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Frequently Asked Questions & Answers on Completion of Supplementary Form S5 – Ship-owner (applicable for year of assessment 2018/19 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
Section 1 – Basis Period
1.
Q:
Can I report different basis periods for the return and the form?
A:
No. The basis period of both of the return and the form should be the same.
Section 2 – Business Operations
2.
Q:
For section 2.2, do I need to state the exact number of ships owned and chartered for each type of business operations that I have ticked in section 2.1?
A:
No. You only need to state the total number of ships owned and chartered for all types of your business operations.
3.
Q:
What is meant by "normally controlled or managed in Hong Kong" for section 2.3?
A:
The business will be considered to be "normally controlled or managed in Hong Kong" if the making of top-level policies, or the management of the daily business operations or the implementation of the decisions made by top management, takes place in Hong Kong.
Section 3 – Assessable Profits or Adjusted Loss
4.
Q:
Should I complete section 3 of the form on the group consolidated basis?
A:
No. You should report only the data of your own business.
5.
Q:
If I have prepared financial statements for a period of more than 12 months (or less than 12 months), how should section 3 be completed? Should the amounts be apportioned or grossed up to show figures for a 12-month period?
A:
It is not necessary to apportion (or gross up) the figures if the financial statements for a period of more (or less) than 12 months have been prepared. Amounts extracted from the Statement of Comprehensive Income/Profit and Loss Account should be used in completing section 3.
6.
Q:
What should be included in calculating the "total shipping income" and "total shipping profits (loss)"?
A:
"Total shipping income" and "total shipping profits (loss)" should include the worldwide income and worldwide profits (loss) respectively from your business as a ship-owner reflected in your accounts for the basis period concerned.
7.
Q:
What is meant by "relevant sums"?
A:
"Relevant sums" is defined under section 23B(12) of the Inland Revenue Ordinance ("IRO"). It refers to the sums relating to the operation of ships within or commencing from the waters of Hong Kong which are chargeable to profits tax. Relevant sums exclude both of the exempt sums in section 4.1 and the sums exempted from profits tax pursuant to a double taxation agreement in section 5.2 of the form. The total amount of relevant sums reported for section 3.3 should be equal to the total of each amount reported for sections 3.4.1 to 3.4.7.
8.
Q:
Should I report the shipping profits attributable to the "relevant sums" only for section 3.2?
A:
No. The amount to report for section 3.2 refers to your total shipping profits, whether or not they are attributable to the relevant sums in section 3 or the exempt sums in section 4.
Section 4 – Exempt Sums (If Any)
9.
Q:
What is meant by "exempt sums"?
A:
"Exempt sums" is defined under section 23B(12) of the IRO. It refers to the sums relating to the operation of ships within or commencing from the waters of Hong Kong which are exempt from profits tax. The total amount of exempt sums reported for section 4.1 should be equal to the total of each amount reported for sections 4.2.1 to 4.2.6.
10.
Q:
What is meant by "reciprocity status"?
A:
A ship-owner that is resident in a territory outside Hong Kong ("the relevant territory") but deemed to be carrying on business in Hong Kong as its ships called at Hong Kong, is regarded as having a reciprocity status, if any profits derived by a Hong Kong resident ship-owner from its business in the relevant territory are granted exemption from taxes, which is of substantially the same nature as profits tax, in the relevant territory.
Section 5 – Relief under Comprehensive/Limited Double Taxation Agreement or Arrangement ("DTA")
11.
Q:
How do I know whether I am a resident ship-owner or a non-resident ship-owner of a DTA jurisdiction?
A:
The definition of "resident" is governed by the provisions of the particular DTA. Generally, if you are incorporated in Hong Kong or you are normally controlled or managed in Hong Kong, you are considered to be a Hong Kong resident. If you are not incorporated in Hong Kong or you are not normally controlled or managed in Hong Kong, you need to look for the definition of "resident" under the provisions of the particular DTA.
12.
Q:
If I am a Hong Kong resident, should I fill in section 5?
A:
No. You should fill in section 5 only if you are a non-resident of Hong Kong and you wish to claim for relief under a particular DTA.
Section 6 – Activities Producing the Exempt Sums in Section 4 ("Relevant Activities")
13.
