The Uneasy Relationship between Permanent Establishments and Section 14 of the Inland Revenue Ordinance
have previously written in this journal that all tax was, at its origin, territorial and that even residencebased systems of taxation have not thereby ceased to be territorial, but rather have merely expanded the nexus of territoriality to focus on the attributes of the taxpayer itself – whether these be nationality, place of management, or place of principal seat and so forth – as opposed to being limited to the activities carried on by the taxpayer.2 The notion of a permanent establishment (“PE”) is an extension of the criterion of geographic nexus that lies at the foundation of all revenue law: a PE is the taxable presence of a person in a jurisdiction in which that person is not resident. In general, a PE is not a subsidiary or associated person of the nonresident enterprise;3 instead, it is comprised in the same legal person as the head office. For example, the Hong Kong branch of a bank incorporated and tax...
Cost of Information and Life under the New Transfer Pricing Regime
Multinational enterprises (MNEs) ordinarily operate in a vertically integrated manner, but each ‘profit centre’ optimises its own profits. Transfer pricing (“TP”) policy is at the heart of this phenomenon as it determines how MNEs’ profits should be optimised in such a decentralised structure. Transaction cost economics stresses that local information specialisation causes information asymmetries in MNEs, and it is costly for the management of MNEs to obtain all necessary local information. With the implementation of the OECD-based TP regime in Hong Kong, MNEs need to step up their efforts in collecting local information to meet the disclosure requirement. This paper discusses the relationship between the valuable information embodied in MNEs and their strategic TP policies. It also examines the relationship between the information embodied in multifaceted global firms and their cross-jurisdictional transactions....
New Tax Deduction of Three Additional Types of Intellectual Property Rights Reignites the Controversies Surrounding Sections 16EC(4)(b) and 39E(1)(b)(i) of the Inland Revenue Ordinance
The Inland Revenue (Amendment) (No. 5) Ordinance 2018 has recently been enacted to grant tax deductions for three new types of specified intellectual property rights (“IPRs”), namely performer’s economic rights, protected payout-design (topography) rights, and protected plant variety rights. These new tax deductions work within the existing tax deduction regime that comprises two main provisions of the Inland Revenue Ordinance (“IRO”):Section 16E, which is not affected by the new law and which grants a 100 per cent tax write-off in the year of purchase for the costs of patent rights and rights to know-how where specified conditions are satisfied; Section 16E, which after the enactment of the new law effective from the year of assessment 2018/19 extends its coverage from registered trademarks, copyrights, and registered designs to include the three new types of IPRs detailed above. Under section 16EA, tax deductions for capital expenditure incurred on the purchase of such IPRs will generally be spread over five successive years in...
Optimise Your Risk Identification and Management Processes by Blending External Company Information with Your Own Tax Data
Tax administrations have been facing pressure from the electorate and media to combat tax avoidance and profit shifting away from their jurisdictions. Responding to this, G20 countries through the Organisation for Economic Co-operation and Development (OECD), and the Base Erosion and Profit Shifting (BEPS) project, have delivered a framework of 15 action plans to equip jurisdictions with tools to minimise the effects of tax avoidance and profit shifting. However, exchanges of data under Action 13 plan pose numerous challenges for tax administrations to make effective use of this information....
