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How does the Inland Revenue Department infer that trade profits are derived from overseas?

The Inland Revenue Department considers the source of trade profits and will ascertain the following information from taxpayers:

1. Provide the company’s organizational chart, which must show the relationships among all companies.

2. What good does the taxpayer buy and sell?

3. Where and how to find suppliers, negotiate with suppliers, order product prices, make and sign contracts, etc…

4. How and where taxpayers find sales targets, negotiate, draft and sign contracts, etc…

5. How and where to process purchase and sales orders?

6. How are the goods stored, transported, inspected, etc…

7. How and where to arrange trade financing and payment?

8. Information on expenditures related to profit generation.

9. Details of payment of foreign profits tax.

10. Explain why trade profits are not taxable.

The Inland Revenue Department will determine the source of trade profits based on the following principles:

• If all contracts are signed in Hong Kong, all profits are taxable.

• If all contracts are signed outside Hong Kong, all profits are not taxable.

• If only one of the purchase or sale contracts is reached in Hong Kong, the Inland Revenue Department will refer to the source of the data provided above for analysis.

• If the goods are sold with a Hong Kong customer or the goods are purchased from a Hong Kong supplier, the profits are usually taxable.

• When determining the source of profits, all operations that generate trade profits must be considered.

The above information is for reference only. If in doubt, we welcome your tax inquiries

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