Sunday July 27, 2008 News
Shortsighted eyes have gone
[Comment] by Alan
Kong
Long time no updated because I was too busy for current job being financial controller in a metal giftwares and cutlery group. I need to travel to shenzhen factory and office for three days per week to monitor the operation.
After due consideration, I have just finished the laser treatment for my shortsighted eyes (around 675) in Hong Kong Sanatorium & Hospital ( 養和醫院) at cost of HK$22,000 plus $1,100 pre-surgery check. The surgery was carried out by Doctor Joan Ng (吳彤). Thanks to her. The surgery was very successful and my vision now is almost perfect.
Monday September 3, 2007 News
IFAC report on risk-based internal controls
[Comment] by Alan
Kong
IFAC's Professional Accountants in Business (PAIB) Committee has released a new publication on Internal Control from a Risk-Based Perspective. This information paper features interviews with 10 senior-level professional accountants in business on their experiences and views on establishing effective internal control systems. The interviews help to demonstrate the importance of a risk-based approach to internal control in helping an organisation manage its overall risk. You may download it here.
Regarding the disputes between Ms Mandy Tam, the legislative councillor representing accountancy functional constituency in the Legislative Council and HKICPA (the "Institute"), the Court of First Instance recently handed down the judgment in favour of Ms Mandy Tam in respect of her judicial review challenging the decision of the Institute to cease distribution of her newsletters and other materials to its members.. The full judgment can be viewed in here.
Monday June 11, 2007 News
New pamphlet released by the IRD
[Comment] by Alan
Kong
The IRD has recently released the pamphlets concerning the arrangement between the Mainland of China and HKSAR for the avoidance of double taxation and the prevention of fiscal evasion, namely "Income From Personal Services" and "Business Profits, Income from Immovable Property, Income from Investment, Gains from Alienation of Property".
Particular attention should be drawn to the tax rates applied in respect of dividends, interest and royalties income which are substantially deviated from standard provisions as set forth in 中華人民共和國企業所得稅法.
Monday June 5, 2007 News
Long time no update
[Comment] by Alan
Kong
Long time has lapsed since my last update. Recently, the judgments have been made in Final Court of Appeal, namely, Zeta Estates Limited v. CIR (FACV 15/2006) and Kim Eng Securities (Hong Kong) Ltd. v. CIR (FACV 11/2006).
In Zeta case, it's interested to note that the interest incurred arising from the loan drawn for the purpose of financing the dividend out of retained profit which is NOT SURPLUS to the business requirement of the company is tax deductible. If the retained profit of the company is mainly financing the non-current assets (i.e. land and building) or essential for ongoing business (irrespective of the fact that the directors may still propose the dividend according to the company law for return of the shareholders), it's likely that the proposition that the retained profit is required by the business can be justified.
Besides, Court of Appeal has handed down a judgment in respect of CIR v. BIR and Indosuez W I Carr Securites Ltd. (CACV 57/2006).
Same as last year, I have been to Tokyo in early this year. Certain photos can be found in here.
Monday December 4, 2006 News
Illustrative Hong Kong Financial Statements under HKFRS
[Comment] by Alan
Kong
KPMG has released the illustrative Hong Kong Financial
Statements under Hong Kong Financial Reporting Standards, December 2006. It's a
very compenhensive guideline with 132 pages for auditors or others preparing
audited financial statements. You may download it here.
Tuesday November 28, 2006 News
Are you working in China more than 275 days per year?
[Comment]
by Alan Kong
The State Adminstration of Taxation (SAT) has issued a Notice 162 named 個人所得稅自行納稅申報辦法（試行）》的通知 on 6 November 2006. The details can be found in here. For one staying in China for more than 275 days per year is now required to file indivudal tax return on annual basis. I have perpared the checklist for those potentially affected people. Please check it out. You may download it here.
Tuesday November 7, 2006 News
Photos taken in BBQ gathering on 4 November 2006
[Comment]
by Alan Kong
I have pleasure to participate with all office staff in one of the factory in China (around three hundred headcount) for BBQ gathering in 小梅沙. Certain photos are shown in here.
Following the scaling down of VAT refund for export of certain industries (i.e. 13% to 11% for textiles and garments), more competitive power is granted to Hong Kong investors as they tend to organise their factory under contract processing arrangement.
The Inland Revenue Department has recently acceded to extend the deadline for "M" code cases from 15 November 2006 to 22 November 2006 (31 January 2007 to 7 February 2007 for loss case). It would be a good news to mitigate the workload of practitioners.
Saturday September 23, 2006 News
Technical update - "183-day" exemption rule
[Comment]
by Alan Kong
The Central People’s Government and the Hong Kong Special Administrative Region Government signed a comprehensive Double Tax Arrangement (DTA) on 21 August 2006 to replace previous arrangement signed in 1998. Inter alia, a much tighter test than that used in the original DTA will apply in counting the 183 days exemption threshold as follows:
Under the new DTA, a resident of one side is exempt from tax on the other side if he or she satisfies all the following conditions:
Under the new DTA, to be fully exempt from China individual income tax in the tax year ending 31 December 2008, an individual would need to spend no more than 183 days in the Mainland China in any 12- month period between 2 January 2007 and 30 December 2009. Likewise, to be exempted from Hong Kong salaries tax for the tax year ending 31 March 2008, an individual would need to spend no more than 183 days in Hong Kong in any 12-month period between 2 April 2006(2 April 2006 - 1 April 2007) to 30 March 2009 (31 March 2008 - 30 March 2009).
It seems to me it's hard to implement in practice as the assessment can only be final and conclusive after a certain period of time. Both retrospective and prospective information need to be assessed in order to correctly determine the tax position in given year of assessment.
