9. Profits Tax 4

9. Profits Tax 4 - BUSI0018D HK Taxation Tutorial Notes on...

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BUSI0018D – HK Taxation Tutorial Notes on Profits Tax (4) – Allowable Deductions Allowable Deductions (IRO s16 – ascertainment of chargeable profits) General Rule: All outgoings and expenses to the extent to which they are incurred during the basis period for the year of assessment in the production of profits which are chargeable to profits tax for any period (s16(1)). The meaning of “incurred”: an expense or outgoing is “incurred” when it is paid out OR when the liability to pay arises (i.e. there is a definite commitment) E.g. interest payments which a taxpayer has an obligation to pay, but has not yet paid, are deductible as “incurred” The meaning of “in the production of chargeable profit”: Whether the outgoings or expenses incurred in the production of chargeable profits is a question of fact. Note that it’s NOT important whether the expenditure incurred can really produce profits or not! Even though no profits is produced at the end, the expenditure incurred may be deductible as long as the expenditure is incurred with a view to producing profit . Case: CIR v Swire Pacific Ltd The payments were gratuitous “retirement grants” paid to striking workers in order to end a strike and allow the taxpayer to continue its business. Though the taxpayer was about to merge and cease business, and so could not make a profit in that year, the payments were held to be deductible as they had been made to get the business functioning again and were therefore made for the purpose of producing profits. Deductions NOT allowed (IRO s17) Section 16(1) provides a list of deductions which are specifically allowed, while section 17(1) provides a list of expenses (private expenses, capital expenditure etc.) which are specifically NOT allowed Therefore, only those items that are qualify under s16 and are NOT excluded under s17 are deductible Specific Deductions (s16(1)(a)-(h) 1
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The following table shows the overview of certain allowable deductions specified in s16(1)(a)-(h) Section Specific Deductible items s16(1)(a) Expenses connected with borrowing money (discussed in the next part of the tutorial notes) s16(1)(b) Rent : Rent paid by any tenant of land or buildings occupied for the purpose of producing assessable profits is deductible s16(1)(c) Foreign tax : Deductions allowed for foreign taxes paid on interest income, gains from bills of exchange, etc, which are deemed to be trading receipts and chargeable to tax under s15(1)(f), (g), (i), (j), (k), (l). s16(1)(d) Bad Debts : Bad debts (including specific doubtful debts) incurred in any trade, profession or business are deductible if they are proved to the satisfaction of the assessor to have become bad. However, bad debt recovered is assessable as a trade receipt
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9. Profits Tax 4 - BUSI0018D HK Taxation Tutorial Notes on...

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