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Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department * Service charge $500/hr

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Profits Tax - deduction of mainland/foreign tax 

Section 16(1)(c) of Inland Revenue Ordinance allows a deduction to all corporations for mainland's / foreign taxes of substantially the same nature as those under the Inland Revenue Ordinance paid on interest or gains under Section 15(1) (f), (g), (i), (j), (k) or (l). 

Besides, Section 16(1) stipulates the general test of deductibility for an expenditure including mainland's / foreign taxes. In this regard, it is necessary to determine whether the foreign tax is (1) a charge on the profits themselves or (2) an expense that must be borne regardless of whether or not a profit is derived.  

A tax under category (2) may be allowed as a deduction. In practice,  the turnover tax such as VAT, business tax, consumption tax of mainland China belongs to this category. Such taxes are deductible if they are incurred in the ordinary course of business of the taxpayer (for example a HK company sells goods to China customers). In such case, the turnover tax can satisfy Section 16(1) general test, in the production of chargeable profits,  if the related sales revenue are chargeable to profits tax.  

A tax on profits under (1) is not deductible because it is part of the profits and is not “incurred in the production of profits” . Rather, such tax is a disbursement of profit that is not “money expended for the purpose of producing such profits”. 

Although a charge on the profits (e.g. FEIT or CIT paid in mainland China) cannot qualify a deduction,  the taxpayer may claim tax credit under Double Taxation Relief. Click here for details.  

As for (b), as the mainland's / foreign tax is payable regardless of whether or not a profit is made, it is not an appropriation of the profits, and hence it may be allowable. Usually, the foreign tax takes the form of a withholding tax on income derived by way of interest or royalties. To qualify a deduction, the foreign tax must be one that is charged on the gross amount of the earnings which form part of the assessable profits.

 

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