Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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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 two conditions:

  1. Had the debt been good, the revenue from the debt would have formed part of the assessable profits.

  2. The debt is proved to have become irrecoverable during the basis period. See Section 16(1)(d) of IRO.  

All 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.

The 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.   

Doubtful debts are 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 ignored.  

The receipts recovered from bad debts that have been allowed previously are assessable.

Read IRD's query: Where the taxpayer claims deduction of Bad Debts

 

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