Profits Tax Guide -- Assessable profits
assessable profits? This question hinges on two points:
first, there are profits, and second, such profits are
Revenue Ordinance does not define “profits”. In fact, there are a number
tax cases, particularly in the U.K., on this question. In business practice,
profit means the net profit, or the net gain, or the surplus of incomes
over expenses. It follows that profits concern determining
incomes and expenses.
The second point is: what profits are
assessable? As established from tax cases, assessable profits are the
accounting profits determined in accordance
with generally accepted accounting principles (GAAP)
as adjusted to conform with the provisions of Inland Revenue Ordinance. See
CIR v Secan Limited & Ranon Limited.
Then, what are accounting profits or
GAAPs? This is a big topic and there are a lot of accounting textbooks on
the question. Besides, the Hong Kong Institute of Certified Public
Accountants has from time
to time issued Statements of Standard Accounting Practice to standardize
the accounting treatments of various topics of importance. Among these
principles and practices, the following are of fundamental
importance and adopted for tax purpose.
Going concern principle
Accrual or matching principle
Revenue versus capital principle
Incomes or gains of a revenue nature
are included in the Profit and Loss Account and hence taxable.
Incomes or gains of a capital nature
are credited to capital reserves and hence not taxable.
Expenses or losses of a revenue nature
are recognized in the Profit and Loss Account and hence deductible.
Expenses or losses of a capital nature,
even though they may in some cases be deductible in computing accounting
profits, are not tax deductible --- and if they have been charged to
Profit and Loss Account, they will be added back in computing the
Naturally the taxpayers are inclined to
claim more incomes to be capital in nature (non-taxable); and the Revenue
will treat more losses of a capital nature (non-deductible). So, there are
quite a number of tax cases on how to apply this principle in practice.
Where the Inland Revenue Ordinance (IRO) makes a specific provision
for a topic, such provision will over-ride the accounting principle or
the general commercial practice of that topic. To read my tax guide on
common topics of importance, please