SECTION A – CASE QUESTIONS (Total: 50 marks)

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

CASE

Champion Group

Before group restructuring

Champion Group is a US-based trader of health care and pharmaceutical products.

Champion Inc, a company incorporated in the US and listed on the New York Stock Exchange,
set up a branch in Hong Kong to trade a health product that protects against infection from
influenza, called Influ-Proof. Influ-Proof is supplied by unrelated overseas suppliers and
traded mainly to customers in the Mainland.

After group restructuring

After a series of restructuring, Champion Inc set up Champion (Services) Limited ("Champion
Services") in Hong Kong during the year ended 31 December 2018. Champion Services
provides corporate services to Champion Inc to conduct re-invoicing activities in Hong Kong.
Employees of Champion Inc travel to the factories of suppliers outside Hong Kong to
negotiate the terms of purchase transactions with those suppliers. When an agreement is
reached, employees of Champion Inc will tell the factory that the transaction will be conducted
through Champion Services. Upon returning to the US, employees of Champion Inc will
send a purchase order to Champion Services offering to buy the goods such that a profit is
"booked" in the books of Champion Services. Champion Services has no offices or
employees of its own. On behalf of Champion Services, Janice Wong ("Janice"),
the General Manager of Champion Inc, will follow instructions from the employees of
Champion Inc to automatically accept the purchase order issued by Champion Inc, and issue
a purchase order on behalf of Champion Services to the supplier outside Hong Kong to buy
the goods for the originally agreed price.

The financial statements of Champion Services showed, amongst others, the following
information:

Profits and loss account for the year end 31 December 2019 31 December 2020
HK$ (million) HK$ (million)
Sales 100 380
Cost of sales 50 100
Gross Profits 50 280

Investment income 50 50

Balance sheet as at 31 December 2019 31 December 2020

HK$ (million) HK$ (million)
Total assets 250 350

Module 14 (December 2021 Session) Page 1 of 9

The notes to the financial statements of Champion Services disclosed the following controlled
transactions:

For the year ended 31 December 2019 31 December 2020

HK$ (million) HK$ (million)
Transfer of properties NIL NIL

Transactions in respect of financial assets NIL NIL

Transfers of intangibles NIL NIL

Other transactions 10 30

Janice Wong

Janice is a citizen of the US and has been employed by the Champion Group for 30 years.
She currently maintains an employment contract with Champion Inc which was negotiated
and concluded in the US. She was asked to work in Hong Kong at Champion Services for
two years effective from 1 January 2019. She will return to the Champion Group in the US
after the secondment.

Janice is responsible for the overall control and management of Champion Services in
Hong Kong. She stayed in Hong Kong during the following periods for the year 2019/20.

Year 2019 Year 2020

April 1 to 16 March 1 to 18
July 1 to 19
October 1 to 13

Champion Inc operated a share incentive plan ("the Plan") whereby conditional awards might
be made to employees of the Champion Group. The shares would only be vested on
the grantee should he/ she remain an employee of the Champion Group on the date of
vesting. The shares will be held by the nominees until they are vested on the grantee.

Janice was awarded at NIL cost under the Plan the following shares:

Award date No. of shares awarded Tranche No. of shares Released date
released
1 April 2018 20,000 1st 10,000 31 March 2019
2nd 10,000 31 March 2020

The market price of Champion Inc in Hong Kong dollar equivalent on the relevant dates is as
follows:

1 April 2018 $100

31 March 2019 $120
31 March 2020 $150

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Champion Inc declared a dividend per share of US$ 1 (i.e. 7.8 Hong Kong dollar equivalent)
on 31 December 2018 and 31 December 2019 respectively.

Janice is divorced. She is solely responsible for maintaining her 16-year-old son.
She received salary and discretionary bonus in the amount of HK$3,000,000 and
HK$2,000,000, respectively, in the year 2019/20. When she travelled to Hong Kong, she
lived in a serviced apartment in Kowloon. All the expenses related to the serviced apartment
were borne by Champion Services. Champion Services also reimbursed all the dining and
travelling expenses incurred by Janice in Hong Kong. The amount that was reimbursed to
Janice in the year 2019/20 was HK$200,000.

Question 1 (14 marks – approximately 25 minutes)

(a) Evaluate the potential profits tax liabilities of Champion Inc in respect of
the profits made from the sale of Influ-Proof by the branch in Hong Kong and
advise on any additional information required to facilitate your analysis.
(7 marks)

(b) Advise whether the profits from re-invoicing activities conducted by Champion
Services will be subject to profits tax.
(7 marks)

Question 2 (15 marks – approximately 27 minutes)

(a) Advise with reference to relevant provisions of the Inland Revenue Ordinance
("IRO") whether Champion Services needs to prepare a master file and local file
for the years ended 31 December 2019 and 2020.
(10 marks)

(b) Advise with reference to relevant provisions of the IRO on :

(i) The time that Champion Services has to prepare and submit a master file
and local file if it has to do so.

(ii) The penalties for non-compliance.

(5 marks)

Module 14 (December 2021 Session) Page 3 of 9

Question 3 (8 marks – approximately 14 minutes)

Advise on the source of Janice's employment income for the year ended 31 March 2020
and any exemption that may be available to Janice.
(8 marks)

Question 4 (13 marks – approximately 24 minutes)

Compute the salaries tax liability of Janice for the year of assessment
2019/20 (ignore provisional tax) with explanatory notes on your treatment of
the following items:

(i) Shares awarded under the Plan.

(ii) Reimbursement of dining and travelling expenses.

(13 marks)

* * * * * * * *

Module 14 (December 2021 Session) Page 4 of 9

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/
calculation and appropriate presentation of the answers.

