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Hong Kong Issues New Guidance On Foreign Tax Credits

by Mary Swire,, Hong Kong

25 July 2019

Hong Kong's Inland Revenue Department has released new guidance notes on the deduction of foreign taxes.

Generally, all outgoings and expenses, to the extent to which they have been incurred by the taxpayer in the production of chargeable profits, are allowed as deductions, as set out in Section 16 of the Inland Revenue Ordinance.

Under the rules, while capital gains tax is disallowed as being attributable to capital and not to profits or income, taxes and duties that are not calculated by reference to profits will be considered for deduction. These may include:

  • rates levied on properties;
  • vehicle licence fee;
  • duties on commodities; or
  • foreign taxes and duties not levied by reference to profits, as in Harrods (Buenos Aires) Ltd v Taylor-Gooby ([1964] 41 TC 450), which concerned an Argentine tax levied on companies at a flat rate of one percent of capital per year, irrespective of profits.

Under Section 16(1)(c), Hong Kong taxpayers are allowed to deduct tax of substantially the same nature as tax imposed under the Inland Revenue Ordinance, providing the Commissioner is satisfied these have been paid elsewhere other than in a territory with which Hong Kong has agreed double taxation arrangements (a DTA country).

The guidelines highlight, with effect from the year of assessment 2018/19, Section 16(2J) restricts the application of Section 16(1)(c). Section 16(2J) provides that relief is not allowed if the foreign tax is paid in a DTA territory; and under the DTA with that territory relief from double taxation is provided by way of credit under Section 50.

The guidelines state: "The reason for denying a deduction under section 16(1)(c) is that a DTA is intended to provide a comprehensive solution to all tax matters which are within its scope. The international practice is that where a DTA is in place, relief from double taxation should be allowed under the DTA only to the extent contemplated by it."

"The tax credit approach is adopted by Hong Kong in all existing DTAs. Section 16(2J) seeks to ensure that the DTAs will prevail in case of any conflicts between the provisions in the IRO and those in the DTAs."

"Therefore, if the foreign tax is paid in a DTA territory and the relevant DTA provides relief from double taxation by way of tax credit, a Hong Kong resident person can only apply for a tax credit under section 50. For a non-Hong Kong resident person who is not covered by the relevant DTA, it may seek unilateral relief from its residence of jurisdiction or bilateral relief under the DTA between its residence jurisdiction and the DTA territory (if any)."

TAGS: tax | corporation tax | transfer pricing | Hong Kong | BEPS

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