Apr 2016, Issue 3
In Board of Review Case D25/14, the Board held that the trading profits derived by a Hong Kong company (the taxpayer) acting as a "middleman" between a PRC company and a Taiwanese company to circumvent the trade restriction between the PRC and Taiwan were sourced in Hong Kong despite only limited activities were performed by the taxpayer in Hong Kong.
The Board took the view that the taxpayer's trading operation was not comparable to that of a traditional trading business. Based on the specific facts of the case, the "middleman" role taken by the taxpayer in Hong Kong and the trans-shipment of goods through Hong Kong were the effective causes of profit generation while the other trading activities (e.g. entering into and performance of the trading contracts) were just antecedent or incidental activities.
As the Board's decision in this case was made based on the very unique and specific facts of the case, there are arguments that the decision should not be generalised and applied to other cases that have different fact pattern. However, taxpayers lodging an offshore claim on their trading profits should be mindful that the IRD now tends to take a more stringent approach in examining the offshore claims.
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