SECTION A – CASE QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation and
appropriate presentation of the answers.

CASE

ABC Limited (“ABC”) is a trading company incorporated in Hong Kong in the year 2012.
To facilitate its trading business, ABC has set up a representative office (“RO”)
in mainland China (“the Mainland”) to provide sourcing and marketing services.
All the income derived by ABC is classified as onshore income and assessable to profits tax
in Hong Kong. ABC closes its accounts on 31 December annually.

New subsidiary

ABC intends to set up a subsidiary (“the Subsidiary”) in the Mainland to take up the local
sourcing and marketing services during the year 2018. In return, ABC will pay the
Subsidiary a fee for the services provided.

To finance the daily operation of the Subsidiary, ABC prepares to borrow a loan from a bank
in Hong Kong and on-lend the money to the Subsidiary. ABC considers charging the
Subsidiary interest income at the same interest rate as that charged by the bank.

New line of business

ABC is also considering expanding its business by introducing a new line of business,
organising cruises, starting from 1 January 2019. It considers purchasing a few ships and
having them registered in Hong Kong. It also considers chartering a few more ships that are
not registered in Hong Kong from other ship-owners. Its plan is that all the cruises it
organises will depart from the Kai Tak Cruise Terminal to overseas countries.

Mr Chan

Mr Chan had been one of the shareholders and directors of ABC since incorporation and was
responsible for looking after the day-to-day operation of the RO. No separate employment
agreement was entered into between Mr Chan and ABC. Mr Chan was stationed full-time in
the Mainland and only returned to Hong Kong during public holidays. Due to a dispute with
other shareholders, he sold all his shares in ABC to Mr Wong and resigned as director on
30 June 2016, but continued to render service up to 31 December 2016. He received a
lump sum payment of HK$10,000,000 from ABC on 31 December 2016 as a reward for the
services rendered by him during the year 2016.

Module D (December 2018 Session) Page 1 of 8

Mr Wong

Mr Wong was appointed as the director of ABC on 30 June 2016. On 1 October 2016,
he purchased a property, being Property A, and let it out to earn rental income.
As advised by the accountant, the rental income of Property A was included in the accounts
of ABC. In regard to ABC, it owns a property in Hong Kong, being Property B, which has
been let out for years. Details of the leases of Property A and Property B are as follows:

Property A Property B
Lease terms 1 January 2017 – 31 December 2017 1 January 2016 – 31 March 2018
Rent HK$30,000 per month HK$20,000 per month
Rates HK$4,500 per quarter# HK$3,000 per quarter*
Management fee HK$3,500 per month# HK$2,000 per month#

* payable by tenant
#
payable by landlord

Module D (December 2018 Session) Page 2 of 8

Question 1 (14 marks – approximately 25 minutes)

During the year ended 31 December 2016, the RO was required to pay various types of taxes
in the Mainland as follows:

(i) Corporate Income Tax (“CIT”) of RMB 200,000

(ii) Value Added Tax (“VAT”) of RMB 50,000
(iii) Individual Income Tax (“IIT”) of RMB 30,000 in respect of a manager of the RO
(borne by the RO)

Required:

(a) Advise, with reference to the relevant provisions of the Inland Revenue
Ordinance (“IRO”), whether ABC is entitled to claim deduction in respect of each
type of tax listed above when computing its assessable profits for the year of
assessment 2016/17.
(8 marks)

(b) In the tax computation filed by ABC together with the profits tax return for the
year of assessment 2016/17, it was reported that the adjusted profits, after
deducting the above taxes, were HK$20,000,000 for the year ended
31 December 2016. Compute the amount of assessable profits of ABC,
the amount of tax paid allowable as tax credit and the net amount of tax payable
by ABC for the year of assessment 2016/17.

For the purpose of computation,

- Exchange rate is HK$100 = RMB 80
- CIT rate = 25%
- Assume that no tax reduction is available for the year of assessment 2016/17
(6 marks)

Question 2 (5 marks – approximately 9 minutes)

ABC wants to obtain certainty that the quantum of the service fee (which will be an expense
of ABC and an income of the Subsidiary) will be acceptable to both the
Inland Revenue Department (“IRD”) and the Mainland tax authority. It is advised by its
accountant to apply for a bilateral Advance Pricing Arrangement (“BAPA”) with the IRD.

