Unincorporated Business and the Common Question for the New Business

• Q: The month I started my sole proprietorship business is October 2014, when should I report my business result to the IRD?
  • A: “Tax returns – individual” should be used to report the profit and loss for sole proprietorship.
  • Although you open your business within the year of assessment 2014/15, your first account is after the date of 31 March 2015, so it is no need to pay tax within the year of assessment 2014/15 as there is no assessable profit.
  • If you receive the “tax returns – individual” every year from the IRD, you need to reply the return for the year of assessment related.
  • If you do not receive the “tax returns – individual” every year from the IRD, IRD will probably send you the return after 18 months you started up your business. It is because they are giving time for you to close and prepare first account, and not much assessable profits can be reported as a large amount of depreciation allowance is given in first start up year in most of the cases.
  • For notification of charagbility, If you have business to be reported for the provisional tax or profit tax in the year of assessment, you need to inform the commissioner in written form for requesting the tax return. Informed letter should be sent and arrive to the IRD before 31 July 2015.
• Q: I operate taxi business and receive “Tax returns – individual”. This year I earned a gross business income $40,000. Is it necessary for me to prepare account and hand in the tax return to the IRD?
  • A: According to IRO section 51C, it is requested for keeping business record and preparing annual accounts for their accounts for at least 7 year even if your amuont of gross income is small.
  • If your gross income is over $2,000,000, you should report the profit and loss account, balance sheet and tax return.
  • If your gross income is $2,000,000 or less, you do not have the necessity to hand in financial statements, accounts and supporting schedules of analysis with the tax return. You must keep the related records in case any checking made by the assessor in the future.
• Q: I have stated out “assessable profit” in  “Tax returns – individual” as I am running sole proprietorship business. But, it is necessary for me to ask professional accounts to get ready my account?
  • A: From the law, it is no need for the sole proprietorships or partnerships to hire any professional one for preparing accounts. If you do have the knowledge of accounting and taxation, you can prepare your account on your own, or hire a bookkeeper.
• Q: Property tax is charged on the assessable profit at standard rate, but I only have net profit. How can I change “net profit “to “assessable profit”?
  • A: With some adjustment, “net profit “can be changed to “assessable profit”. When you plan to find the assessable profit, you need to add capital payments, depreciation and less depreciation allowances on the net profit per account to find the assessable profit. More can be referred to Proforma Tax Computation Form IR957A(c).
  • When you fill in the part 5 tax return, you need to include the name of your company, business registration number, gross income, turnover, gross profit, net profit, assessable profit before charitable donation, approved charitable donation, and mandatory contributions to MPF scheme in the amount for a self-employed person.
• Q: I am single and live in Hong Kong, supporting my 70 years old mom which is living in Mainland China. The only source of my income is from my retail business, which earn a $160,000 gross profit this year of assessment. What tax relief I can apply for?
  • A: You can get basic allowance of $120,000 (from 2014/15 onwards) by choosing personal assessment. More can be referred to a brief guide to personal assessment. After subtracting the basic allowance, your assessable income would be $40,000. Before tax reduction, tax payable is $800, the first progressive rate, 2%, on PA in Hong Kong of the assessable income. After 75% tax reduction ($600, i.e. 75% of $800), then the tax payable is $200. It is applied to 13/14, 75% of final tax payable under profits tax, salaries tax and tax under personal assessment can be waved. As your mom does not live in Hong Kong generally, dependent parent allowance for your mom cannot be applied.
• Q: May you tell me more if I do not earn any profit but suffer loss from my business?
  • A: Your loss in present can set off the profit earned in future, or other income that you earned (if you choose personal assessment). Any loss that are not yet used to set off gain can be used to set off the gain in the following years.
• Q: As an owner of a traditional toy shop, my daily sales are marked down in a notebook. Unfortunately, many expenses are without proved by the receipts or invoice. Can you tell me ways of reporting profits to IRD?