Tuesday September 12, 2006 News
IFRS-Chinese GAAP comparison in English
[Comment]
by Alan Kong
As you may be aware, all listed companies in the PRC will be required to prepare its financial statements in accordance with Accounting Standards for Business Enterprises ("ASBE") from financial period 1 January 2007 onwards. Other Chinese entities are also encouraged to apply the ASBEs. It's the trend that standard setters will formulate the local standards closely modeled to the IFRS modified by their local circumstances.
IAS Plus has published the comparison of IFRSs and New Chinese Accounting Standards (English version, Chinese version).
On the other hands, HKICPA recently entered into a new Agreement on Recognition Arrangements (ARA) with ACCA. In a nutshell, members of the ACCA must have a university degree, pass the final professional examination of the Institute’s qualification programme and gain practical work experience under an Institute-authorised employer or supervisor. For people wishing to be a CPA in Hong Kong, the ACCA's route previously pursued may not be practical in view of complicated entrance requirement.
Tuesday May 9, 2006 News
Complete CPD records online
[Comment]
by Alan Kong
Hong Kong Institute of Certified Public Accountants (HKICPA) has launched a new layout in member only section in which detailed Continuous Professional Development (CPD) records can be viewed and updated. In MyCPA page, we can update the CPD records one by one. We can also have a glance or even online booking of CPD activities organised by HKICPA in this page.
Under new CPD requirement as set out in Statement 1.500 (revised August 2005), we are obliged to complete at least 120 CPD hours in each rolling three year period, of which 60 hours should be verifiable. We also need to ensure at least 20 hours must be achieved per annum, irrespective whether they are verifiable or not.
HKICPA has also effectively withdrew all previously issued SSAPs and related interpretations in this month. Goodbye to all SSAPs.
Monday May 8, 2006 News
Bad news to insurance agents receiving fixed income
[Comment]
by Alan Kong
One month has lapsed after last update and I found a tax news particularly interested by insurance agents.
The Court of First Instance handed down two judgments on 28 April 2006, namely LO TIM FAT v. COMMISSIONER OF INLAND REVENUE (HCIA 13/2005) and THE COMMISSIONER OF INLAND REVENUE v. SAWHNEY, SUBHASH CHANDER (HCIA 1/2006).
In Lo Tim Fat's case, the Judge relied on a old case, Smart v Lincolnshire Sugar Co. Ltd. (1937) 20 T.C. 643, held that the incomes received by the taxpayers (i.e. the initial signing fee and monthly bonus) which are subject to refund to insurance company upon termination of agreement, were assessable to profits tax despite there are contingencies that all or certain amounts of which may be liable to be refunded. He did not mention any guideline, whether sec. 70A need to apply or being treated as deduction of income in that year of assessment, as to the case that the refund indeed occurs after the subject income has been taxed.
Henceforth, any agent entering to the agreement under which the fixed income is subject to refund upon contingencies shall be obliged to report all such incomes in his/her individual tax return.
In Sawhney's case, the Judge adopted purposive approach to construe the section 11C, instead of literal approach done by the Board of Review, in dealing with the case involving the taxability of gain of share option after the employee has left the company. The taxpayer contended that the gain of share option was derived after his cessation of employment with the company, shall not be subject to tax in accordance with certain authorities abroad. The judge analyzed the history of amendment in IRO since 1950 and concluded that the construction of section 11C, does not have any intention to draw a distinction of taxability of income between income earned before and after the cessation of employment. I agree with the points made by him.
Wednesday April 5, 2006 News
Two
new tax cases
[Comment]
by Alan Kong
The Court of Appeal and Court of First Instance handed down two
judgments on 29 March 2006, namely KIM ENG SECURITIES (HONG KONG) LIMITED v.
COMMISSIONER OF INLAND REVENUE (HCIA7/2004), and LEE YEE SHING JACKY and YEUNG YUK CHING v.
COMMISSIONER OF INLAND REVENUE (HCIA11/2005).
In KAM ENG's case, the main issue is whether the rebate of commission for its handling services for matching complementary needs for both customers (saving of commission) and overseas broker (Singapore's statutory requirement). The taxpayer endeavoured to tie the taxability of its handling services (with heavy involvement in Hong Kong by itself) with general rule for stock trading. The Board of Review had clearly set out the reasoning below which was unanimously agreed by all of Judges in this appeal:
“In the Board’s Decision, the appellant was not brought into the picture, did not earn its share of the minimum commission and was not paid for “effecting and executing the trades outside Hong Kong”. Of course, the appellant would not have earned its share of the minimum commission if the overseas brokers had not executed the relevant transactions, and these took place abroad, but this does not tell us why the appellant came into the picture at all. What the appellant was doing to earn its share of the commission was bringing together the complementary needs of the customer (to pay less than the minimum commission) and the overseas broker (to earn a portion of the minimum commission from customers who were not prepared to pay the minimum commission), and that bringing together the appellant did in Hong Kong by: -
(a) opening a trading account for a customer upon notification by an overseas account executive, or in the case of a customer solicited by its own account executive;
(b) taking note of settlement procedure/instructions;
(c) booking trades as confirmed by the overseas account executive and executing broker;
(d) matching confirmations;
(e) generating contract notes and related settlement and accounting documents for trade;
(f) following up on settlement of trades with the account executive and the executing broker (if necessary) and updating records accordingly;
(g) making book entries of the transactions and reconciling statements; and
(h) preparing/generating reports on commission.”
Due to the fact the substantial involvement of the taxpayer in H.K. for carrying out the value added operation from which the rebate of commission was earned (contrary to profit of stock trading itself), it's extremely hard to argue for non-taxability or even apportionment.
In LEE YEE SHING's case, the main issue is whether the dealing of stock by an individual (without applying the business registration), is in fact carrying on a business, if so, the loss thereon to be deducted for applying personal assessment to offset substantially his income in tenure of director in certain companies. It's not fair or reasonable that any gain on stock is non tax accessable but deductible if in loss position. Stamp duty mechanism is already in force for the Revenue in collecting such gain by individual. If the taxpayers are dealing with stock in high risk profile, I would suggest him to operate a company for such transactions.
