T K Lo & Co
Hong Kong CPA Firm
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| Tax - Advice |
Personal Assessment (PA) - {A Residual Tax Comparision Game}
PA is an assessment method to allow Hong Kong taxpayers to consolidate their salaries, rental and business income to calculate tax liabilities and enjoy a lesser payment of tax. From Y/A 2018/19, spouses are allowed to elect PA separately. This new option can let taxpayers enjoy more calculation advantage to pay lesser tax, if the separation can make one of the spouses also entitling another more lower band progressive tax rate. Under jointly elected PA, only one set progressive rate calculation for the total aggregate income and it is more easy to push some income to calculate tax payment at a higher progressive rate.
The two key advantages of PA are (One) to make use lower progressive tax rates to calculate tax payment of some income, and (Two) to utilize all available kinds of tax deduction or any residual deduction (amount not be fully used). For example:-
-mortgage loan interest on rental properties
-business tax loss
-not fully utilized personal or other tax allowances or deduction
-one more one-off $20,000 tax deduction for another spouse not under couple join PA election
On the other hand, the two-tiered tax rate benefit will not be entitled, once PA is elected.
Overview of Transfer Pricing Documentation <extract from webpage of IRD>
The transfer pricing regulatory regime mandates Hong Kong entities to prepare transfer pricing documentation, namely master file, local file and country-by-country report. This three-tiered standardized approach requires a Hong Kong entity to articulate and execute a consistent transfer pricing policy and provide the Assessor with useful information for assessing transfer pricing risks.
In essence, transfer pricing documentation requires a summary of the global supply chain and the identification of the value drivers. It is important to document how value is generated by the group as a whole, the interdependencies of the functions performed by the associated enterprises with the rest of the group, and the contributions that the associated enterprises make to that value creation. It will also be relevant to document the legal rights and obligations of the relevant parties in performing their functions. Therefore, enterprises need to explain their value chain, including value drivers and related risks and functions. Value driver framework underlies the functional analysis of the transfer pricing documentation. A value chain analysis should provide information about the following aspects of the business activity:
- the key value drivers in relation to the transaction, including how the associated enterprises differentiate themselves from others in the market;
- the nature of the contributions of assets, functions and risks made by the associated enterprises to the key value drivers, including consideration of which contributions are unique and valuable;
- which parties can protect and retain value through performance of important functions relating to the development, enhancement, maintenance, protection and exploitation of intangibles;
- which parties assume economically significant risks or perform control functions relating to the economically significant risks associated with value creation;
- how parties operate in combination in the value chain, and share functions and assets in parallel integration; and
- how the economic circumstances may create opportunities to capture profits in excess of what the market would otherwise allow, such as those associated with unique intangibles, first mover advantages or other unique contributions.
{We think the above concepts will be likely applicable to other non-qualifying companies in tax practice. Therefore, they are good reference to business management and preparation for the coming tax compliance in transfer pricing startegy setting.}
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