  • A: As the law required, 7 years related documents of income and expense should be kept for clearly calculating your assessable profit. If you lost any receipts or invoice for proving your expense, you may find another related evidence to prove it. For instance, manifold the monthly rent by 12 for calculating the yearly rent if you lost any receipts of rent. You can calculate the ratio of gross profit and multiple the sales to gross profit ratio to find the gross profit. You may find the amount of salaries, rates, utilize and other operating expenses from bank statements and cheque butts.
  • Yet, starting from now, you should keep related receipts and invoices to clearly show your assessable profit.
• Q: What will happen if I do not have enough business record?
  • A: A court fine (up to $100,000) will be charged, estimated assessment will be done on calculating your tax payable. More details can be referred to “Guide to Keep Business Record”.
• Q: I am used to receive the tax return from the IRD for 9 years. However, I do not receive the tax return this year. What do I need to do?
  • A: It is not required for you to fill in the tax return if your taxable income is smaller than tax allowance. Hence, only is the tax return sent to you, you are required to fill it in. But if you need to pay tax but receive no tax return, you need to inform the commissioner.
• Q: May you state out the difference between sole proprietorships and partnerships in reporting tax?
  • A: The basic requirement between sole proprietorship and partnership is generally the same, yet, the form to be filled in for reporting tax is different. For sole proprietorships, the form to be filled in is “tax return – individual”. For partnerships, the form to be filled in is profit “tax return – person” other than corporation. When you change your business nature from sole proprietorship to partnership or from partnership to sole proprietorship, you should fill in the required form to report your gain and loss.

Unincorporated Businesses and the Types of Taxable Receipts and Expenses

• Q: May you tell me which receipt is taxable and which is not?
  • A: The daily receipts (for example selling goods, providing service) are normally treated as operating income, so it is normally taxable. Selling fixed or capital assets are normally treated as capital receipts, so it is normally non-taxable.
  • Some kinds of income with relation to business operation may also be taxable. For example, rent gained from subleasing part of your business office, rebates gained from trade associates, the fine of trade deposits, compensation from customers for cancelling the service or violating contracts. Those are also counted as taxable.
  • In general, income from transferring related business to others for continuing operating due to close down of your company is treated as capital nature generally, so it is generally non-taxable. You may refer to IRO to know how to treat the stock and machinery and plant under this situation more. Professional accounts may be needed to be hired for handling this type of case.
  • Claimed irrecoverable trade debts recovered from customers (which was subtracted from assessable profits of last year), grants and subsidies (unconnected to capital expenses) obtained from the Government or other, rental and charges for letting out your computers, equipments and machines, money recovered from an insurance for the loss of trading stock, and money earned for the transferring right to get income are also taxable. Proceeds from selling fixed assets, business interests/goodwill, compensation for early discharge of business lease, dividends from corporations and interest income on Tax Reserve Certificates are also counted as non taxable.
• Q: Which expense or outgoing is deductible from the assessable profits?
  • A: The expense which is arisen from daily operation is mainly deductible from the assessable profits, as operating expenses are deductible.
  • For instance, rents of paying the employees‘ business office or house, light, water and telephone charges for business offices, salaries, wages, allowances, bonuses for employees, mandatory and voluntary contributions to Mandatory Provident Fund (MPF) schemes or MPF-exempt Occupational Retirement Schemes Ordinance (ORSO) schemes for employees (yet the maximum is 15% monthly income of the employee) and a self-employed person, the sole proprietor or partner, severance or long service payments paid when stop hiring the employees, interest and other expenses which contain legal fees on money borrowed for usual business operations (like purchasing stock , borrowing the money which is secured by a mortgage of property from a financial institution), bad or doubtful debts which payment cannot be collected from the customers and have been recognized as sales, repairing costs for articles, premises, machinery and plant used in making profits (besides the cost of improvements), the replacement expenses of tools and appliances used in generating profits (no same type of depreciation allowance would be enjoyed), and approved charitable donations (more than $100, yet not more than 35% of the adjusted assessable profits from 2008/09 onwards).
• Q: Are any tax incentives can be used in deducting tax?
