CG Lighting is a Hong Kong firm that produces lighting fixtures. In 1994, it converted its previous processing arrangement with a Chinese third party into a manufacturing agreement with a wholly owned subsidiary of CG Lighting to continue manufacturing lighting fixtures.
The conversion changed the arrangement from contract processing to import processing, though CG Lighting’s manner of operations remained unchanged in substance. The Inland Revenue Department (IRD) only grants apportionment for contract processing arrangements, while it treats import processing arrangements as trading profits that are fully chargeable to tax in Hong Kong.
CG Lighting claimed that because profits could be attributed to its involvement in the manufacturing process in the PRC, part of its profits were sourced offshore, entitling it to a 50:50 apportionment concession.
The CA rebuffed this claim, citing a previous case between the Commissioner of Inland Revenue and Datatronic, which was almost identical. The CA concluded that CG Lighting was a trader (not a manufacturer) of lighting fixtures, with no distinguishable difference from that of Datatronic, and that its trading transactions were carried out in Hong Kong. As a result, all of its profits should be subject to Hong Kong profits tax.
Allen & Overy, who represented CG Lighting on the case, declined to comment on the CA’s ruling.
The CA’s judgment suggests that the courts are being consistent when interpreting cases involving the apportionment of profits from an import processing arrangement, highlighting the point that the 50:50 tax concession applies only to contract processing arrangements.
Since the Chinese authorities no longer encourage contract processing arrangements, businesses in Hong Kong are shifting towards import processing arrangements to safeguard their operations in China. If the IRD continues to maintain its position on only granting the 50:50 apportionment concession for contract processing arrangements, the concession could have little significance in the future.
