Profits Tax - Bad debts
Bad debts are those debts
that have become irrecoverable. Not all bad debts are tax
deductible. Generally speaking, a deductible bad debt fulfills
Had the debt been good,
the revenue from the debt would have formed part of the
The debt is proved to
have become irrecoverable during the basis period. See
Section 16(1)(d) of IRO.
trading debts giving rise to Hong Kong profits meet the first
condition. No deduction will be allowed for those debts in relation
to operations or activities outside Hong Kong if their
profits are not assessable.
taxpayer is required to supply documentary evidence of the recovery
action to prove the debt having become irrecoverable. Just
identifying a debt appearing to be irrecoverable is not sufficient.
The taxpayer should have taken actions to recover the debt. Recovery
actions include writing to the debtor to ask for payment. If the
debtor does not pay within a time limit, the debt will generally be
accepted as bad and qualify a deduction.
deductible if they are estimated to be bad as at the Balance Sheet
date. But the taxpayer may be required to supply the name and
address of the
debtor, the nature of the debt and details of the
recovery action to
prove the claim for deduction. Generally speaking, general provision for bad debts is not deductible
because the composite debtor and the related recovery action
cannot be substantiated. As regards specific provision, the taxpayer
must be able to prove that such debts have become irrecoverable as
at the balance sheet date. If it is only an accounting estimate and
no recovery actions have been taken, the IRD will not allow such
expenses. The question of whether the
debt is bad should be decided honestly in the circumstances as
at the Balance Sheet date. Matters occurred after this day should be
The receipts recovered from
bad debts that have been allowed previously are assessable.
Read IRD's query:
taxpayer claims deduction of Bad Debts