  • A: Yes. Specified expenditures on copyrights, registered designs or trademarks, capital expense on environmental protection facilities, 100% depreciation allowance can be enjoyed if those goods you purchased are a “prescribed fixed assets”.
  • For instance, plant or machinery used purposely and straightly in any manufacturing process, computer hardware (not include the one is the integral part of any machinery or plant), and computer software and systems yet except the one leased or purchased under hire-purchase terms, capital expense due to renovating or refurbishing buildings (except domestic buildings) by 5 same amount of subtraction over 5 consecutive years of assessment, industrial building allowance which is for industrial buildings and structures, and commercial building allowance which is for commercial buildings and structures.
• Q: May you tell me which types of expenses is not deductible?
  • A: There are many expenses are not deductible.
  • Domestic and private expenses
    • For instance, medical expenses, insurance premiums, birthday celebration expenses, private part of utilities (like rates, electricity, water) which the apartment is used for both business and residential purposes, private part of motor vehicles expenses for vehicles used for both personal and business purpose and travelling costs between residence and business’ place and overseas travelling not for business purpose.
  • Payments to sole proprietor/partners and/or the spouse
    • For instance, salaries, interest on capital/loans, rent for business premises, drawings from business and withdrawal of capital.
  • Capital expenditures or losses
    • For instance, the cost of purchasing fixed assets (like plant and machinery, exempt those fixed asset mentioned before) , the costs of purchasing the business premises (include related stamp duty and legal fees), the costs of any improvements to business premises, loss of capital and loss on disposing fixed assets.
  • Certain contributions to retirement schemes
    • For instance, mandatory MPF contributions for proprietors/partners which is greater than the amount stated in the IRO, voluntary MPF contributions for proprietor/partners, and any MPF contributions for proprietor’s/partner’s spouse.
  • The payment which is not for the purpose of producing assessable profits
    • For instance, penalties for breaking the laws, expenses of entertainment which are not for business purpose and rent for premises not in use for the aim of producing assessable profits.
  • Business losses recoverable under an insurance policy or indemnities’ contract
  • Tax paid under the IRO, excluding salaries tax which are paid by employees’ salary
• Q: If I purchase two machines which cost are counted as capital expenditure and cannot be deducted from assessable profits, may I claim any allowance?
  • A: Depreciation allowances can be claimed. Initial Allowance (IA) which is 60% of the cost of the machinery or plant and Annual Allowance (AA) which is granted yearly on the reducing worth of machinery or plant at 10%, 20% or 30% (as required in the
    Inland Revenue Rules) can be applied. The AA rate is different, like 10% for air-conditioning plant, 20% for room air-conditioners, 20% for electric refrigerators, 20% for washing machines and boilers, 20% for furniture (excluding soft furnishing), 30% for motor vehicles and 30% for tractors. In 1980/81, “Pooling System” was brought in. The one with the same AA rate will be put into a pool, so as to make the one to calculate the AA more conveniently. Anything added or disposed can be changed from the “Pool”. If the disposal value is larger than the total depreciated value, the value between will be named as “balancing charge”. “Balancing allowance” cannot be applied unless the end of the business. For the year of purchase and the next two years, allowances for machines and lorry can be applied.
  • For the year of purchase, first, the purchase cost minus 60% of purchase cost for IA, then minus 20% of remaining cost for AA (for 20% pool) and we can find the reduced c/f for year 2. In year 2, the amount should continue to minus 20% of the remaining cost for AA (for 20% pool) and we can find the reduced c/f for year 3. In year 3, the amount should continue to minus the 20% of remaining cost for AA (for 20% pool), and we can find the reduced c/f for year 4. If the machines are sold in year 4, the reduced c/f for year 4 minus the sale proceeds will be the amount of balancing charge in year 4. In year 4, the amount should continue to minus the 20% of remaining cost for AA (for 20% pool), and we can find the reduced C/F for year 5.
  • If the balancing charge is negative, your assessable profits for that year will be raised by the negative amount. AA will still be able to apply till the date you deduct the whole pool to 0. In general, it is not easy to happen as there is always new asset added into the new pool.
