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 - When is an expenditure incurred?

Section 16(1) allows expenses “incurred” during the basis period. The word “incurred” is not defined in the Inland Revenue Ordinance. 

From case law, “incurred” does not completely mean "paid". In general, an expenditure is incurred when the claimant has committed a definite or absolute liability and that the amount has been ascertained on an accurate basis, even though the amount of liability may not yet be determined. 

In the case of So Kai-tong Stanley trading as Stanley So & Company v CIR the judge said: "the appellant relies on Lo & Lo v. CIR, in which it was stated that deductions are not confined to a disbursement, but included an obligation to pay. What the appellant has overlooked is that the obligation to pay must be an accrued liability, which is undischarged .... It is therefore imperative to identify the legal basis for giving rise to the liability to pay. The appellant says that his firm will be obliged to pay up if Yam & So brings a claim against it in a court of law. This is a circular argument because it does not address the core issue of why the appellant's firm will be adjudged to be liable to Yam & So's claim. It is not the appellant's case that the parties had entered into a legally binding agreement on the matter. Indeed no such material had ever been adduced to explain the nature of the obligation. The appellant has throughout not identified the basis upon which the alleged obligation is founded. The Board is entitled to reject the contention that the appellant's firm was under an obligation to pay make good the loss or liability incurred by Yam & So. There is no basis for challenging the Board's conclusion that the retrospective fixation of the amount of office facilities charges was not related to a commercial agreement…” Click here for more about the case. In short, in order that an expenditure paid after the end of the basis period to be "incurred" during the year of assessment, there must be a "legal liability" to pay the amount by the end of the basis period.

Click here to see the court comments on "incurred" in the case Lo & Lo v CIR.  

Accruals for rent, interest, insurance, lighting and heating, … etc. in respect of the accounting period are acceptable. 

A mere commitment, without an established and definite legal liability, to pay a future debt does not satisfy the requirement of "incurred". A provision for contingent liability is not deductible either. Neither is a transfer to a general reserve against possible future expenditure or loss a deductible expenditure.


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