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These notes are issued for the information of taxpayers and their tax - page 28 / 68

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mere purchase by that permanent establishment of goods or merchandise for the enterprise. This is because purchasing activities do not directly generate profits in the overall business activities. In fact, it is very difficult to compute the part of the total business profits that is attributable to such purchasing activities.

65.

The profits to be attributed to the permanent establishment must be

determined by the same method year by year unless there is good and sufficient

reason for a change.

More particularly, the method should not be changed

merely because some other method would produce more favourable results.

66.

“Business profits” may include, apart from profits derived from

business activities, income and interest. The taxation

such as of these

that from categories

immovable property, dividends of income is governed by other

Articles of the Comprehensive Arrangement. To clarify the application of Article 7 in relation to other Articles, paragraph 7 of Article 7 provides that where profits include items of income which are dealt with separately in other Articles of the Comprehensive Arrangement, then the provisions of those Articles will not be affected by the provisions of Article 7. It should be noted, however, that some Articles contain provisions stating that the provisions of

Article 7 paid is

shall apply effectively

if the relevant property in respect of which the income is

connected

with

a

permanent

establishment.

Those

provisions

are

paragraph

4

of

Article

10,

paragraph

5

of Article

11,

paragraph

4

of Article 12, and paragraph 2 of Article 20.

Article 8

SHIPPING, AIR AND LAND TRANSPORT

67.

Article 8 provides that revenue and profits derived by an enterprise

of One Side (i.e. an enterprise of the Mainland or an enterprise of Hong Kong) from the operation of ships, aircraft or land transport vehicles in shipping, air and land transport businesses (except when the ship, aircraft or land transport vehicle is operated solely between places in the Other Side) shall be exempt from tax in the Other Side. The taxes exempted in the Mainland include enterprise income tax and business tax. Enterprise income tax is calculated by reference to profits whereas business tax is calculated by reference to revenue. Accordingly, the Article specifically includes revenue and profits in the scope

of the exemption.

Revenue and profits refer to revenue and profits derived by

24

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