Advance Ruling Case No. 29

1. The provisions of the Ordinance

This ruling applies in respect of section 18E of the Inland Revenue Ordinance ("IRO").

2. Background

(a)

The Applicants comprise thirty-nine companies in the same group. Two of them commenced business before 1 April 1974. The rest commenced business after 1 April 1974.

(b)

The holding company, one of the Applicants, is Company A which is incorporated in Hong Kong.

(c)

The Applicants make up their accounts to 31 March.

(d)

The Applicants have established a number of entities in the PRC to carry on business there. These PRC entities were required by PRC law to close their accounts on 31 December.

3. The arrangement

(a)

The Applicants will change the accounting date from 31 March to 31 December in the year of assessment 2006/2007.

(b)

The reason put forward by the Applicants for the change of accounting date is for administrative efficiency and to reduce problems arising from the preparation of consolidated accounts due to different accounting year end dates among the group companies.

4. The ruling

(a)

The Commissioner will adopt the 9-month period from 1 April 2006 to 31 December 2006 as the basis period for the year of assessment 2006/2007 for those Applicants which commenced business after 1 April 1974.

(b)

The Commissioner will adopt the 12-month period from 1 April 2005 to 31 March 2006 as the basis period for the year of assessment 2005/2006 for those Applicants which commenced business after 1 April 1974.

(c)

The Commissioner will adopt the 12-month period from 1 January 2006 to 31 December 2006 as the basis period for the year of assessment 2006/2007 for those Applicants which commenced business before 1 April 1974.

(d)

(e)

Section 61A of the IRO will have no application to the transactions identified in the application, nor any part thereof, with respect to all Applicants.

5. The period for which the ruling applies

The ruling applies to the Applicants for the years of assessment 2005/2006 and 2006/2007.

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

There are no assumptions made by the Commissioner.

7 . Date of ruling issued

6 November 2006.

8. Commentary

Under section 18E of the IRO, where the assessable profits of a person from any trade carried on in Hong Kong have been computed by reference to an account made up to a certain day in any year of assessment and the person fails to make up an account to the corresponding day in the following year of assessment, the assessable profits from that source for the year of change and the year preceding the change shall be computed/recomputed on such basis as the Commissioner thinks fit. For businesses which commence before 1 April 1974, a basis period of 12 months should be maintained for all years of assessment unless there is tax avoidance motive. For businesses which commence after 1 April 1974, the aim is to ensure that profits not less than the total profits made over the life of the business are assessed. Hence, in the present case for the year of change, a 12-month basis period is adopted for the two Applicants that commenced business before 1 April 1974 and a 9-month basis period is adopted for those Applicants that commenced business after 1 April 1974. For the year preceding the change, the Commissioner considers it not necessary to recompute the profits.

(This commentary is not a legally binding statement and it does not form part of the Ruling.)