Source of Profits: Its Time (For Change)

Abstract

This article first sets out the current law to determine the source of profits for the purposes of Hong Kong profits tax. It then examines, by reference to both case law and Inland Revenue Department practice, the pressing areas of dispute and concludes that the source/residence dichotomy may be somewhat illusory. Should these critical issues be left to develop on a case-by-case basis? If not, how should they be dealt with - by legislative fiat or by a clear statement of departmental practice? This article goes on to analyse these questions and concludes that, although the general principles for determining source of profits developed by the Courts are clear, the problems of mapping them to existing departmental practice and then applying them to common forms of cross-border transactions are real, militate against certainty of taxation treatment, and should no longer be ignored.