e_dipn13a_Interest Expense_s16(2ABC)

Recognising the risk of revenue loss that might be

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Unformatted text preview: uctible. Recognising the risk of revenue loss that might be caused by tax avoidance schemes that would take advantage of the lack of symmetry in tax treatment on interest, specific rules were introduced in 1984 and 1986 to restrict the deduction of interest under certain circumstances. The interest deduction scheme has been revamped substantially by the recent amendments introduced by the Inland Revenue (Amendment) Ordinance 2004 (the 2004 Amendment Ordinance), with a view to bolstering up the interest deduction rules. This Interpretation and Practice Note sets out the Department’s views and practices on the interest deduction scheme that applies before and after the commencement of the 2004 Amendment Ordinance, which came into operation on 25 June 2004. [The practices of the interest deduction scheme that applied before the commencement of 2004 Amendment Ordinance were previously included in the DIPN No. 13.] INTEREST DEDUCTION SCHEME BEFORE THE COMMENCEMENT OF THE 2004 AMENDMENT ORDINANCE 2. Following the abolition of interest tax, anti-avoidance measures were enacted in relation to interest deductions under profits tax to protect the profits tax yield. In addition to the interest being incurred in the production of chargeable profits, specific conditions must also be satisfied before interest expenses could be allowed as deductions in computing assessable profits. In practice, these measures required all claims for deductions in respect of interest payable on moneys borrowed for the purpose of producing assessable profits to be supported by sufficient details and/or documentary evidence to satisfy at least one of the six prescribed conditions in section 16(2)(a) to (f). [Sections of the Main Ordinance referred to in paragraphs 2 – 9 are those provisions that were in force before the commencement of the 2004 Amendment Ordinance.] Conditions for Deduction 3. Conditions (a) and (b) were largely self-explanatory and referred to borrower taxpayers who were financial institutions or publi...
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