BUSI 0018 Hong Kong Taxation

Tutorial Questions
Unit 9 Profits Tax (3)

Question 21
Mr. Lee has been carrying on a business in Hong Kong as a distributor of microcomputers for many years. His operating results for the year ended 31 December 2009
were as follows:
$
Gross Profit
Interest received (Note 1)
Commission received (Note 2)
Profit on disposal of fixed asset
Sundry income (Note 3)
Less: Expenses
Salaries and bonuses to staff
Rent and rates
Telephone, telex and postage
Entertainment and travelling (Note 4)
Legal and professional fee (Note 5)
Interest expenses (Note 6)
Repairs and maintenance (Note 7)
Insurance (Note 8)
Salaries to proprietor
Provision for bad debts (Note 9)
Depreciation for fixed assets
Donations (Note 10)
Miscellaneous expenses (Note 11)

$
2,600,000
80,000
55,000
15,000
25,000
2,775,000

550,000
350,000
21,000
100,000
65,000
105,000
162,000
(23,000)
162,000
30,000
85,000
6,000
8,000
1,621,000
1,154,000

Net profit

Additional information:
(1) Interest received from
(i) US$ deposits placed with a bank in Singapore
(ii) Euro$ fixed deposits with a local bank
(iii) Debentures registered in US
(iv) HK$ deposits placed with a local bank (deposits were
used to secure for bank borrowings and interest expenses
on the borrowings are deductible see note 6)

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$40,000
16,000
8,000

16,000
$80,000

(2) Commission received from a company in Malaysia for the sale of certain products.
Sale contracts were negotiated and concluded by Mr. Lees staff in Malaysia.

(3) Sundry Income

Dividend from shares investment
Sale of scrap stock to staff

$10,000
15,000
25,000

(4) Entertainment and travelling

Air tickets and hotel charges for sales managers trip to
attend an exhibition in US
Entertainment of local customers
Travelling expenses in respect of commission income
mentioned in note (2) above

(5) Legal and professional fee

Solicitor fees and stamp duty for the purchase
of a new office
Solicitor fees for litigation to recover debts
from customers
staff (loan to staff)
Registration of trade mark in HK

(6) Interest expenses

Interest on bank overdrafts (secured by a
personal guarantee given by Mr. Lee)
Interest paid to Mr. Lee for capital injection
Interest paid to a local bank for a mortgage to
finance the purchase of the new office
Interest on bank borrowings secured by the
bank deposits as mentioned in (1)(iv) above

(7) Repairs and maintenance

Decoration of new office
Repairs and maintenance of office equipment

$60,000
30,000
10,000
100,000

$45,000

12,000
3,000
5,000
65,000

$8,000
25,000
42,000
30,000
105,000

$150,000
12,000
162,000

(8) Insurance account included a credit entry for a compensation of $28,000 received
from the insurance company for the loss of stock in a fire. The cost of the stock
loss of $32,000 was written off in the trading account. Mr. Lee paid an annual
insurance premium amounting to $5,000.

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(9) Provision for bad debts

General Provision b/f
Bad debts recovered (previously allowed for tax
deduction)
Specific provision for bad debts - trade debts
- staff loans
Bad debts written off - loans to customers (the
loans were not trade debts)
General Provision c/f
Charged to profit and loss accounts

(10) Donations
Paid to Tung Wah Group of Hospitals
Paid to a hospital in Shenzhen, PRC

$(30,000)
(7,000)
12,000
5,000
10,000
40,000
30,000

$1,000
5,000
6,000

(11) Miscellaneous expenses

Including office expenses of $6,000 and government traffic fines of $2,000.

(12) Depreciation allowance for fixed assets for the year of assessment 2009/10 as agreed
with the IRD is $92,000.

Required:
(a)

Compute the profits tax liability of Mr. Lee in respect of his sole proprietorship
business for the year of assessment 2009/10, assuming that he does not elect for
personal assessment for the year.

(b)

Explain the tax treatment you have accorded to the issues arising in the above
notes.

Check figure for Question 21:

Assessable profit: $1,430,000

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Question 22
Part I
(a)
Referring to Question 18 [Part II (a)], discuss whether or not the sum paid by the
Hong Kong television company is deductible for HK profits tax purposes.
(b)

Referring to Question 18 [Part II (c)], assuming that the IRD has agreed that the
manufacturing company is subject to HK profits tax in respect of 50% of its profits
derived from the sale of its products; discuss the deductibility of the cost incurred
in the PRC activities in terms of :
(i) cost of machinery;
(ii) cost of staff who regularly visited the PRC factory; and
(iii) cost of raw materials used in the PRC manufacturing.

Question 18 (Part II)

(a) Sums received by a foreign film production company for allowing a Hong
Kong television company to show in Hong Kong certain designated films it
produced offshore Hong Kong. The film production company has no
representative office or agent in Hong Kong.
(c)

Profits earned by a manufacturing company from its sale of products in Hong

Kong. The products were partly manufactured in Hong Kong and partly in
the PRC. The manufacturing activities conducted in the PRC were greatly
involved by the manufacturing company in terms of expertise, machinery,
raw materials and quality control.

Part II
Evaluate the deductibility of expenditure/loss incurred in each of the following cases:
(a)

Company A placed the sale proceeds it received from a local customer into a three
month time deposit account with a bank in Tokyo. The account was in Japanese
Yen. However, owing to fluctuation in the exchange rate, it suffered an exchange
loss when converting the deposit back to Hong Kong dollars.

(b)

Company B is an international medicine manufacturer. One of its chief researchers

retired and the company paid him a substantial sum of money for entering into an
agreement whereby he agreed not to become involved in any activities which
might compete directly or indirectly with the companys business.

(c)

In order to maintain a constant source of supply of raw materials, Company C

made a large loan to one of its main suppliers which had a serious financial
problem. However, the supplier later went into liquidation and the company could
not recover this loan which was later written off as bad in its accounts.

Additional Questions:
Self Test Question on Profits Tax Computation (Q1)
Self Test Question on Profits Tax Computation (Q2)

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