If the court overturned and agreed that personal dealing of stock constituting a business, which will have significant effect upon all stock investors or speculators in public.
Monday March 20, 2006 News
Issues
facing by manufacturers situated in southern part of mainland
china
[Comment]
by Alan Kong
From 2006 onward, the PRC government may abolish the tax benefit
(i.e. two year 100% exemption, three year 50% exemption) enjoyed by wholly
foreign owned enterprises (WOFE) in eleventh five years plan and advocate the
growth of high value added development.
In accordance with statistics from China Chamber of Commerce for Import and Export of Textiles (CCCT), the Top 5 provinces in term of total export value in textiles and garments in year 2005 are:
|
Name of province |
Total export value |
Growth from last year |
|---|---|---|
| Zhejiang (浙江省) | US$24,435 million | 24.27% |
| Guangdong (廣東省) | US$22,010 million | 23.22% |
| Jiangsu (江蘇省) | US$18,819 million | 26.27% |
| Shanghai (上海) | US$12,869 million | 10.45% |
| Shandong (山東省) | US$10,620 million | 19.78% |
| Others | US$26,280 million |
Despite Guangdong province performed reasonably well in 2005, all manufacturers within the province are encountering a common issue: the shortage of low cost labour.
The shortage of low cost labour in Guangdong province can be attributable to three reasons. Firstly, the pulling from manufacturers in northern part of mainland china. The enterprises in Zhejiang province, usually hold the leasehold land titles themselves whereas the enterprises in Guangdong province (i.e. contractual processing factories or WFOE) are usually owned by abroad and occupy the land under operating lease rental from the landlords, hence, the enterprises in northern part of mainland china may have a cost advantage in providing more wages and fringe benefits to pull the labour in elsewhere. Secondly, the constant growth of consumer price index (CPI) in Guangdong province (i.e. 2% throughout every month in year 2004) which aggravates the cost of living for labour. The wages demanded by labour are in fact 30-40% higher than the minimum wage stipulated by the government in order to afford their living in working there. Thirdly, the gradual shifting of manufacturing to tertiary or service industry in the economy. In 2005, tertiary industry formed 44.2% of total GDP in Guangdong province (even reached 56.8% in Guangzhou City). The labour is pulled into tertiary industry sector (i.e. hotel) with better remuneration and working environment.
In this context, the operation of manufacturing enterprises in Guangdong province may be adversely affected and their control upon production capacity and scheduling become passive. It also gives rise to the emergence of contractors leading an informal group of freelance skillful workers with 5 times higher than regular pay. The enterprises without sufficient labour force may resort to outsource the production to such contractors with cost substantially higher than usual.
The shortage of low cost labour may be alleviated by rapid progress of urbanization with the fresh supply of labour from agriculture in rural areas. Notwithstanding this factor, the era of low production cost in terms of land and labour in Guangdong province will become history. In order to survive, the enterprises strive to balance the production cost with growth of productivity.
One of the most significant advantages enjoyed by enterprises in Guangdong province is the neighborhood of highly developed metropolitan such as Hong Kong or Taipei with pools of capital and professional for fund raising, cutting edge technology and know how improvement (i.e. Toyota Production System (TPS) in garment manufacturing, Industrial Engineering (I.E.) aiming to re-engineering of work flow, high throughout and efficiency with low waste) and high-end machinery injection superseding the labour force. The modern infrastructure in Guangdong province is also another advantage.
In addition, the enterprises in Guangdong province are posed to receive the rapid changing market trend of fashion design and concept with their dynamic global information channel originated from talents in abovementioned metropolitan. Coupled with abundant supply of specialized processing support (i.e. digital printing, lace and embroidery), the enterprises are capable of providing holistic solution to customers matching with or beyond their requirements.
Besides, nine PRC provincial governments in southern part of China are providing supports for enterprises in Guangdong province by signing certain cooperative agreements (i.e. 泛珠三角九省區勞務合作協議, 泛珠三角區域勞務合作聯席會議章程) in respect of recruitment of skillful workers and mutual acknowledgement of their qualification. The third phase of implementation of CEPA between Mainland and Hong Kong may also provide additional professional services for technology advancement in Guangdong province.
Given that the trade conflict between the United States/European Union (EU) and China remains severe due to imbalance of trade, the low value added massive production methodology previous adopted by the enterprises must change to high value added production to minimize the threat of protectionism measures (i.e. anti-dumping, quota restriction). The entry of value added route will enable us to survive in the era of globalization and compete with neighborhood countries.
For these reasons, I am of view that the prospect of manufacturers adopting such strategic change in southern part of China remains healthy and positive in the foreseeable future. We should be prepared to shift the traditional low-cost competitive advantage into creativity, technology and value oriented. The above issue may create threat to us but also provide an opportunity and momentum for driving us into a new dimension.
Thursday March 9, 2006 News
Interest expenses, appears connected with dividend payment,
deductible or not?
[Comment]
by Alan Kong
The Court of
Appeal handed down a judgment on 6 March 2005 concerning the deductibility of
interest expenses adhered to the shareholders' loan arising from distribution of
dividend, namely ZETA ESTATES LIMITED v. COMMISSIONER OF INLAND REVENUE (CACV 191/2005). The judges unanimously dismissed the appeal of
the taxpayers with quotation of certain passages of cross-examination and
similar case laws in Australia and South Africa. I read through the judgment,
and with respect, I am of view that the interest expenses in this case, shall be
tax deductible. The nutshell of my reasoning from which my decision is drawn is
as follows:
1. We divide the material components in this case into three events in causality, investment properties ("ultimate cause"), dividend ("trigger point" ") and loan ("result"). It's a trite or general rule that the deductibility of interest is depending upon the nature of causative purpose for which the loan is drawn, whether it's revenue or capital or for the production of income. If the loan is drawn for settlement of a capital or domestic item in a particular case, it shall not be deductible. Hence, the approach is first we need to identify the key events.
