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Advance Ruling Case No. 13

1. The provisions of the Ordinance

  This ruling applies in respect of section 14 of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) A group with head office located in the USA carries on business with global operations. It manufactures its products in countries throughout the world and sells its products in over 150 countries. It operates companies dealing with manufacturing ("Manufacturing Companies"), distribution ("Distribution Companies"), marketing ("Marketing Companies") and logistic support ("Logistic Companies") in various jurisdictions.
(b) The Manufacturing Companies (no manufacturing operations are carried out in Hong Kong) receive orders from and sell the products to the Distribution Companies (established outside Hong Kong and without any employees in Hong Kong), who in turn sell to the Marketing Companies (one Marketing Company was incorporated in Hong Kong and is responsible for the marketing and sale of the group's products in Hong Kong and PRC). The group's head office determines the products to be manufactured and the inter-group selling prices.
(c) The Logistic Companies (including Company L) provide logistical and administration support services to the Distribution Companies for handling the procurement and supply processes. Company L was established in Hong Kong and provides support services to the Distribution Companies.

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3. The arrangement

(a) The Marketing Companies place orders with the Distribution Companies through the group's web-based international supply system (ISS), which is managed by the head office.
(b) Company L downloads the Asian Marketing Companies' purchase orders from the ISS and verifies the details. It then consolidates the orders into a summary of purchases to be made by the Distribution Companies from the Manufacturing Companies.
(c) A summary of purchases is then forwarded by Company L, by e-mail, to the respective Distribution Companies for approval. If applicable, the latter confirm approval to Company L by e-mail. Acceptance or rejection of an order is based on the worldwide pricing guidelines established by the group head office.
(d) Based on the approved purchase order, Company L prepares an order form under the name of the Distribution Company concerned to the Manufacturing Companies. The latter confirms with Company L via e-mail the quantity of goods available for export to the Asian Marketing Companies.
(e) Company L then forwards to the Asian Marketing Companies via e-mail the confirmation of the products available for export from the Manufacturing Companies and requests the Asian Marketing Companies to confirm its agreement thereto.
(f) Based on the purchase orders approved by the Distribution Companies and confirmed by the Manufacturing Companies, Company L prepares pro-forma invoices to the Asian Marketing Companies, under the letterhead of the relevant Distribution Companies.
(g) Upon receipt of the pro-forma invoices, the Asian Marketing Companies issue purchase orders to the Distribution Companies, based on the details contained in the pro-formas.
(h) Company L then consolidates the details of the Asian Marketing Companies' orders and forwards them to the Distribution Companies via e-mail for approval. The latter confirms its acceptance by e-mail.
(i) Most of the finished products are shipped from the Manufacturing Companies direct to the Asian Marketing Companies in the region without being warehoused in Hong Kong. Once the products are shipped, the Manufacturing Companies forward or fax the shipping documents to Company L, which issues invoices to the Asian Marketing Companies under the letterheads of the Distribution Companies.
(j) On some occasions, products are shipped to Hong Kong for warehousing. In such circumstances, Company L notifies the Asian Marketing Companies of the products to be warehoused in Hong Kong and arranges the shipment of these products. Company L also provides services including transportation, co-ordination of customs arrangement and clearance and visual checking to verify the quantity and package of the products imported into Hong Kong. For sales to Hong Kong and PRC, Company L liaises with the suppliers to arrange for the delivery of products to the Hong Kong Marketing Company.
(k) Company L maintains all accounting records in connection with the Distribution Companies' trading activities in the Asia region. This includes details of all sales made to the Asian Marketing Companies, and purchase and sale of raw materials to the Manufacturing Companies. Company L also summarizes and reports the Distribution Companies' accounting transactions to the group treasury center which is outside Hong Kong.
(l) The Distribution Companies maintains bank accounts outside Hong Kong, which are monitored by the group treasury center. The treasury center monitors and co-ordinates all inter-group accounts and fund flows together with Company L which provides the details of the trade receivables and payables to the treasury center on monthly basis.
(m) Besides, Company L also provides information technology services including a technology platform and software to enable order processing, stock management and location processing, miscellaneous reporting and general communication to customers and management of the Distribution Companies.
(n) Company L charges a service fee to the Distribution Companies at cost plus 5% mark up.

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4. The ruling

(a) The Distribution Companies carry on business in Hong Kong through Company L; and
(b) The profits derived by the Distribution Companies from their trading operations with group companies in the Asia region arise in or are derived from Hong Kong and hence are chargeable to Hong Kong Profits Tax under s.14(1) of the IRO.

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5. The period for which the ruling applies

  This ruling will apply for the year of assessment 2002/03 and subsequent years of assessment.

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6. The material assumptions in respect of a future event or any other matter made by the Commissioner

  No assumptions were made by the Commissioner.


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7. Date of ruling issued

  4 July 2003.