Application of the source principles to a datacentre or server permanent establishment (“PE”)
A Hong Kong Server alone does not constitute a Hong Kong PE, but more to be seen to pursue offshore claim for e-commerce and cryptocurrencies mining business
While Hong Kong is still adopting traditional operation tests in determining source of profits of e-commerce profits, digital services tax has been popular across the globe and BEPS 2.0 also suggests other methods to determine allocation of taxing rights for e-commerce business. HKICPA would therefore like to clarify the importance of the location of datacentre or server in determining the source of profits.
HKICPA suggested that Examples 5 and 19(a) of DIPN 39 seem to provide different answers to the importance of the location of server. Their details are as follows:-
Example 5 of DIPN 39
A non-Hong Kong corporation leased a primary datacentre from an unrelated service provider in Hong Kong to support its core business in which the profits attributable to that datacenter would be assessed to tax in Hong Kong.
Example 19(a) of DIPN 39
A Hong Kong corporation that performs all its core business activities in Hong Kong is fully chargeable to tax in Hong Kong, even though the PE server is located outside Hong Kong.
The Inland Revenue Department (“IRD”) has further confirmed that merely maintaining a server in Hong Kong alone would not give rise to Hong Kong Profits Tax. Based on our interpretations, physical location of personnel carrying out the business operations remained to be the most important factor. Nevertheless, it is likely that the IRD will consider that a profit will be subject to Hong Kong Profits Tax as long as any of the profit-generating activities are performed in Hong Kong.
Lastly, the IRD has also highlighted that the existence of the server in Hong Kong will become more important in determining the source of the profits under the following circumstances:
• Datacentre / Server / Mining Machines constitutes the core operations of the taxpayer; and
• The server was at the disposal of the taxpayer (i.e., under the effective control of the taxpayer).
Points to note:
Based on our observations, it is common for corporations to utilise server / datacentre / cryptocurrencies mining machines in Hong Kong despite the fact that the operation teams are based outside Hong Kong. More importantly, some corporations will outsource the operations to a third-party consultant instead of carrying out the operations on its own.
In any case, we are of the opinion that the importance of the existence of server / datacentre / mining machines in Hong Kong in determining the source of profits cannot be denied. It is important for the taxpayers to provide sufficient documentary evidence to support that these kinds of equipment do not form the core part of their business operations and thus do not form the profit-generating activities of the taxpayers.