2. The investment properties for rental purpose of a company may be financed by a loan, or capital from shareholders, or internal generated reserve arising from accumulated profits. In a usual circumstance, there should not be any dispute from everyone about the deductibility of interest if we re-finance the properties by repaying previous loan (as demanded by lender) and simultaneously drawing a new loan as it adheres to income generating assets. The situation of shareholders should not make any difference as they still demand dividend as they are investors with the view of return. This is the decision of shareholder (as a separate entity) separated from the view of company despite it's proposed by the directors of the company. Once the shareholders demanded the dividend, all the company need to do is re-finance the assets from somewhere else. In this case, the company adopted to use another fund from shareholders with interest bearing but it will not preclude the deductibility thereof. All we need to do is to prove the fund ("result") is indeed adhered to income generating assets ("ultimate cause") rather than unidentified purpose.
Notwithstanding the above, I am of opinion that despite we may have substantial ground in the context of taxation for a particular transaction, it should not be too brilliant as it must attract attention of the IRD which means avoidance of tax.
On 1 March 2006, the Legislative Council passed the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005. Any company, no matter incorporated in Hong Kong or elsewhere, with central management and control outside Hong Kong, and dealing with financial instrument effected in Hong Kong, shall be exempted from profits tax. It does override the rule in locality of profits and encourages the offshore fund incorporated in Hong Kong. However, I don't think any substantial benefit in flow of money towards Hong Kong as offshore fund may set up in tax heaven (i.e. BVI, Bermuda) which is always not subject to Hong Kong profits tax irrespective of the above legislation.
IASPLUS has recently published HKFRS Financial Statements 2005: A Practical Guide for Preparers, another good resource for preparers of financial statements. You may download it here.
Saturday February 25, 2006 News
Fiscal Budget 2006/07 - still lag behind my expectation
[Comment] by Alan
Kong
Our Financial Secretary, Mr Henry Tang, has
recently announced the fiscal budget 2006/07. Upon review of which together with
Singapore's budget, I have following comments:
1. In Appendix B – Total Public Expenditure by Policy Area Group, I note that the support expenditure (i.e. central management of the civil service, intra-governmental services...etc) is 14% out of total expenditure. Given that we advocate “Big Market, Small Government” philosophy, it seems that there is room to reduce such extent. For your information, the Government Administration expenditure forms 4% out of total expenditure in 2006/07 budget of Singapore which pursues “Best Sourcing”. The saving may be further utilized in other important areas, particularly education and social welfare. I also propose to strengthen the internal audit department so as to facilitate better control upon the irregularities on expenditure and value for money.
2. Based on information set out in “Supplement – Salaries Tax” and “Appendix A – Relationship between Government Expenditure and Public Expenditure in 2006/07”, I note that the tax revenue from individual represents 15.65% of total tax revenue. My analysis also reveals that:
| No. of taxpayers | Tax revenue | |
| Income between $100K - $400K (a) | 686,000 | $6.37 billion |
| Total (b) | 975,000 | $26.46 billion |
| Percentage (c)=(a) / (b) | 70% | 24% |
| Total tax revenue (d) | $169.7 billion | |
| Percentage (a) / (d) | 3.7% (if charge nothing on $100K - $400K group) |
Hence, I propose to increase the variety of allowances granted but also increase the tax rate in higher salary band so as to balance the loss of tax revenue. In addition, it can save substantial revenue collection cost and reduce the gap of wealth disparity.
3. I agree to provide G.S.T. on long run to maintain the
stability on the revenue side. I can also refer to Revenue Collection in
Singapore which apart from G.S.T., she provides a variety of charge (i.e.
statutory boards’ contribution, assets tax, motor vehicle taxes, vehicle quota
premiums…etc) so as to maintain the long run stability. Hence, she affords to
adopt “Balancing Budget” in long run, rather than solely accumulating the fiscal
reserve in our side (i.e. 391.6 billion in 2010/11).
Saturday February 18, 2006 News
China adopts 38 new accounting standards
[Comment]
by Alan Kong
IAS Plus
published that the Ministry of Finance (MOF) of the People's Republic of China
had announced that it had adopted a new basic standard and 38 new Chinese
Accounting Standards that are substantially in line with IFRSs. The basic
standard is akin to a conceptual framework, and the 38 standards address nearly
all over the issues covered in IFRSs. The MOF has also adopted 48 new Chinese
Auditing Standards that are similar to International Standards on Auditing
issued by the International Auditing and Assurance Standards Board. Click for a
List
of the New Chinese Accounting Standards (PDF 123k English and Chinese). The
new accounting and auditing standards will become effective for listed
enterprises from 1 January 2007. Other enterprises are encouraged to adopt them.
Sunday February 12, 2006 News
1,182 hours tax investigation work worths HK$3.3
Million?
[Comment]
by Alan Kong
The Court of
First Instance handed down a judgment in connection with claiming of
professional fee rendered by a CPA on 10 February 2006, namely TSANG KA YUEN
CERTIFIED PUBLIC ACCOUNTANT v. DIORVA KNITTERS LIMITED (HCA 2140/2003). I have read through the whole judgement and
have following observations:
1. Given that the client was willing to pay HK$160K for single company audit, it appears not very excessive for charging HK$350K for group audit including certain special audits and issued consolidated audited financial statements to banker, despite the time cost for merely a junior in a small local firm reached HK$600 per hour. In order for the auditor to issue unqualified audit report, he must ensure the previous financial years of the group had been audited. Thus, I believe both parties should agree to launch three years audit.