• Q: In February 2011, I own a motor bike for $200,000 for personal use, but from May 2014, I start using it for business use. What allowance can I apply?
  • A: The business share of the car expense can be claimed from May 2014 as deductible expenses. The expense of car used on business purpose can be claimed. Yet, you have used the car for 3 years, so you are not able to apply for IA, but you can still apply for AA. Three years of Notional Allowances which is of non-business use for three whole years will be cancelled from the purchase cost. The reduced value will be the purchase cost less year 1 notional allowances less year 2 notional allowances less year 3 Notional Allowances.

Partnership Businesses

• Q: A partnership business is opened by my friend Tom and me. We closed our account on 31 March 2015. May you tell me the way of reporting my part of profit from the partnership business to the IRD?
  • A: For IRD calculating profits tax, they will count partnership as an independent legal person. The assessable profits will be counted on a whole, and will be responsible by the partnership (which is act as a separate legal person).
  • The precedent partner is the one who is named first in the partnership agreement. Yet, for those partnerships without partnership agreement, the precedent partner will be the one who decides after consulted and designated by the remaining partners for taking the role of precedent partner. The precedent partner needs to fill in the “Profits Tax Return – Persons Other Than Corporations”  for the year of assessment 2014/15.
  • For the new start-up companies, they will receive their first profit tax return eighteen months after commencing the business. If there is any assessable profits available for tax, it requires you to report to commissioner for a tax return in written form, and make sure IRD will receive your inform before or on 31 July 2014. You are required to turn the net profits into assessable profits before reporting in the return. In general, profits tax assessment will be chosen for partnership. Assessable profits will be taxed at the standard rate. Yet, you can choose PA for reducing tax burden.
  • If you choose PA to show obvious tax benefits to the partner, IRD will not charge his or her part of the profit tax and provisional profit tax from the partnership, but individually charge under Personal Assessment (PA).
• Q: According to the partnership agreement, my yearly wage is $200,000, profit will be shared evenly. May you tell me how the assessable profits of the partnership will be separated?
  • A: Your assessable profit should include any salary, interest on loan or capital laid out paid to your spouse and you. After removing all these expenses from assessable profit, the assessable profit can allocated according to the ratio assigned.
  • Condition: There is partner A and B. Partner A’s salary is $200,000. They share assessable profits evenly.
  • Example A: (The assessable profit for the partnership is $500,000.)
    • Remaining balance for allocation is $300,000 (assessable profit ($500,000) minus salary ($200,000)). Share of balance is $150,000. For partner A, his assessable profit is $ 350,000 (salary ($200,000) plus share of balance ($150,000)). For partner B, his assessable profit is $150,000 (share of balance).
  • Example B: (The assessable profit for the partnership is $100,000.)
    • Remaining balance for allocation is – $100,000 (assessable profit ($100,000) minus salary ($200,000)) Share of balance is -$50,000. Now, for partner A, his assessable profit is $150,000 (salary ($200,000) plus share of balance (-$50,000)). For partner B, his assessable profit is – $50,000 (share of balance).
  • If partnership has a positive assessable profit in total, no partner should have negative assessable profit. Thus, conceptual loss will be relocated to the ones who have positive assessable profit.
  • After relocation, the negative part of partner B will transfer to the partner A.
    • For partner A, his assessable profit is $100,000 (original ($150,000) minus the loss from partner B ($50,000)).
    • For partner B, his assessable profit is 0 (the loss is transferred).
• Q: Is it necessary for me to report my salary as a partner in the “Tax Return – Individuals” which is for employee reporting salary?
  • A: No. Your salary as a partner is already counted in the assessable profits of partnership, so it is no need for you to fill in that form.
• Q: I have informed IRD to choose PA for my profits tax. However, they still charge me tax on my part of the assessable profits of the business. May you tell me the reason behind?
