THE TREASURY,
101
HONG KONG,
23rd February, 1940.
My dear busines
I am sorry to bother you with a conundrum but in conversation with His Excellency yesterday I said that I did not know what "profits made in the Colony 11 meant and further that I had my doubts as to whether a workable definition could be evolved. He then said in effect that I'd better find out quickly and added that as Mr. C accepted it he probably knew and I should ask him. I protested that being out voted about 12 to 1 wasn't quite the same thing as "having accepted a condition".
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However I think perhaps you might care to pass the query on to some one in the Inland Revenue and see what happens.
This is Huxham on the point:-
"Chapter IV.- It is sought to tax only profits "made in the Colony". If it is meant to tax only part of the profits of abusiness controlled in the Colony with transactions out- side the Colony, I know of no precedent for such a scheme, and I believe it would prove tobe utterly unworkable. Such a scheme would mean immense work, endless disputes, and a mass of litigation. It is an Income Tax axiom that if the central control of a business is situated in a certain territ- ory, the whole of the profits of that business "arise" for Income Tax purposes in that territory. Parts of such profits may also "arise" for Income Tax purposes at branches and agencies in other territories, and this leads to double taxa- tion for which relief has or ought to be given. It is thus attractive at first sight to seek to tax only profits earned with- in the territory, and to refuse double tax relief; but in the case of a business extending into several territories how are profits earned within the territory to be computed in all the ramifications and complexities of modern business? A man sitting in an office in Hong Kong may buy goods in Java and sell them in England; the goods may never come within hundreds of miles of Hong Kong, andno document relating to the transaction may be signed in Hong Kong. Where are the profits "made"? Again, take an importing concern with Head Office in Hong Kong; its London office buys goods, which are imported through Hong Kong, and sold by a branch in China. How much profit is "made" in Hong Kong?
"If I were administering the Ordinance as it stands, I should feel bound in the first instance to have assessments made on normal Income Tax principles, viz. that all the profits of e.g. the Hongkong & Shanghai Bank were "made" in Hong Kong, because the whole business of the bank is controlled from Hong Kong. But I should expect to have such assessments short to pieces in the Courts, and criteria laid down for determining "profits made in the Colony" which would prove quite unworkable in practice."
I was