QuestionTax Planning and ManagementCase PresentationCompany A is a private company incorporated in Hong Kong, and its principal activities consist of the letting and sale of properties. Its issued and fully paid share capital was $990,000 divided into 9,900 shares of $100 each, and the shareholders were:No of shares heldCompany B9,600Company C100Company D100Company E1009,900On the other hand, the shareholders of Company B were:No of shares heldCompany C3,300Company D3,300Company E3,3009,900Ever since its incorporation in 2012, Company A has been dealing with the development of a residential complex in the New Territories and industrial buildings in the Hong Kong Island. Company A’s chief sources of finance for the two developments came from trade payables ($300,000,000), shareholders’ equity ($300,000,000) and 6% interest-bearing loans from its shareholders ($400,000,000). Company A began paying interest on the shareholders’ loans as from April 2017. As the two developments had been completed in April 2018, Company A began earning profits from the sale of the residential units as well as rental income from the industrial units which it retained. As shown in its audited balance sheet on 31 March 2019, the balance of Company A’s Statement of Comprehensive Income stood at $400,000,000 which represented its accumulated undistributed profits. In April 2019, Company A made a declaration of interim dividend of $40,000 per share payable to its shareholders, in the total amount of $396,000,000. When the various dividends were declared, no cash payments were involved at all. Paul Ho, the financial director of Company A, admitted that the declaration of the interim dividend out of the retained profits meant, in effect, withdrawal by the shareholders of their finances offered to Company A as working capital.In April 2020, Company B declared an interim dividend payable to its shareholders of $38,788 per share, in the total amount of $384,001,200 – a sum equivalent to the amount of interim dividend receivable by Company B. Upon the payment of dividends, Paul Ho found it necessary to source for fresh working capital in the form of 8% secured interest-bearing loans from Company F (for the sums equivalent to the dividend amounts due to the shareholders) in order to continue the company’s operations.Company A has recently received notices of additional profits tax assessment for the years of assessment 2017/18 to 2020/21, on the basis that the following loan interest expenses were not allowable for deduction in the computation of assessable profits.Year of AssessmentInterest expensesAdditional tax payable2017/18$24,000,000$3,960,0002018/19$24,000,000$3,960,0002019/20$24,000,000$3,960,0002020/21$32,000,000$5,280,000$17,160,000Company A objected to all relevant additional profits tax assessments.Representing the Inland Revenue Department’s arguments.Each case should be presented in the following manner:Statement of facts and statement of issues (IRD perspective)IRD arguments -IRD presents their legal and factual argumentsIRD summaryLawSocial ScienceTax law ACCOUNTING 123
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