Accidental trading activity in Hong Kong

[expat2016]

Hi everone,

My HK company sells software worldwide online. Mostly to Europe.
Recently I had an accidental sale to HK customer.

IRD webpage says it can be classified as accidental activity and I should pay profit tax only from this sale.
https://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm

I don't have office or stuff in HK. But my accountant says this breaks offshore status of the company and I will need to pay tax from all global earnings.

HK income is less than 5% from overall income.

What do you think ?

[shri]

In all seriousness, have you asked IRD?

The guiding principal usually is the operations test - where are the operations / decision making located.

[expat2016]

Hi Shri,

All operations and activity are outside of Hong Kong.

Do you mean I can ask IRD directly ?

[ermen]

In all seriousness, have you asked IRD?

The guiding principal usually is the operations test - where are the operations / decision making located.

actually i disagree. it is where the profit making activity happens that gives rise to the profit, irregardless of where the "brains" / "decision making" is. IRD wants to take a broad view, but been smacked down by the courts.

See
ING Baring
CIR vs Li and Fung
(https://www2.deloitte.com/content/da...-en-050511.pdf)



Normally, selling into HK to a HK company is NOT a taxable affair.

However, it complicates things here in that it is a HK Company selling to another HK entity. My view is that this sale is actually taxable. HK company -> HK client sounds very much to me like profit generated in HK.

Disclaimer: this is pure internet speculation and is not advice

[civil_servant]

Just call them up.

https://www.ird.gov.hk/eng/cu_enqs.htm

[expat2016]

Ermen,

Thank you for attention to my question.

The problem is that my accountant says that it breaks my offshore income status for entire income and ALL company's income (not only this small sale) become taxed.

[expat2016]

civil_servant, thank you very much!

[shri]

it is where the profit making activity happens that gives rise to the profit,

Thats the operations test?

[ermen]

Thats the operations test?

sorry maybe semantics. but i disagree.

you can soley have your major operations / decision making in hkg. but if the transaction that gave rise to profit was done overseas, it is clearly not taxable in hkg

[muzzdang]

Ermen,

Thank you for attention to my question.

The problem is that my accountant says that it breaks my offshore income status for entire income and ALL company's income (not only this small sale) become taxed.

No it does not. If you can prove that all your other trading income is offshore sourced, then only that 5% sale to Hong Kong should be taxable. You should also be entitled to a deduction on the direct costs and an apportion of the general expenses (i.e. 5%) against the gross income.

I presume this is your first tax return? For any offshore claim, the IRD will typically issue queries and request documents to support the offshore claims. If you are unable to support the offshore claims, the IRD will then treat all income as taxable, also on a net basis. There should be no penalties if you eventually lose, but you must have acted in good faith to support the offshore claim is genuine.

The profits tax return is only signed by the taxpayer and not the accountant. So either get the accountant in line or change one.