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

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U9_profits_3_0809_rev 08/09 1 THE UNIVERSITY OF HONG KONG SCHOOL OF BUSINESS BUSI 0018 – Hong Kong Taxation Unit 9 – Profits Tax (3) Coverage 1 Specific deductible items: Sections 16(1)(b) to (1)(g) 2 Other specific deductible items: Sections 16A to 16K 3 Specific non-deductible items: Section 17(1) and (2) 4 Examples of common items 5 Basis period – for normal continuing business 6 Provisional profits tax 7 Other matters 8 Loss relief Learning Objectives After completing this unit, you should be able to: explain the deductibility of expenses under profits tax identify non-deductible expenses for the purposes of profits tax explain how the profits tax of a continuing business is computed on a current year basis compute provisional profits tax explain the profits tax treatment in respect of post-cessation receipts and payment explain the profits tax treatment in respect of pre-commencement expenditure explain the valuation of stock and work in progress for profits tax purposes explain a loss computation and the profits tax treatment of losses applicable to an individual, a partnership and a corporation 1 SPECIFIC DEDUCTIBLE ITEMS 1.1 Section 16(1)(b) - Rent Rent payment in respect of land & buildings used for producing chargeable profits 1.2 Section 16(1)(c) - Foreign Tax Paid Foreign tax paid in respect of interest income and gains or profits from sale of certificate of deposit or bill of exchange, and that tax is substantially the same nature as tax imposed under the IRO
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U9_profits_3_0809_rev 08/09 2 1.3 Section 16(1)(d) - Bad Debts Debts incurred in any trade proved to the satisfaction of assessor to have become bad during the year (proof: recovery actions have been taken to chase the debts but in vain), provided that the debts are: - previously included as taxable trading receipts, or - in respect of money lent in the ordinary course of a money lending business carried on in HK (proof of a money lending business includes: money lender license, organised set-up, frequency of similar transactions, scope of activities mentioned in the Memorandum and Article of Association, etc.) Subsequent recovery of bad debts previously allowed for deduction is taxable in the year of recovery Specific provision for doubtful debts, which is ascertained based on detailed rules and supporting documents, is regarded as “incurred” because the provision amounts to an accrued liability, whether legal or practical, and is an accurate measured liability (re: case) General provision, which is ascertained based on rough estimation without sufficient documentary evidence, is not regarded as “incurred” 1.4 Section 16(1)(e) - Repairs Expenditure incurred in the repair of any premises, plant, machinery, implement, utensil or article employed in the production of profits Should not be improvements on the assets nor an entirety of the asset 1.5 Section 16(1)(f) - Replacement Expenditure incurred in the replacement of any
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09 - THE UNIVERSITY OF HONG KONG SCHOOL OF BUSINESS BUSI...

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