2. In accordance with Statement 1.208 "Professional Ethics - Fees" issued by HKICPA, the member practice should inform the client in writing prior to the commencement of any engagement (i.e. tax investigation) on request and practicable, the level of fees likely to be charged. It seems to me that there was no fee proposal letter prepared by the plaintiff outlining the total fee to be charged for the tax investigation. In addition, it appears that no interim billing to be addressed to client demanding at least HK$ 1 million. The plaintiff may mitigate the loss if he presented his interim billing to client which was unpaid so he would consider to curtail his work. I feel doubtful whether the client knew the extent of fee to be charged for the tax investigation.
Being a CPA (Practising) carrying out the professional works to public, it's essential that we should be honest to client and charge them fairly in relation to our work. For our own protection, deposit or interim billing should be charged prior to completion of work on certain occasions.
Tuesday February 7, 2006 News
Happy new year
[Comment]
by Alan Kong
The Year of
the Rooster is over.
In Year of the Dog, I will further improve my speaking of Putonghua and English, keep abreast with increasingly complicated professional standards issued by HKICPA, continuously update the business news, articles, cases and information pertinent to my profession, and develop the client base for my professional practice.
The role of internal audit is rapidly changing in order to cope with this business world. The new approach of internal auditing, "Risk Based Internal auditing (RBIA)", is recently emphasised by the Institute of Internal Auditors (UK and Ireland), is a way in which we can ensure the enterprise-wide risks are properly managed. David M Griffiths PhD FCA, recently published the introduction and implementation guideline in RBIA. Both documents are well prepared with plenty of illustrative examples. You may download them here, 1) introduction and 2) implementation.
Friday January 20, 2006 News
How long shall we keep business records for tax
purpose?
[Comment]
by Alan Kong
The Court of
First Instance handed down the judgment of tax appeal on 17 January 2006, namely
THE COMMISSIONER OF INLAND REVENUE v. COMMON EMPIRE LTD (HCIA1/2004). The subject matter of the contention between both
parties was whether "Statement of Loss" is amounted to an assessment. The deputy
judge, Anthony To, upon analysed the key sections of Inland Revenue Ordinance,
concluded that:
"the word "assess" must be construed to mean assessed to tax and the word “assessment” for the purpose of sections 59, 60 and 62 must be construed to mean a process of ascertaining or computing the amount in respect of which a person is chargeable to tax, ...and the application of the appropriate rate of tax to that value, which by definition under the tax regime must yield a positive amount of tax payable by the person assessed to tax. An ascertainment of loss which does not result in the application of the appropriate rate of tax to that loss cannot be an assessment within the meaning of the Ordinance." (emphasis supplied)
He added that statement of loss is not issued pursuant to any provisions in the Inland Ordinance. It is only issued as a matter of administrative convenience for the purpose of advising the person of the loss which may be used for set off purpose in the subsequent years of assessment.
However, the decision on whether to allow or disallow a loss to be set-off against the assessable profits does affect the taxpayer’s liability to pay tax but that decision is only part and parcel of the process of assessment and can only be taken at the point in time when the set-off can take place, i.e. in a year when assessment can be made in respect of assessable profits. Thus not until a loss carried forward was set off does it form part of an assessment. Once that occurred it may only be reviewed within the expiration of six years from the year of assessment pursuant to section 60.
Interestingly to note, due to the foregoing, Judge To advised that
the taxpayer should keep records beyond the section 51C requirement to the year
after his tax liability has been finalised (formal notice of assessment has been
issued), even if that involves keeping record beyond seven years, so as to allow
the Commissioner to investigate into matters older than six years or that there
is finality in tax matters after six years. In my opinion, it is open for the
Court to interpret and see which provision prevails as it seems to me the
legislature did not consider this point while drafting section 51C.
Wednesday January 11, 2006 News
COSO launches new guidance initiative for small businesses
[Comment] by Alan
Kong
Sponsoring Organizations of the Treadway Commission (COSO)
published a new guidance concerning Reporting on Internal Control Over
Financial Reporting for Smaller Public Companies in exposure draft. It
outlines 26 fundamental principles associated with the five key components of
internal control: control environment, risk assessment, control activities,
information and communication; and monitoring. The report defines each principle
and describes its attributes, lists a variety of approaches smaller companies
can use to incorporate the principles, and includes real-world examples of how
smaller companies have effectively applied the principles. People reading this
may be impressed by its contents containing plenty of illustrative examples. You
may download it here. Upon its finalisation, this copy will not be able to be
obtained in free of charge.
Tuesday January 3, 2006 News
Illustrative Hong Kong Financial Statements under HKFRS
[Comment] by Alan
Kong
KPMG has finally released the illustrative Hong Kong Financial
Statements under Hong Kong Financial Reporting Standards, December 2005. It's a
very compenhensive guideline with 160 pages for auditors or others preparing
audited financial statements. You may download it here.
Friday December 30, 2005 News
Christmas in Tokyo
[Comment]
by Alan Kong
One need to
relax and unwind himself irrespecive of immense workload. I have spent five days
in Tokyo during X'mas holiday. Certain photos are posted in here.
Saturday December 17, 2005 News
Outcome of HKICPA's survey of members' opinion on government's
proposals for Constitutional Reform
[Comment]
by Alan Kong
On the basis
of 2,697 members responding to the survey, representating slightly more than 10
percent of total membership, HKICPA has released the survey result here. On the contrary, our functional constituency's LegCo
representative, Ms Mandy Tam, has recently indicated her opinion against the
Reform in public. Since Ms Tam has been elected by our members, does she has own
discretion to vote on behalf of us or to be bound by this survey. It seems to me
that it may give rise to the need to examine our institute's constutional
document or international practice in this respect.
Interestly to note, there is no such survey in Hong Kong Law Society. The LegCo representative for legal constituency, Ms Margaret Ng, clearly pointed out that she will vote against the Reform. Does she need to obtain members' opinion prior to the voting?
