE

• The OECD (Organization for Economic Co-operation
  and Development) Tax convention on Article 5 ( 22
  Dec.,2000 )
• In electronic commerce operations of computer
  equipment in a country could constitute a
  permanent establishment ( Para. 42.1, page 5 )
  Which may be set up at a location so as to
  constitute a PE under certain circumstance, and
  the data and software which is used by, or stored
  on, that equipment ( Para. 42.2. page 5 )

6
IRD point of view

• Web-site is treated as a PE
• Who is the Web-site belonging to ?
• Is it the foreign trader or the Internet Service
  Provider ?
• How much trading transaction is attributable to
  the activities conducted by the Web-site ?
• How much activities of the foreign trader in its
  own country ?

7
The Source question

• Departmental Interpretation Practice Notes
  (DIPN) No.21 show that the source of trading
  profits
• The place where the contract of purchase is
  negotiated and concluded
• The place where the contract of sales is
  negotiated and concluded
• Whether purchase order are receive in or placed
  from Hong Kong and whether sales orders are
  received in or placed from Hong Kong
• Whether goods are procured from Hong Kong
  suppliers and whether goods are sold to Hong Kong
  customers.

8
Internet trading transactions

• Legal point of view that a contract is generally
  concluded at the place where the acceptance is
  communicated to the offeror.
• Case 1
• Homepage (foreign supplier) made an offer to sell
  ? HK customer ( accept the offer )? Foreign
  supplier
• (ie. The Foreign supplier is the offeror hence
  the acceptance would be received by the foreign
  supplier outside Hong Kong.)
• Case 2
• Homepage (foreign supplier) made an invitation to
  treat ? HK customer made an offer to the foreign
  supplier on the homepage ? Foreign supplier
  (accept the offer)
• (ie. The HK customer would be the offeror hence
  the acceptance would be received by the Hong Kong
  customer in Hong Kong.)

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Other tax issues - manufacturers

• For manufacturer shifting their manufacturing
  operations outside Hong Kong such as China.
• In accordance with IRDs practice, usually tax on
  5050 basis on profit.
• For the use of the Internet, most of the
  supporting functions can now be carried out
  outside HK. As a result, two issues are to be
  considered
• Transfer pricing
• Source issues

10
Problems and Solutions of Taxation

• Problems
• Potential for double taxation Internet may be
  included many countries have different tax
  treatment.
• Easy tax avoidance Internet easy to make
  transaction outside Hong Kong and use the
  transfer pricing to reduce tax liabilities.
• Administrative Cost It is very costly to
  investigate the Internet transactions unless the
  company can disclose the relevant transactions
  voluntary.

• Solutions
• IRD should use Double Taxation Relief ie. Tax
  Credit S.49 50 Exclusion of income
  already taxed by other jurisdiction S.8(1A)(c)
  and Foreign tax paid as a deductible expenses
  S.16(1)(c) .
• IRD should use IRO S.61 and S.61A to against the
  tax avoidance. For the transfer pricing that S.20
  should be used.
• IRD has been issued new format Profit Tax Return
  to collect the E-commerce transactions started
  from last year.

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Problems and Solutions of Taxation ( continue )

• Problems
• Non neutral If IRD can not determine the
  Internet transaction taxable or not that it is
  very unfair for the company is not dealing with
  the Internet transactions.
• Legal Aspect Contract concluded is the main
  factor to determine the source of profit.

• Solutions
• IRD should consider the fair basis to every
  individual / company to determine the tax
  liability for the Internet transaction.
• For the above Case 1 and Case 2 that the
  acceptance is received by the offeror is the
  place of the contract is concluded.