  • A: This may happen if it is not the best choice for you to hand in tax under PA. If the total tax payable of your income and your other half’s under PA is larger than the total tax payable on your individual incomes and your other half’s under the separate direct taxes (like Profits Tax, Salaries Tax and Property Tax), profits tax will still be imposed on the profits of partnership.
  • This will also happen if you do not fill in the “Tax Return – Individuals” with full details. In this case, IRD cannot justify your choice. If your will is to select PA, you should inform the assessor dealing your “Tax Return – Individuals” and finish all the processes of choosing PA. File reference should be stated out.
• Q: In year of assessment 2013/14, our partnership faced the assessable loss. One partner, Kris, quit in the end of that year. Thus, may the loss of the part of Kris can be used in settling off the profits in the following assessment year?
  • A: If the one suffers loss in partnership and does not choose PA, their amount of loss will be brought to the next year to set off the assessments profit in the following assessment year, until the date of full amount is settled. If the part of loss for the partner who already quit is entirely set off, the profit in the following assessment year cannot be set off.
• Q: Is it necessary for us to report any quit of a partner to the Business Registration Office?
  • A: Yes. It is necessary for you to report any admission or retirement of partners to Business Registration Office in one month after the date of changes. Form “Notification of Change of Partners” should be used, which can be obtained from IRD website or IRD office.
• Q: At first, business was run by me only, and accounts were closed on 29 March every year. My friend Bunny joins my business as a partner, and we share our profits evenly. Is it required for us to cancel the original business registration certificate and apply for a new one? How is the assessable profit for the year 2011/12 allocated?
  • A: It is no need for you to cancel the old business registration certificate, but you need to report the issue of having a new partner to the Business Registration Office by filling in the form “Notification of Change of Partners”.
  • If the mode of your business is transformed from sole proprietorship to a partnership, you need to state your whole year profit and loss in the time of change in the partnership form. i.e. “Profits Tax Return” but not “Tax Return – Individuals”
  • Tax payable is counted on yearly basis, and taxed in the same interval, not concerning the changes of the ownership. Yet, tax for assessable profit can be shared according to the share ratio of the owners. For example, Kristy and Chloe share their profits evenly, and their assessable profit is $300,000. Each one will share the assessable profits by $150,000.
• Q: Is it able for a partner, who is not the precedent partner, to bear legal responsibility of sending profit tax return on behalf of partnership, if the precedent partner is missing and leaves no book of account of the business?
  • A: Yes. All partners share the same liability of partnership together and respectively. Hence, you can send profit tax return on behalf of partnership. You should also prepare the accounts even you do not have the whole record. All the records or relevant information should be used. You have the liability to pay unsettled profit tax, which is even not related to you but to your partner.

Companies Incorporated Outside Hong Kong

• Q: Is it necessary for an offshore company to pay profits tax?
  • A: According to IRO, offshore company needs to pay profits tax. Yet, whether the profit tax will be charged or not depends on the character and degree of its activities in Hong Kong.
• Q: May you tell me when an offshore company needs to pay profit tax?
  • A: Usually, whether the profit tax will be charged or not depends on the source of the profit. This situation is also applicable for Hong Kong companies and those incorporated overseas.
• Q: May you tell me the way IRD determines the place where that company is running?
  • A: This is decided case by case. Yet, you are reminded that a company does not necessarily have lots of business in Hong Kong to make IRD determining the place that company is running in Hong Kong or not. The activities of the company’s agents in Hong Kong are also concerned.
• Q: May you tell me how IRD determines the source of profit?
  • A: Usually, they will decide the source of profit based on where the profit arisen or from.
• Q: What are required to report to an offshore company which runs in Hong Kong?
  • A: An offshore company faces the same requirements as a Hong Kong company when it comes to reporting to IRD, which has to matriculate its business with the Business Registration Office of the IRD and hands in the profits tax returns issued.
  • If you need to hand in tax in that year of assessment, but not yet received any tax returns, you need to report to the IRD within four months after ending the basis period for that year of assessment in a written form.