Monday December 12, 2005 News
Two new tax cases
[Comment]
by Alan Kong
Court of First
Instances handed down two judgements related to tax matters on 2 December 2005,
namely REAL ESTATE INVESTMENTS (N.T.) LIMITED v. THE COMMISSIONER OF
INLAND REVENUE (HCIA8/2005) and NAM TAI TRADING COMPANY LIMITED v. COMMISSIONER OF INLAND REVENUE
(HCAL80/2004). Upon reviewed the judgments, the key points we learned are
while we lodged objection for assessment being excessive or incorrect, we must
need to establish the case with evidence. In paragraph 44 of HCIA8/2005, Ian
Carlson J said the party which bears the onus of proof has failed to discharge
that burden and must therefore be taken to have lost. Despite both CIR and the
taxpayer is unable to substantiate the income is either trade or capital in
nature, being referred as "scoreless draw", However, given that the onerous
requirement under sec.68(4) of IRO, the taxpayer is bound to lose. In
HCAL80/2004, it depicted clearly the practices of IRO in respect of the holdover
of tax in dispute pending determination. On the basis of tax analysis of subject
matters(i.e. management fee), it seems to me that the application of judicial
review is not tenable.
IRD also released a guideline involving profits tax treatments on cross-border manufacturing and trading business. You may download it here.
Monday November 14, 2005 News
LegCo passes the Revenue (Abolition of Estate Duty) Bill
2005
[Comment]
by Alan Kong
The
Legislative Council today (November 2) passed the Revenue (Abolition of Estate
Duty) Bill 2005 which seeks to amend the Estate Duty Ordinance to implement the
proposal announced in the 2005-06 Budget to abolish estate duty.
The Ordinance will commence operation three months from its publication in the gazette, i.e. February 11, 2006. Estates of persons who pass away on or after the commencement date of the Ordinance will not be subject to estate duty. However, it is proposed that, upon the commencement of the Ordinance, the estate duty chargeable in respect of deaths occurring on or after July 15, 2005 but before the commencement date (the interim period) would be reduced with retrospective effect to a nominal duty of $100 for estates of assessed value exceeding $7.5 million. Any estate duty overpaid will be refunded. The nominal duty is necessary to ensure that all existing legislative provisions and legal documents making reference to actual charging or payment of estate duty would not be put in doubt during the interim period.
Implementing Hong Kong Financial Reporting
Standards: The Challenge for 2005
[Comment]
by Alan Kong
Deloitte
(China) has published Implementing Hong Kong Financial Reporting Standards: The
Challenge for 2005 (PDF 2,022k). Starting in 2005, Hong Kong Financial
Reporting Standards (HKFRSs) are identical to International Financial Reporting
Standards. While Hong Kong had adopted many of the earlier IASs as Hong Kong
standards, some had not been adopted, including IAS 32 and IAS 39. And all of
the December 2003 improvements and new and revised IFRSs issued in 2004 and 2005
will take effect in Hong Kong beginning in 2005. For each standard, this new
180-page book sets out a summary of its content, the key changes it makes to
accounting in Hong Kong, the most significant implications of its adoption, and
related anticipated future developments.
Monday September 26, 2005 News
Did the tax planning scheme go too far?
[Comment]
by Alan Kong
On 9 September
2005, a judgment concerning tax avoidance was made by deputy J Poon, namely COMMISSIONER OF INLAND REVENUE v. TAI HING COTTON MILL
(DEVELOPMENT) LIMITED (HCIA8/2004). I have read through it and it seems to
me that simple is always better. Providing excessive complicated transactions
may not acheive the desired effect but may even jeopardise the tax position. If
Tai Hing Group indeed sold the lands for development on a lump sum amount to
unrelated, albeit higher than market value of HK$800 million, instead of
additional sum of 50% of final net profits appears to be the payment for
acquiring a right or appropriation of profits in payer side, the innocent tax
amount may not need to be paid.
Saturday September 17, 2005 News
CPD - new requirement
[Comment]
by Alan Kong
HKICPA has
issued the revised statements 1.500 "Continuing Professional Development"
requiring all members, irrespective of practising or non-practising status, to
meet at least 120 hours of relevant professional development activity in each
rolling three-year period, of which 60 hours should be verifiable. Under this
scheme, it seems to me that the timing of compliance can be more flexible and
the onus of compliance to be more fair as a whole.
I have been very busy upon commencing the new employment as group financial controller, not to mention the freelance practice. However, in-depth practical experience has been gained including PRC tax, accounting requirement, apart from broad statutory requirement.
Monday August 15, 2005 News
Hong Kong Institute of Certified Public Accountants - Member
Survey
[Comment]
by Alan Kong
What I said in its survey:
"In broadest sense, the accounting profession helps to standardise the bottomlines of different economic activities for variety of users. The rapid change of increasing complex of standards and practices causing the financial information verge onto a pure technical document which is not easy to interpret, by general public or even certified public accountants themselves. Professional advices need to be sought or otherwise misdirect themselves into wrong direction.
In individual business perspective, the knowledge obtained by accounting profession is obviously inadequate to run the business successfully."
Friday July 22, 2005 News
Renminbi (RMB) no longer pegged to Dollars
[Comment]
by Alan Kong
Last night the
PRC government announced to uplift RMB 2% against US Dollars and adopted the
pegging to a basket of currencies from US Dollars. The monetary authority of
Hong Kong reiterated that HK dollars will not adopt such policy in the
foreseeable future.
Since it's expected that more countries will sell US dollars and acquired RMB in next steps to protect their foreign exchange reserve, the fully utilized quota for certain category of textiles to the US coupled with substantial balance of US dollars kept by PRC as her foreign exchange reserve will have a negative effect to the considerable upwards revaluation of RMB against US. However, due to pegging to a basket currencies, the exchange rate of RMB towards other major currencies will increasingly correspond with their trade affairs and not distorted by US currency fluctuation. Hence, it seems to me that it's a good news for alleviating their trade conflict.
