Profits Tax on Treatment of Electronic Commerce
Hong Kong adopts territorial source concept for taxation and only profits sourced from Hong Kong are taxable under Profits Tax. As the Inland Revenue Ordinance (“IRO”) has no specific provisions on taxation of Electronic Commerce (“E-Commence”) in Hong Kong, the Hong Kong Inland Revenue Department (“IRD”) has issued Departmental Interpretation and Practice Notes No. 39 (“DIPN 39”), a form of document issued by the IRD for information and guidance on certain tax practice and has no legal binding force, for Profits Tax on Treatment of E-Commence back in July 2001.
As stated in DIPN 39, the IRD applies the same basis as to conventional forms of business to E-Commerce and generally refers to the basic charge of Profits Tax under Section 14 of IRO with the following three conditions:
- The person concerned must carry on a trade, profession or business in Hong Kong;
- The profits to be charged must come from the trade, profession or business carried on by the person in Hong Kong; and
- The profits must be “profits arising in or derived from Hong Kong”.
In determining whether a person engaging in E-Commerce is carrying on a trade, profession or business in Hong Kong, the IRD would normally consider a totality of facts which includes the nature of any contracts concluded in the jurisdiction and the locations of the following activities performed by the person:
- Where goods are stored and delivered by the person
- Where services are provided
- Where the places payments are made and received
- Where purchases and sales are made
- Where the bank accounts are maintained
- Where business back-up services are provided
The mere presence of a server in Hong Kong, even if it is capable of concluding contracts, processing payments or delivering digital goods without involvement of human activities in Hong Kong, would not generally be regarded as “carrying on business in Hong Kong” by the arrangement.
Furthermore, to determine whether or not the E-Commerce profits arising in or derived from Hong Kong, the IRD looks into the locations and details of the taxpayer’s operation which produce the relevant profits to ascertain the source of such profits. The actual physical locations of business operations would weigh more than the physical locations of servicers in determining the profits source. The IRD has also stated in DIPN39 the following illustrations as a general preposition:
- A company which has all of its business operations in Hong Kong apart from operating a server (intelligent or otherwise) which is at its disposal and located outside Hong Kong for E-Commerce purposes will be liable to Profits Tax.
- A company which has all of its business operations outside Hong Kong apart from operating merely a server (intelligent or otherwise) which is at its disposal and located in Hong Kong will not be liable to Profits Tax.
Apart from the above, the IRD also follows Section 15(1) of the IRO in dealing with receipts for the use of or right to use in Hong Kong a patent, design, trademark, copyright material or secret process or formula or other property of a similar nature as deemed receipts chargeable to Profits Tax.
Should you require further details or assistance on the above, please contact Sylvester Chu at tax@zetland.biz.
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