Required:

(a) State and describe the principle that ABC should follow when deciding the
quantum of the service fee paid to the Subsidiary.
(2 marks)

(b) State the cost and benefit of a BAPA.

(3 marks)

Module D (December 2018 Session) Page 3 of 8

Question 3 (6 marks – approximately 11 minutes)

Analyse, with reference to the relevant legal principles and provisions of the IRO,
the tax implications on ABC in Hong Kong in respect of the loan arrangement made
with the bank and the Subsidiary.
(6 marks)

Question 4 (9 marks – approximately 16 minutes)

(a) Analyse, with reference to the relevant provisions of the IRO, the chargeability of
the income derived by ABC from the new shipping business as ship-owner and
charterer.
(3 marks)

(b) Advise, with reference to the relevant provisions of the IRO, how the assessable
profits of ABC derived from the shipping business should be ascertained.
(6 marks)

Question 5 (7 marks – approximately 13 minutes)

Analyse, with reference to the relevant provisions of the IRO, whether the sum of
HK$10,000,000 received by Mr Chan for the year ended 31 December 2016 should be
subject to salaries tax in Hong Kong.

Note: Assume that the sum is sourced in Hong Kong

(7 marks)

Question 6 (9 marks – approximately 16 minutes)

(a) Analyse, with reference to the relevant provisions of the IRO, the chargeability of
the rental income derived by Mr Wong and ABC from Property A and Property B
respectively.
(6 marks)

(b) Compute the net assessable value of Property A and Property B for the year of
assessment 2016/17.
(3 marks)

* * * * * * * *
Module D (December 2018 Session) Page 4 of 8
End of Section A
SECTION B – ESSAY / SHORT QUESTIONS (Total: 50 marks)

Answer ALL of the following questions. Marks will be awarded for logical argumentation and
appropriate presentation of the answers.

Question 7 (20 marks – approximately 36 minutes)

SK (Asia) Limited (“SK”) provides services in inspection, verification, testing and certification.
For the three accounting years ended 31 March 2018, SK has recorded the following fixed
assets movements:

Year ended 31 March 2016

Additions
 Office furniture and fixtures of HK$250,000 (Settled by cash)
 Office equipment A of HK$600,000 (The equipment was eligible for 20% annual
allowance (“A.A.”) and was acquired under a hire-purchase agreement with initial
down payment of HK$210,000, and the balance was repayable in ten instalments in
the amount of HK$40,000 for each month commencing from 1 August 2015)
 Office equipment B of HK$700,000 (The equipment was eligible for 20% A.A. and was
acquired under another hire-purchase agreement with initial down payment of
HK$115,000, and the balance was repayable in 30 instalments in the amount of
HK$20,000 for each month commencing from 1 January 2016)

Other tax information (for year of assessment 2015/16)

 Tax written down value brought forward: HK$296,400 (20% pool), HK$105,730
(30% pool), HK$320,000 (Commercial building allowance)
 Ranking cost brought forward: HK$400,000 (Commercial building allowance)

Year ended 31 March 2017

Disposal
 Furniture and fixtures with sale proceeds (amounts all below original cost) of
HK$85,000 (all assets previously ranked into 20% pool)
 A motor vehicle (the only asset in 30% pool) with sale proceed (below original cost) of
HK$30,000

Year ended 31 March 2018

Additions
 Decoration of SK’s existing office premises in Causeway Bay of HK$230,000
 Decoration of SK’s existing directors’ quarters in Wanchai of HK$145,000
 Decoration of SK’s newly leased premises in Science Park, the New Territories of
HK$380,000 (The premises was used by SK for the purpose of research and
development in connection with its business)

Required:

Compute (i) the deductible expenses, and (ii) the allowances on capital expenditures
incurred for years of assessment 2015/16 to 2017/18 pursuant to the fixed assets
movements of SK.
(20 marks)

Module D (December 2018 Session) Page 6 of 8

Question 8 (11 marks – approximately 20 minutes)

Ms Keung was a finance manager of ZG Limited (“ZG”), a listed company carrying on

business in Hong Kong. On 1 April 2016, ZG granted a share option to Ms Keung for
subscribing to 150,000 shares at the exercise price of HK$1 per share. The option was
granted to her at nil consideration.

