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Contemporary Tax Issues Arising from Recent Court Decisions

Li & Fung (Trading) Limited (Li & Fung) had its head office in Hong Kong, and many of its most senior staff were based there. Li & Fung normally entered into contracts with its customers under which it was appointed as the customers’ buying agent. The agency agreements specified the services to be provided by Li & Fung to its customers in connection with the manufacture, sale, and purchase of goods. Such services included finding suppliers to manufacture goods and selling the goods so sourced to Li & Fung’s customers as buyers. Li & Fung managed the sourcing and manufacturing processes to ensure that satisfactory goods were supplied to its customers.Li & Fung had entered into contracts with its overseas affiliates under which the latter had undertaken to perform certain services. These overseas affiliates usually had their own staff. Li & Fung engaged or acted through these overseas affiliates or sourcing companies in performing those services which it had contracted to provide to its customers. Upon delivery of the finished goods to a customer, Li & Fung was usually paid a commission of six per cent of the total FOB value of the customer’s export sales. Li & Fung paid its overseas affiliates a commission of four per cent of the total FOB value of the customer’s export sales. Li & Fung argued that the commission (six per cent of the total FOB value of the customer’s export sales) earned on orders from overseas customers that were handled by overseas affiliates was from an overseas source and thus was not chargeable to Hong Kong profits tax.