Tax Efficiency Profits of Hong Kong Trading firms – Contracts Effective outside Hong Kong
Contracts for purchase and sale
The factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are effected. "Effected" does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts. Following the Court of Appeal judgment (Magna Industrial Co. Ltd v CIR) it is now clear that a wider approach is necessary. The proper way is to look at all the relevant operations carried out to earn the profits, not simply the purchase and sale of the goods.
In Magna Industrial Co. Ltd. v CIR, the Court of Appeal noted that: "Obviously the question where the goods were purchased and sold is important. But there are other questions: For example: How were the goods procured and stored? How were the sales solicited? How were the orders processed? How were the goods shipped? How was the financing arranged? How was payment effected?"
How relevant facts are considered
In considering the relevant facts the nature and quality of the activities matter more than their quantity. It is the cause and effect of such activities on the profits that is the deciding factor.
Facts not directly related to the trading activities are considered irrelevant in determining the locality of profits. For example, renting office premises, recruiting general staff, setting up office, etc.