HK Allows Fair Value Basis In Profits Tax Returns
by Mary Swire, Lowtax.net, Hong Kong
28 February, 2017
Hong Kong's Inland Revenue Department (IRD) has said it will accept 2016/17 profits tax returns in which assessable profits are computed on a fair value basis, while it reviews a ruling of the Court of Final Appeal (CFA).
In 2014, in Nice Cheer Investment Limited v Commissioner of Inland Revenue (FACV 23/2012), the CFA allowed a taxpayer appeal against a determination from the Commissioner. The IRD had previously confirmed an assessment that the investment trading company was liable for profits tax in respect of unrealized gains for the three years between 2003/04 and 2005/06.
There was no dispute between the parties that, in accordance with prevailing accounting standards, unrealized gains and losses should be shown in the taxpayer's profit and loss account at fair value. However, the taxpayer relied (and the CFA agreed) on a provision of the Hong Kong Inland Revenue Ordinance (IRO) that anticipated or imputed profits must first be realized before they are subject to tax.
The IRO stated that taxable profits mean "real profits arising in or derived from actual buying and selling of commodities in commercial transactions between the taxpayer and his trading partners or supply of professional or other services by the taxpayer to another person and do not include notional or unrealized profits arising out of revaluation of the taxpayer's stock of trade."
Subsequently, following the final resolution of the case, it was confirmed that the Financial Services and Treasury Bureau and the IRD were reviewing the issues arising from the judgment, and, in particular, whether there should be a change in law to allow continuation of the mark-to-market practice for computation of taxable profits.
With regard to 2013/14 profits tax returns, the IRD said it understood that substantial costs would be incurred by firms if taxable profits computed on a fair value basis had to be immediately recomputed on a realization basis. The IRD therefore agreed, as an interim administrative measure, to accept returns in which the assessable profits are computed on a fair value basis.
This measure was subsequently extended to 2014/15 and 2015/16 filings, and the IRD has now agreed to extend it further to 2016/17 filings, pending completion of its review.
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