Profits Tax - deduction
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
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
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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.