(iii) Hong Kong profits tax implication of the royalty income received by Smart-PRC
The taxability of the royalty received by Smart-PRC from Smart-HK for the use of copyright in Hong Kong and Singapore is
governed by s.15 of the IRO. As Smart-PRC is not carrying on business in Hong Kong, the royalty it receives will not fall
within the scope of s.14, but s.15. Under s.15(1)(b), any payments received for the use of, or right to use, in Hong Kong a
patent, design, trademark, copyright material, secret process or formula or any similar property or for imparting know-how in
connection with the use of any of those properties are deemed to be receipts arising in Hong Kong from a trade, profession
or business carried on in Hong Kong. In the case where the right to use is offshore Hong Kong, s.15(1)(ba) taxes a royalty
payment for use outside Hong Kong if the royalty payment is claimed as tax deductible in Hong Kong. In the case of
Smart-PRC, the royalty received for the use of the copyright in Hong Kong in the training sessions conducted by Smart-HK
in Hong Kong would fall within s.15(1)(b) and thus be taxable. 30% of the gross royalty received is deemed to be assessable
profits of Smart-PRC. Based on the figures provided, the estimated tax is $445 ($9,000 x 30% x 16·5%). Smart-HK is
deemed to be acting as the agent of Smart-PRC and is obliged to file the appropriate tax return on behalf of Smart-PRC,
withhold the tax amount from the payment before it is made to Smart-PRC, and pay the tax amount to the IRD on behalf of
Smart-PRC. Failure to do so would trigger a penalty. It is recommended that Smart-HK be requested to provide evidence that
these reporting and withholding obligations have been duly complied with.
In respect of the royalty paid for the use of the copyright in Singapore by Smart-Singapore, since Smart-HK has sought to
claim the royalty from Smart-Singapore as offshore and non-taxable and thus has not claimed the related royalty payment to
Smart-PRC as tax deductible in Hong Kong, Smart-PRC would not be liable to Hong Kong profits tax in respect of the
Singapore-sourced royalty income unless Smart-HK’s aforesaid claim fails. No compliance obligation is required.
(iv) Other tax compliance obligations in Hong Kong
Other than the above-mentioned technical risks which may potentially expose Smart-HK to additional tax risks, it is also
important to assess the tax compliance level of Smart-HK itself. In the absence of a satisfactory level of tax compliance or
reporting, Smart-HK is potentially subject to challenge by the IRD, leading to tax payable on additional assessments and
possibly a penalty. The following is a list of information required for further review, together with relevant explanations:
