From Pitfalls to Profits :
10 Secret Write-offs to Paying Less Taxes
Contributed by AsiaBC | 28 April 2023
Entrepreneurs around the world can all agree when Albert Einstein said, “The hardest thing to understand in the world is tax.”
Taxes are inevitable and one of the essential aspects of running a thriving business. Having the knowledge of how they influence your company can have a significant bearing on your cash flow, profits, and overall business operations.
If you are like many business owners who feel confused and intimidated by the effects of taxes on your venture, relax. This blog will break down what you need to know about Hong Kong tax and build a strategy to minimise your liabilities while maximising your revenue :
- Taxes Make an Impact on Your Business
- Mastering the Hong Kong Tax System
- 10 Tax Deductions for Hong Kong Enterprises
- Optimise Tax Write-offs in 5 Steps
- Simplify Your Tax Season with AsiaBC
Taxes Make an Impact on Your Business
Tax is defined generally as a compulsory payment imposed by the government on businesses and individuals collected through income, goods, and services. These levies regulate economic activity, maintain financial stability, fund government operations and public services, and more. However, for some business owners, taxes are a burden that affects their :
- Profitability. It lowers the company’s net income, reducing the money available for reinvestment in the business or distribution to shareholders.
- Cash flow. Paying taxes can cause negative effects on funds, particularly if a business experiences fluctuations in earnings or unforeseen expenses.
- Compliance costs. Staying compliant with tax regulations can be time-consuming and costly, especially for small businesses that may not have a dedicated accounting or legal team.
- Investment decisions. Tax considerations can factor into a company’s decision-making process when evaluating potential investments or expansion opportunities.
- Employee benefits. Employers’ responsibility for payroll taxes can increase the administrative burden and cost of providing employee benefits, such as healthcare or retirement plans.
Mastering the Hong Kong Tax System
We covered in our previous blog, ‘3 Direct Taxes in HK & Why They Are Attractive to Tax-Savvy Startups,’ that Hong Kong is a thriving city ideal for business expansion for numerous reasons — strategic location, simple company registration process, competitive telecommunication and transportation, strong labour force, and exceptional quality of life.
But what makes this Asia’s World City appealing to global entrepreneurs is its low tax rate collection. To jog your memory, here are Hong Kong’s three direct taxes :
- Profits Tax – With its 2-tier tax system, HK levies 8.25% for every first HK$2 million net profit, while net revenue over HK$2 million will be at 16.5%.
- Salaries Tax – HK imposes a 15% standard rate on the income of employees, which is calculated based on the progressive rates of their net chargeable pay.
- Property Tax – The city collects a property tax of 15% on the net assessable value of all leased properties.
Aside from these, Hong Kong does not levy other taxes, including :
- Retention charge on profits or interest
- Business charges
- Capital additions expense
- Inheritance charge
- Capital gains
- Withholding tax; and
- Tax for imports
10 Tax Deductions for Hong Kong Enterprises
Tax deductions play a crucial role in reducing the tax liabilities of entrepreneurs, allowing them to keep more of their earnings. It promotes economic growth by encouraging various productive activities and behaviours. Businesses in Hong Kong significantly reduce their tax burden and free up funds for reinvestment and expansion by taking advantage of these ten tax deductibles :
- Charitable grants – Donations made to organisations that the Hong Kong government approves.
- Rent – Expenses paid for business premises and related expenses, such as management fees and rates.
- Foreign taxes – Levies paid to countries with double taxation agreements with Hong Kong.
- Bad debt – Irrecoverable charges that have been written off.
- Refurbishment expenses – Fees accumulated in repairing, renovating, or replacing assets that are integral to the operation of the business.
- Intellectual property – The cost of acquiring or renewing patents, trademarks, and copyrights.
- Retirement schemes – Contributions made on behalf of personnels.
- Technical education – Expenses incurred in providing employees with vocational education and training.
- Company innovation – Expenditures used for research and development activities.
- Capital spending – The cost of purchasing fixed assets, such as machinery and tools and environmental protection equipment.
Bonus : The Mandatory Provident Fund (MPF) Contributions can also be deducted as part of your business expense.
But keep in mind that starting 01 April 2023, the Inland Revenue Department (IRD) will now require corporations in Hong Kong earning less than HKD 2 million profit to provide additional documents along with their Profits Tax returns. As a result, SMEs must now submit the following :
- A certified copy of the up-to-date audited accounts, including balance sheets & comprehensive income statements.
- A tax computation showing assessable profits or adjusted loss.
- Additional paperwork as indicated in the Profits Tax Return notes.
Optimise Tax Write-offs in 5 Steps
Taking advantage of tax deductions effectively reduces the number of tax burdens and ultimately increases your net income. Adhering to Hong Kong’s tax laws and regulations is important to avoid penalties or legal consequences. Here are five steps to help you make the most out of tax deductions in Hong Kong while ensuring compliance with tax statutes :
- Determine eligibility. Check if your business qualifies for tax deductions based on the type of expenses accrued and the nature of your business.
- Keep proper records. Maintain complete and accurate accounting records of all the relevant expenditures you want to claim as deductions.
- File tax returns. File your tax returns on time and report all the income earned and payments made during the applicable tax year.
- Claim deductions. Fill out your tax return form and provide the necessary supporting documents — receipts, invoices, and other financial records.
- IRD Assessment. Submit all paperwork to the Inland Revenue Department (IRD) for their assessment, and present additional requirements to back up your application.
The IRD will notify you of your evaluation, indicating the amount of tax you need to settle or the returns you are entitled to. You can make an appeal within the specified time frame if you have any disputes.
Simplify Your Tax Season with AsiaBC
The Hong Kong tax system can be challenging and confusing, so seeking professional advice is highly recommended. Their in-depth knowledge and expertise guide you in handling your tax duties for your business to accurately comply with the government’s prerequisites and avoid potential legal issues or penalties.
At AsiaBC, we assist you with tax planning and structuring to minimise your tax obligations and ensure your company properly observes the city’s ground rules. Our team of experts audits your financial records and advises you on what expenses are not eligible for tax deductions to keep it simpler.
Instead of telling clients the deductible expenses from their taxes, it is less complicated to advise them on what expenses are not eligible for tax deductions. For example, if a company is involved in stock trading, it cannot claim tax deductions for costs like legal or transaction fees since there is no capital gain tax in Hong Kong.
Don’t let taxes stress you out! Our team is here to help you make the most out of your tax deductions. Connect with us through WhatsApp +852 6547 1314 or email us at email@example.com. Let’s work together to save you money and simplify your tax season!”