Question 5 (15 marks – approximately 27 minutes)

Varian Limited ("VL") is a company incorporated and carrying on property holding and
investment businesses in Hong Kong. In prior years, VL demolished one of its shabby
industrial buildings in San Po Kong, Hong Kong and redeveloped the site into a modern
factory building. The redevelopment project was completed last year and, with the launching
of letting promotion, tenants in various business sectors (including but not limited to printing
factories, food processing, warehouses, retail outlets, etc.) have been secured and have
moved into the building gradually for business operations. It is estimated that about 70% of
the building's units have been leased out and used by the tenants in the latest accounting
year of VL. VL will treat the rental income from letting of the building's units as subject to
profits tax.

In view of the complexity in preparing the profits tax computation, the accounting department
of VL has appointed a reputable tax consulting firm named SK & Co to provide profits tax
computation services.

Required:

(a) In the context of computing statutory depreciation allowance of VL attributable

to the abovesaid redeveloped factory building in San Po Kong:

(i) Explain, with reference to relevant provisions of the IRO, how VL should
ascertain the industrial building allowance and commercial building
allowance.
(5 marks)

(ii) Advice VL on what actions it should take to support the computation of

the allowance(s).
(5 marks)

(b) Describe the ethical considerations SK & Co should be aware of in the course of
providing profits tax computation services to VL.
(5 marks)

Module 14 (December 2021 Session) Page 6 of 9

Question 6 (23 marks – approximately 41 minutes)

Mr Lam (a Hong Kong permanent resident) and Mrs Lam (a national of the People's Republic
of China ("PRC")) are a married couple ordinarily residing in Hong Kong and Mainland China,
respectively, and occasionally travel across the border for family gatherings. Both of them
own immovable properties in Hong Kong (a residential property in Tsuen Wan owned by
Mr Lam and a shop premises in Kwun Tong owned by Mrs Lam) and in the Mainland
(a residential property in Shenzhen owned by Mr Lam and another residential property in
Zhuhai owned by Mrs Lam) for rental purposes.

The tenancy details of the abovesaid Hong Kong properties are as follows:

Residential property in Shop premises in

Tsuen Wan Kwun Tong
1. Term of lease 2 years from 4 years from
1 March 2019 1 December 2018
2. Monthly rent HK$35,000 payable in HK$48,000 payable in
advance on the first day of advance on the first day of
each month each month
3. Rent free period 1 month from ½ month from
1 March 2019 1 December 2018
4. Premium N/A HK$72,000 payable on
1 December 2018
5. Refundable deposit HK$70,000 payable on HK$96,000 payable on
1 March 2019 1 December 2018
6. Rates HK$2,500 per quarter HK$6,000 per quarter
(after Rates concession, (after Rates concession,
if any), payable by Mr Lam if any), payable by Mrs Lam
7. Property management fee HK$2,300 per month, HK$3,200 per month,
payable by Mr Lam payable by the tenant

It is also noted that the couple had not applied for personal assessment for all relevant years
of assessment.

Module 14 (December 2021 Session) Page 7 of 9

Required:

(a) Calculate the Hong Kong property tax liabilities of Mr Lam and Mrs Lam for
the year of assessment 2019/20.
(7 marks)

(b) Without considering the implications arising from any double taxation
arrangement, discuss the PRC tax exposure of Mr Lam and Mrs Lam, respectively.
(5 marks)

(c) Mr and Mrs Lam have engaged you as tax advisor. In the context of
the Arrangement between the Mainland of China and the Hong Kong Special
Administrative Region for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with respect to Taxes on Income, prepare a letter to them to
explain and analyse:

(i) The applicable Hong Kong and PRC tax exposure; and

(ii) Reliefs, if any, available to Mr Lam and Mrs Lam, respectively

with respect to each of their immovable properties located in Hong Kong and the
Mainland (computation of tax liabilities is not required).

Note: A maximum of 2 marks for communication skill and 2 marks for analytical skill will
be awarded.
(11 marks)

Question 7 (12 marks – approximately 22 minutes)

Discuss whether stamp duty is payable in the following circumstances (discussion on

Special Stamp Duty and Buyer's Stamp Duty is not required; calculation of the stamp
duty liability, if applicable, is required):

(a) Mr Poon is the sole shareholder of A Limited, whilst A Limited is the 100%
shareholder of B Limited and C Limited. It is also noted that C Limited currently
holds 80% shares of D Limited, whilst the remaining 20% shareholding of
D Limited is directly held by Mr Poon. Recently, it is resolved that a portfolio of
securities listed on the Hong Kong Stock Exchange currently held by D Limited
with a market value of HK$15 million will be transferred to B Limited for cash
consideration at current market value.
(4 marks)

(b) Mr Lam will get married to Ms Yeung next month. As a wedding gift, Mr Lam will
transfer a residential property in Hong Kong (owned by Mr Lam for more than
10 years with a current market value of HK$9 million) to Ms Yeung at nil
consideration. Both of them are Hong Kong permanent residents and Ms Yeung
does not have any residential property in Hong Kong at the present time.
(3 marks)

Module 14 (December 2021 Session) Page 8 of 9

(c) Mr Cheung's mother, Madam Yu, passed away last month. According to the will
prepared by Madam Yu, a shop premises in Hong Kong owned by her at
the market value of HK$20 million would be inherited to Mr Cheung upon
the execution of the relevant estate administered by a lawyer.
(2 marks)

(d) Ms Hung will transfer the entire shares of H Limited, a Hong Kong incorporated
company, to her son, Mr Wong, at nil consideration as a gift in recognition
of his graduation with first-class honours in accounting. H Limited does not
have any assets or liabilities except for an immovable property in Japan with
a current market value of HK$6 million.
(3 marks)

* * * END OF EXAMINATION PAPER * * *

Module 14 (December 2021 Session) Page 9 of 9