  • Enough records should be kept, either in English or Chinese, for the minimum period (seven years), to ensure the assessable profits can be traced.
• Q: Should an offshore company submit audited accounts with profits tax return?
  • A: If it is not required by law for audited accounts, IRD will accept the incorporated company to hand in unaudited accounts as evidence for the tax return. Yet, if the account is audited, even it is not required by the law, you should hand in the audit accounts with the tax return.
  • If there is a branch of an offshore company in Hong Kong, while the head office is set outside Hong Kong, in general case, IRD will allow unaudited branch accounts, and do not require the audited world-wide accounts. Yet, in some cases, the assessor may ask you for a copy of the audited world-wide accounts.
• Q: A Royalty payment is paid by our company to an offshore company which does not have any business in Hong Kong. Does that offshore company need to pay profit tax?
  • A: In some situations, the royalty payment received will be charged; even that offshore company does not run any business inside Hong Kong.
  • For the payments obtained from the exhibition or for the use of Hong Kong of cinematography or television film or tape, any sound recording, or any advertising materials related to such film, tape, or recording or use in Hong Kong any patent, design, trademark, copyright material or secret process or formula or other property of a alike nature, or for giving or accepting to give knowledge related to the use in or outside Hong Kong of any such patent, design, they are able to be deducted in the assessable profits under Profits Tax . This is not suitable in the case before 25 June 2004.
  • 30% of the payments, in general, will be the assessable profits (from 1 April 2003 onwards). 100% of the payments may be counted as assessable profits for the company whose associate is an offshore company. Proper tax rate will be used on the assessable profits for counting tax payable. The offshore company is asked by the IRD for the tax in the name of your company. It is compulsory for your company to follow the IRO to keep enough money to pay the tax before paying to the offshore company.
• Q: May you tell me all the tax rules that offshore companies needs to follow?
  • A: Offshore companies and Hong Kong have same set of tax rules to follow. Yet, there are special reminders when your company is a non resident.
  • First, a non-resident is asked by the IRD for the tax in the name of their agent or their own. The profit, which source is Hong Kong, from a trade, profession or business carried on in Hong Kong is charged for the tax. Tax will be taken back from the non-resident’s assets or the agent. It is essential for the agents to keep enough money from the asset of non residents to settle the tax.
  • Second, a non resident who earns royalty income needs to pay profits tax in the way mentioned before.
  • Third, if a localer (as well as a company) represents the non-resident selling goods in Hong Kong, they need to hand in returns to IRD per quarter stating the gross sales income. Meanwhile, they also need to be charged by IRD for tax by 1 % of gross sales income or smaller amount which has been approved by the IRD.
  • Forth, the local company will be counted as agents of the non-resident if the local company has business with a closely-connected resident and has no profit or less profit than the ordinary one.
  • Fifth, if the non-resident earns income straightforwardly or not directly, as entertainer or sportsman, from the performance in Hong Kong, they may be charged for tax. More can be referred the above “Guide to Taxation of Non-resident Entertainers and Sportsmen in Hong Kong” or the website of IRD http://www.ird.gov.hk/eng/pdf/pam48e.pdf.
  • It is reminded that not all offshore companies are counted as non-residents. Whether or not a business is a non-resident depends on the fact.
• Q: May you tell me the ways for an offshore company to be more confirmed if their activities would charged for profits tax or not?
  • A: They can consider applying for an advanced ruling regarding a proposed transaction or arrangement to the IRO. Fee is needed to be paid for this process.

Prepaid or Deferred Revenue Expenses related to Departmental Interpretation and Practice Notes (DIPN)

• Q: Which type of expense is discussed by DIPN?
  • A: Prepaid expenses which are the revenue expenses paid beforehand is concerned in the DIPN. For example, insurance premiums, car license fees, rates and subscription fees etc. Under normal circumstances, people prepay their expenses before the end of accounting year. Hence, expense will be divided into parts and charged to the profit and loss accordingly. The DIPN gives you more information about when IRD deducts the prepaid expense.