The currency risk to which the enterprises facing, particularly those engaged in PRC trade or establishing the factory in the Mainland, will be expected to rise due to fluctuation of currency rate between RMB and H.K. The running cost of Hong kong enterprise having a labour intensive factory will inevitably grow but not expected to beyond 10%. But I think it's a good time to consider setting up a reserve denominated in RMB.
Whilst the garment and textile enterprises in H.K. getting stuck as to the halt of PRC shipment for certain categories to US and EU, setting up a Outward Processing Agreement (OPA) or even establishing overseas manufacturing base may be one of the leeway can be done. However, certain practical issues arise such as the supply of skilled labour and logistics efficiency. Some enterprises are providing "diving" services where the trade description to be forged in the overseas to facilitate the shipment to US or EU with return of service charges around 5%. Under section 22 of Trade Descriptions Ordinance (Cap 362), any person who, in Hong Kong, procures, counsels, aids, abets or is accessory to the commission outside Hong Kong of an act which, if committed in Hong Kong, would be an offence under this Ordinance, commits that offence as a principal and shall be liable to be prosecuted in Hong Kong as if the offence had been committed within Hong Kong. Section 7 of the Ordinance provides:
(1) Subject to the provisions of this Ordinance, any person
who-
(a) in the course of any trade or business-
(i) applies a false trade
description to any goods; or
(ii) supplies or offers to supply any goods to
which a false trade description is applied; or
(b) has in his possession for
sale or for any purpose of trade or manufacture any goods to which a false trade
description is applied,
commits an offence.
Despite it seems to me that the enterprises engaged those providers for such arrangement shall not commit any offence, however, it has to take the credit risk for the good shipped to the providers as well as the L/C receipt by the latter on their behalf.
Thursday July 14, 2005 News
Debate of civil servant's pay deduction is over
[Comment] by Alan
Kong
Today the Court of Final Appeal unanimously overturned the ruling
of Court of Appeal and restored the judgement of Hartmann J in Court of First
Instance (FACV No. 15 of 2004,FACV No. 16 of 2004,FACV No. 8 of 2005). I
have read the whole judgement and totally agreed with the view of all honorable
judges. In essence, the conditions of service, both before and after
that date, were exposed to a variation by way of a reduction of pay
through legislative action which was not dependent for its validity on
contractual authority. In these circumstances, neither s.10 of Cap. 574 nor s.15
of Cap. 580 introduced a term into the contracts which made the conditions of
service “less favourable” than they were before 1 July 1997, within the meaning
of art.100 of the Basic Law. It seems to me a correct analysis. This conclusion
is drawn largely based on the observations of Devlin LJ (later Lord Devlin) in
Commissioners of Crown Lands v. Page [1960] 2 QB 274 at 291:
“When the Crown, or any other person, is entrusted, whether by virtue of the prerogative or by statute, with discretionary powers to be exercised for the public good, it does not, when making a private contract in general terms, undertake (and it may be that it could not even with the use of specific language validly undertake) to fetter itself in the use of those powers, and in the exercise of its discretion.”
It also clarify the meaning of "special bodies" in article 103 of Basic Law, in its broadest sense. The judges confirmed it should refer to the Standing Commission, rather than the mechanism used by it, the Pay Trend Survey Committee (PTS). The Standing Commission recommended that, when necessary, Hong Kong’s economic circumstances should be the decisive factor in determining public sector pay. The Commission said:
“... from the point of view of the public, civil service pay must have regard to the economic circumstances of Hong Kong as a whole. If the economy is buoyant it is right and proper that civil servants should share in the benefits. If the economy is depressed it is equally right that civil servants should share the burden of any necessary measures to limit expenditure.” [emphasis supplied]
Hartmann concluded that the conduct of a PTS was not so inherent an element in the scheme of determining pay adjustments that a failure to conduct a survey would of itself, no matter what the circumstances, constitute a breach of art.103. In the nature of things, a provision which is designed to offer transitional protection to employees, such as art.103, is not intended to stultify the processes of government and prevent the capacity of government to reform and improve its processes when it appears that some aspect of the processes is serving no useful purpose or is not making a significant contribution to beneficial outcomes. It is correct in my view.
In economy perspective, the European Union (EU) reported that the economic growth for the year is merely 1.3%. The unity of currency is found no way to improve the economy of members, but getting worse, particularly Italy, Germany and Netherland. If the problems arising from monetary policies, such as interest rate, persist, the Euro may be eventually dissolved. In the meantime, the sluggish eocnomy of EU may have substantial implication to our export, quota issue is likely arise in foreseenable future.
Recently, I have tendered my resignation letter to my existing company and an offer have been made by a sizable garment group filling the position of Financial Controller on 1 August 2005.
Friday July 1, 2005 News
Statement of losses = assessment?
[Comment]
by Alan Kong
The Inland
Revenue Department (IRD) normally issues Statement of losses to the taxpayer if
the latter one has incurred a taxable loss during the year of assessment. One
may consider it should form part of notice of assessment with same effect
applied, including the time limitation of additional assessment, ...etc. In THE
COMMMISSIONER OF INLAND REVENUE v. YAU LAI MAN, AGNES trading as L.M. YAU &
COMPANY (HCIA3/2004), it clearly set out that Statement of losses =/=
notice of assessment. Every tax representatives should take note of this
technical interpretation to avoid providing wrong advices to the clients.
Friday April 22, 2005 News
Photos taken in meeting wih members of Democratic Party
[Comment] by Alan
Kong
I have attended a meeting with certain members of Democratic Party
and shared the political views. The photos taken during the meeting:
I have been very busy for business trip overseas during this and last month.
