1.Introduction of the Company S Expertise in Management Efficiency and Effectiveness To

Case 1

City Ltd is an UK company. It has carried on a business consultancy development service since 1990. It has offices in major cities in UK and South East Asia (except Hong Kong and Macau). It provides consultancy services to foreign companies setting up business in UK, and UK companies setting up business in South East Asia.

Mr Bob, the General Manager of City Ltd, wishes to explore opportunities in the Mainland of China and Hong Kong by providing the following services:

1.introduction of the company’s expertise in management efficiency and effectiveness to Mainland enterprises,

2.introduction of UK companies to enter the market in the Mainland and Hong Kong, and

3.introduction of Mainland enterprises to enter the UK market.

The company has to decide whether it will set up a company in Hong Kong or in the Mainland of China. There are two alternatives open to the company:

1.set up a branch or a company in Hong Kong to make use of the infrastructure of the Hong Kong business environment as a stepping stone to the Mainland market

2.set up a branch or a company in the Mainland and run the business directly from the Mainland.

Required:

(a)A comparison of the Mainland’s enterprise income tax system with Hong Kong’s profits tax system explaining their similarities and differences in the charge to tax with particular reference to the tax incentives generally available to a business in the Mainland and Hong Kong.

(b)Based on your answer on (a), give your opinion whether it is better to set up a business entity in the Mainland or in Hong Kong.

(c)Your firm is approached by City Ltd to carry out a feasibility study on the tax implications of setting up a business in the Mainland. Explain the ethical issues you have to consider before accepting the appointment.

(d)City Ltd wishes to set up a branch in the Mainland, and send staff from UK to work in the Mainland.

Explain the rules that City Ltd is required to observe for employees working in the Mainland in respect of their UK staff and how their income is chargeable to individual income tax in the Mainland?

(e)City Ltd wishes to set up a branch in the Hong Kong, and send staff from UK to work in Hong Kong.

Explain the rules that City Ltd is required to observe for employees working in Hong Kong in respect of their UK staff and how their income is chargeable to Hong Kong salaries tax?

(f)BBC Ltd, a UK company, wishes to set up a business in both the Mainland China and Hong Kong. It decides to invest ₤1,000,000 in each business. Initially, the company will inject share capital of ₤100,000 into each company and finance the balance with a loan of ₤900,000.

Explain the tax rules governing the payment of interest expenses and dividends by a Hong Kong company and a Mainland company.

1