08 - THE UNIVERSITY OF HONG KONG SCHOOL OF BUSINESS BUSI...

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U8_Profits_2_0809 08/09 1 THE UNIVERSITY OF HONG KONG SCHOOL OF BUSINESS BUSI 0018 – Hong Kong Taxation Unit 8 – Profits Tax (2) Coverage 1 Accounting profit vs assessable profit 2 Capital vs revenue receipts 3 Capital vs revenue expenditure 4 General deduction rule: Section 16(1) 5 Specific deduction rule – Interest expense Learning Objectives After completing this unit, you should be able to: distinguish assessable profit versus accounting profit explain the principles distinguishing capital and revenue items identify capital receipts and revenue receipts identify capital expenditures and revenue expenditures explain the general deduction rule under section 16(1) determine the deductibility of interest expense 1 ACCOUNTING PROFIT VS ASSESSABLE PROFIT Accounting Profit = Revenue Expenses Based on generally accepted accounting principles In the Court of Final Appeal in CIR v Secan Ltd (2000) “Both profits and losses must be ascertained in accordance with the ordinary principles of commercial accounting as modified to conform to the Ordinance.” Profit before taxation” in the financial statements is the starting point for the calculation of assessable profit, subject to adjustments which are required either under general rules or specific provisions of IRO Profit before taxation per account Add: Non-deductible expenses Accounting depreciation Taxable items not reflected in account Less: Non-taxable income Depreciation allowance Deductible items not reflected in account = Assessable profit
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U8_Profits_2_0809 08/09 2 ABC Limited Profits Tax Computation For the year of assessment 20xx/xx $ $ Net profit per accounts X Add: Charitable donations X Accounting depreciation X Expenses attributable to offshore profits X Non-deductible interest expenses X Non-deductible bad debts X Increase in general provision for doubtful debts X Improvement X Initial purchase of assets on replacement basis X Disallowable portion of contribution to retirement scheme X Disallowable exchange loss X Fine / penalty X Non-deductible legal / professional fees X Non-deductible taxes X Other expenses attributable to non-assessable profits X Other non-deductible items / capital expenditure X X X Less: Dividend income X Exempted interest income X Offshore interest income X Decrease in general provision for doubtful debts X Recovery of bad debts previously not allowed X Prescribed fixed assets under s16G, etc. X Non-taxable exchange gain X Other non-taxable items / capital gain X (X) X Less: Plant & Machinery Depreciation Allowances X Industrial Building Allowances X Commercial Building Allowances X (X) A Less: Charitable donation (restricted to 25%* of A) (35%* w.e.f. 08/09) (B) Assessable Profits C Less: Loss brought forward from previous years/periods (X) Net Assessable Profits D Profits Tax Payable (D x applicable tax rates) E z One-off measure for 2007/08: amount of profits tax charged is reduced by: - 75% of the amount of tax computed above; or - $25,000, whichever is the less
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U8_Profits_2_0809 08/09 3 2 CAPITAL VS
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08 - THE UNIVERSITY OF HONG KONG SCHOOL OF BUSINESS BUSI...

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