Q:
I carried on more than one Relevant Activities during the year, but some of them have ceased now. What should I tick for section 6.1?
A:
You should tick the boxes for all the Relevant Activities that you carried on during the basis period even though some of them have ceased after the basis period.
14.
Q:
What is the difference between the Relevant Activities carried out by the employees of associated person(s) in box 1 and the Relevant Activities carried out by the Taxpayer's associated person(s) in box 2 for section 6.2?
A:
For the scenario in box 1, it generally refers to the situation that the employees of the associated person(s) are assigned / seconded to work for the Taxpayer. For the scenario in box 2, it involves the engagement of the service of the associated person(s) at a fee charged to the Taxpayer on an arm's length basis. Please refer to the examples in Note 17 and Note 18 of the form for details.
15.
Q:
If the associated person does not have Business Registration Number, what should I fill in for section 6.3?
A:
Please provide the name of the associated person and state "NA" for the Business Registration Number.
Questions 16 to 18 are related to "Details of full-time employees in Hong Kong who carried out the Relevant Activities and had the necessary qualifications":-
16.
Q:
What is the basis of counting the number of employees? Is the number of employees as at the end of the basis period an acceptable basis for this purpose?
A:
All these are related to the threshold requirements on the indicator of the level of activity under section 26AB(4) of the IRO. After the relevant bureaux have consulted their stakeholders on the detailed arrangement, the Commissioner will specify the detailed thresholds, which are applicable to all taxpayers who enjoy the tax concessions, in a notice to be published in the Gazette. The Department will announce the details after consultation with the stakeholders and seeking of the legal advice.
17.
Q:
How should a taxpayer report if the full-time employee who carried out the Relevant Activities has dual / multiple roles or capacities in the corporation?
A:
As long as the employee was a full-time staff, then no matter the number of roles or capacities he/she had in the corporation, he/she should still be counted as a full-time staff. Regarding how the employee should be counted, this is related to the threshold requirements on the indicator of the level of activity under section 26AB(4) of the IRO. After the relevant bureaux have consulted their stakeholders on the detailed arrangement, the Commissioner will specify the detailed thresholds, which are applicable to all taxpayers who enjoy the tax concessions, in a notice to be published in the Gazette.
18.
Q:
What do employees with the "necessary qualifications" refer to?
A:
The taxpayer should include the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications / with relevant working experiences in relation to the Relevant Activities.
19.
Q:
All of my employees or the employees of the associated person in Hong Kong who carried out the Relevant Activities were employed on a part-time basis, what should I fill in for section 6.4?
A:
If all of the employees are under part-time employment, they should not be counted for the purpose of section 6.4. However, an employee who worked partly for the Taxpayer and partly for other companies in the same group in Hong Kong should be treated as a full-time employee.
20.
Q:
What type of employees should I report as "Others" in section 6.4?
A:
You should include the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications / with relevant working experiences in relation to the Relevant Activities.
21.
Q:
What is meant by "Operating expenditure incurred in Hong Kong for the Relevant Activities" in section 6.5? Do I need to provide a breakdown of the expenditure?
A:
It refers to the operating expenses that were incurred in Hong Kong for the production of the profits from the business as an owner of ships. Please also refer to Note 20 of the form. There is no need to provide a breakdown of the expenditure.
22.
Q:
Regarding Operating expenditure incurred in Hong Kong for the Relevant Activities, the note stated that "the amount of operating expenditure reported should include the remunerations borne by the Taxpayer in respect of the employees of the associated person(s) who carried out the Relevant Activities, and/ or the service fee incurred by Taxpayer for the Relevant Activities carried out by the associated person(s)".
Suppose a taxpayer is recharged by an associated person in one lump sum which includes cost of management support, office and administrative charges, and staff remuneration etc. for both relevant and non-relevant activities. But the taxpayer has difficulty to allocate the expenditure incurred in Hong Kong for the relevant activities specifically. What cost allocation method would be accepted by the IRD for the purpose of reporting this section?
A:
The taxpayer may consider to allocate the cost attributable to the Relevant Activities and other activities respectively by reference to a basis as to reasonably reflect the contributions by the employees to the carrying out of the Relevant Activities, e.g. by income or working time. Please note that for any activity which does not generate income to the taxpayer, it should not be allocated with any of the operating expenditure.