Wednesday February 23, 2005 News
The appeal of Peter Po Fun Chan dismissed
[Comment]
by Alan Kong
The Court of
Appeal dismissed the appeal of Peter Chan regarding the disciplinary action
conducted by HKICPA (CACV 87/2004). it seems to me that the Judges are now required
to peruse the accounting standards in addition to the law whereby they can reach
the proper judgment. Based on the nature of complaints before the disciplinary
council, in my opinion, Peter Chan should know that none of the grounds on which
he relied is capable of being substantiated, yet he chose to fight the case to
the bitter end.
Given that the growing power of disciplinary action, more professional care should be taken in the course of audit to the financial statements to make sure the audit opinion so drawn can be reasonably substantiated by sufficient evidence, coupled with sound technical skills.
On the other hand, I have visited London, Paris and a city in England named Bristol during two weeks Lunar New Year holiday. The weather in England was so bad that it rained almost everyday.
Wednesday January 19, 2005 News
Improving the evidence finding
[Comment]
by Alan Kong
As
professional, we usually deal with fact or law extensively for our reporting of
a research or expression of opinion. Unlike solicitors, they tend to collect
evidences to articulate their proposition for the purpose of establishing their
case. In the course of evidence finding, one may consider whether the evidences
are probative (logically relevance) or some are derived from inference
(premise). To deal with the latter one, one may need to consider the basis of
reasoning; whether inductive or deductive, before collection of the evidence.
By more understanding of law of evidence, the way in which we obtain the evidence will be improved, lead to a robust conclusion for reporting.
Thursday January 13, 2005 News
Change of political alliance
[Comment]
by Alan Kong
After due
consideration, I have joined Democratic Party (民主黨) in lieu of Liberal Party.
The reason of the change is I considered that the philosophy and the action of
Democratic Party is closely matched with the world class political party,
Liberal Party of Canada, which sustains the principles:
However, after meeting with their officials, it seems to me that plenty of rooms for improvement still exist, in particular to the finance or funding matters. I have confidence that my participation thereto can be of great value for the achievement of their objectives.
The members section has been updated accordingly.
Wednesday January 12, 2005 News
BVI strives to maintain the world's premier offshore company
domicile
[Comment]
by Alan Kong
Further to the
enactment of IBC (Amendment ) 2003 Act which strengthened the protection of
bearer shares for International Business Company, to which I refer as an
offshore company, it further proposed a bill in respect of the amalgamation of
the IBC Act and the old Companies Act into a new single statute; BVI Business
Companies Act. The cause of this proposal is to place all BVI corporate entities
within a zero tax regime in the light of the criticism from EU.
The benefits being enjoyed by IBC are fully retained including the loose share structure, the confidentiality of corporate information, low annual fee and simple administrative procedure. The Chief Minister proposed that the Bill to be brought into force on 1 January 2005. However, I am unable to verify this fact.
For a transition period of the two years 2005 and 2006, there will be three corporate statutes in the BVI: the existing Companies Act; the existing IBC Act; and the new BVI Business Companies Act.
• In 2005, new incorporations will be possible under all three Acts.
• In 2006, new incorporations will only be possible under the BVI Business Companies Act, and companies already on the Register will be permitted to operate under the existing IBC Act and Companies Act for one final year to enable them to prepare for transition to the new BVI Business Companies Act.
• On 1st January 2007, any companies remaining on the Registers maintained under the existing Companies Act and the existing IBC Act will automatically be re-registered under the BVI Business Companies Act. By 2007, it is therefore envisioned that all companies registered in the BVI will be operating under the new regime.
It seems to me BVI will become a second Cayman Islands after this move.
Sunday January 9, 2005
News
Joining Liberal Party
[Comment]
by Alan Kong
I have applied for the membership in Liberal
Party, one of the famous political parties in Hong Kong, in which I can put my
effort for its serving the Hong Kong people and I am confident that I can also
strengthen my experience and public exposure which will be invaluable to my
life.
On the other hand, I also applied for the membership (ACA) in the Institute of Chartered Accountants in England and Wales (ICAEW) through the reciprocal membership agreement entered into with HKICPA. The reason of my admission to this U.K. based accounting body is its growing worldwide recognition including the E.U., Canada and Australia. The details of its latest international membership affair is in here.
Tuesday January 4, 2005
News
PRC imposed export Tax on
apparels
[Comment]
by Alan Kong
Happy new year. I sincerely hope that all
victims from the assault of tsunami can soon be recovered.
In view of the rising pressures from interested groups in the U.S. and E.U. concerning the safeguard measures to tackle the potential flooding of apparel products shipped from China, the PRC government promulgated the export tax on apparel products shipped overseas effectively on 1 January 2005. The basis of export tax is on quantity or kilogram of products shipped (i.e. RMB 0.2-0.3 per unit/kg), instead of product price, which effectively prevents the excessive export of low value products because of the increasing portion of tax reflected in the total cost of apparel products.
It may encourage the mainland manufacturers to improve their value added effort so as to bring their products into a higher price ledge, but, in my opinion, it may affect substantially on certain manufacturers serving a stable low end markets in the rest of world or less developed countries.
Three DIPNs updated
[Comment]
by Alan Kong
The Inland Revenue Department (IRD) has updated three Departmental Interpretation and Practice Notes (DIPNs), namely 13 (Profits tax - Taxation of Interest Received), 13A (Profits Tax - Deductibility of Interest Expense) and 34 (Exemption from Profits Tax (Interest Income) Order 1998 ) on 30 December 2004 with regard to the interest income and expenses resulting from the amendment of the Inland Revenue Ordinance (IRO) to tackle the tax avoidance scheme manipulating the listing of fund overseas.
New archive, click here.
Copyright (c) 2001-2006 Kong King Yiu, Certified Public Accountant/ Chartered Accountant. All rights reserved.