As the relevant share option agreement did not have any restriction clause prohibiting her
from assigning any portion of the option to other parties, she assigned 1/3 of the whole option
to her brother Mr Keung on 30 September 2016 at the consideration of HK$85,000.
Due to the realignment of capital structure in mid-October 2017, ZG invited Ms Keung to
release her remaining option. Finally Ms Keung agreed and released 1/2 of her remaining
option back to ZG at the consideration of HK$350,000 on 31 October 2017.

Notwithstanding that Ms Keung resigned and left ZG on 31 December 2017, she exercised
her remaining share option on 31 January 2018 pursuant to the share option agreement, and
disposed of the shares on 31 March 2018. It was further noted that Mr Keung also
exercised his share option previously assigned from Ms Keung and disposed of the shares
entirely on the same respective dates.

The share prices of ZG on the specific dates up to 31 March 2018 were as follows:-

1 30 31 31 31 31
Date April September October December January March
2016 2016 2017 2017 2018 2018
Price
(HK$) 4 4 5 6 5 7

Required:

Discuss the salaries tax implications and compute, where applicable, the assessable
income of Ms Keung attributable from the abovesaid share option for the relevant
years of assessment.
(11 marks)

Question 9 (3 marks – approximately 5 minutes)

Mr Lin is a Mainland resident and currently operates a small scale manufacturing and sales
business in the Mainland on his own. Specifically, the business produces and sells
handmade jewellery items for the Mainland local market. Recently, in celebrating his
granddaughter’s commencement of her new high school year, Mr Lin has invited his
granddaughter to choose a valuable jewellery item from his business stock as a gift.

Required:

Analyse the China Value Added Tax implications, if any, to Mr Lin’s business with
respect to the above gift arrangement in the contexts of distribution of
self-manufactured goods.
(3 marks)
Module D (December 2018 Session) Page 7 of 8
Question 10 (16 marks – approximately 29 minutes)

Mr Chan is the sole proprietor of CN Chan & Co, a small scale audit firm providing audit and
tax filing services for small and medium enterprises. Earlier this morning he has been
approached by two of his clients Mr A and Mrs B, and incidentally both of them also requested
stamp duty advice. Details of their issues are as follows:

Case A

Mr A is a Hong Kong permanent resident (“HKPR”) and does not own any residential property
in Hong Kong. He would acquire a residential property in Kowloon (“Property A”, currently
being held by an independent owner for more than five years) together with one of his family
members as joint owners, either with his wife (a HKPR and currently holding a residential
property in Hong Kong) or with his mother (a non-HKPR and does not hold any residential
property in Hong Kong). The proposed consideration of the acquisition is HK$7 million and
the amount is in line with Property A’s market value. Mr A would like to know if there is any
difference on the abovesaid alternative joint owners’ arrangements from a stamp duty
perspective.

Case B

Yesterday Mrs B, as a sole purchaser, entered into a sale and purchase agreement for
acquiring a residential property (“Property B”) in New Territories. Property B had been held
by an independent owner for more than five years. Mrs B is a HKPR and did not own any
residential property in Hong Kong when she entered into the above agreement.
Due to family reasons, Mrs B would now like to add her spouse Mr B (a HKPR and currently
holding a residential property in Hong Kong) as the transferees together with herself in the
conveyance on sale (“COS”) for Property B. The consideration of acquiring Property B is
HK$7 million and the amount is also in line with its market value. Mrs B has no idea if the
intended addition of Mr B in the COS as the transferees would have any stamp duty
implications for the acquisition of Property B.

Mr Chan has hesitated to provide the tax advice, as he is not sure if he can legitimately
provide a stamp duty advisory service, and also he has not had such practical experience
hitherto.

Required:

(a) Discuss (i) if CN Chan & Co is eligible to provide the stamp duty advisory service
and (ii) the consideration to be taken into account by Mr Chan before accepting
the engagement.
(5 marks)

(b) Discuss the stamp duty implications as depicted in Case A and Case B
correspondingly (computation of stamp duty liabilities, if any, is NOT required).
(11 marks)
* * * END OF EXAMINATION PAPER * * *
Module D (December 2018 Session) Page 8 of 8