• Q: DIPN have discussed the “old” practice and the revised one of deducting prepaid or deferred revenue expense. May you tell me more?
  • A: For the old practice, IRD will put the deduction of prepaid expense into profit/ loss in the respective year. Yet, you can still deduct prepaid expense in the year that you pay for it.
  • For the revised way, you cannot deduct prepaid expense in the year that you pay for it. Yet, the deduction of prepaid expense will be made in the profit/ loss in the respective year. You should fulfill the related standards of financial report when preparing your accounts.
• Q: When will the revised practice begin?
  • A: It begins in the year of assessment 2002/03. This revised practice will be effective in the following years of assessment.
• Q: May you tell me the reason why IRD adopts this new practice?
  • A: In the Case of CIR v. Secan Limited & Ranon Limited, the court stated obviously that assessable profits must be calculated in line with normal principles of commercial accounting. Yet, the old one is not in line with the normal principles, hence IRD decided to change their practice.
• Q: May you tell me how accounting treatment for a prepaid expense is treated as satisfactory by IRD?
  • A: If the accounting treatment fulfills the related standards of financial reporting and is not in conflict with provision of the IRO, the accounting treatment will be treated as acceptable.
• Q: For a foreign company, which financial reporting standards should be used?
  • A: Foreign Company may prepare their account in different ways because of different financial reporting standards. IRD will accept it if the accounting treatment fulfills the standards of financial reporting stated from the related country or from the International Accounting, and truly reveals their profit and loss. Yet, it is required for the company to adjust their profit and loss regarding the provisions of the Ordinance and the recognized taxation.
  • Nevertheless, foreign company (like a subsidiary of a Hong Kong company) prepares their accounts under the Hong Kong’s financial reporting standards. IRD will need that foreign company‘s accounting treatment of any prepaid expense be in line with the Hong Kong Institute of Certified Public Accountants.
• Q: According to the DIPN, it is acceptable to use the same way in taxation treatment of prepayment if accounting treatment used obeys the related financial reporting standard?
  • A: The accounting treatment taxpayer used to meet the related financial reporting standard should be in harmony with the tax law. Hence, we should first find out whether the expense is deductible or not in accordance with IRO. If IRO does not accept that expense is deductible, like the one not spent in making assessable profits, even the accounting treatment used is correct, the expense cannot be deducted.
• Q: For those business which accounts are not arranged by professional accountants or not law-required to be audited, is the revised practice suitable?
  • A: Yes. The revised practice of deducting prepayments can be used in all the businesses likewise.
• Q: What will happen if the accounting treatment used does not meet the related standard of financial report?
  • A: IRD will help you to adjust the accounting profit, and ensure that it meets the related standards of financial report. Yet, if the amounts of the prepaid expenses are very small and acceptable not to be deferred under the related standard of financial report, in this case, IRD will not make any tax adjustment.
• Q: May I adopt the old practice or the revised one for the expenses in my profits tax computations for the year of assessment 2014/15?
  • A: Before year of assessment 2002/03, you can still choose to claim deductions for prepaid expense under the old practice or the revised one. But whatever you choose, the expenses can only be deducted for one time only. However, on and after year of assessment 2002/03, only revised practice can be used. Assessable profits will be adjusted for only the related year of assessment.
• Q: When I fill in the returns, no deduction of prepaid expense is claimed. As the changes of practice, will assessable profits of my company be adjusted?
  • A: No.
• Q: For scientific study expenses deductible (section 16B of IRO) and expenses on purchasing patent rights deductible (section 16E), is the revised practice still be applicable?
  • A: No. The revised practice is not applicable for the deductibles. These two types of expenses can be deducted in the year spent in a whole amount. For example:
  • Company TH settles its accounts on 31 March each year. Agreement of maintenance of its machine was signed and comes to effect from 1 December 2013 to 31 November 2014, which lasts for 1 year, with $24,000 maintenance fee prepaid. For year of assessment 2013/14, maintenance deductible is $8,000 (4 months). For year of assessment 2014/15, maintenance deductible is $16,000 (8 months).