Question 2 (30 marks) Amy is the sole owner of an accounting firm. The firm provides tax advisory and accounting services in Hong Kong. She was divorced last month and needs to bear the full cost (around $600,000 annually) of studying abroad for her son (aged 8). Amy is very anxious for her financial ability to fund her sons study. Amys best friend, June, wants to help Amy so she introduces her friend, David to meet Amy in her office. David is the managing director and a majority shareholder of Shine Ltd, a Hong Kong listed company with major business in trading furniture to Southeast Asian countries. David asks Amy whether she can provide tax advice on how to reduce the profits tax liabilities of his company. David knows that many companies use tax havens to pay little tax, so he suggests that Amy help him set up a subsidiary company in the Cayman Islands while management and business operations, such as goods purchasing and selling activities, will continue to be performed at the companys Hong Kong office. The Inland Revenue Department will be informed that these activities are transferred to and performed by the subsidiary company in the Cayman Islands. Thus, the business profits generated from this arrangement will be exempt from Hong Kong profits tax. He proposes that Amy be the auditor of Shine Ltd and at the same time also helps him with accounting and tax advisory services including preparing all the necessary documents to support the offshore claim. In return he will pay Amy a service fee of HK$400,000 annually for the next 10 years.

Required: (a) Identify at least FIVE primary stakeholders and assess their positions with reference to the above case. (5 marks)

(b) Identify at least THREE possible actions that might be taken by Amy. (3 marks)

(c) Explain the FIVE fundamental principles of the HKICPA Code of Ethics and evaluate whether accepting Davids proposal would violate any of these principles. (10 marks)

(d) Discuss all relevant tax rules and the legal implications if Amy accepts Davids offer. (10 marks)

(e) Advise Amy the appropriate course of action. (2 marks) [Total for Question 2: 30 marks]