What are assessable profits? The assessable profits are the net profits (other than profits arising from the sale of capital assets) for the basis period, arising in or derived from Hong Kong, calculated in accordance with the provisions of Part IV of the Inland Revenue Ordinance (“IRO”).
IRO does not define “profits”. In business practice, profit means the net profit, or the net gain, or the surplus of incomes over expenses. It follows that profits concern determining incomes and expenses.
What profits are assessable? Assessable profits are the accounting profits determined in accordance with Generally Accepted Accounting Principles as adjusted to conform with the provisions of IRO. The Hong Kong Institute of Certified Public Accountants has, from time to time, issued Statements of Standard Accounting Practice to standardize the accounting treatments of various topics of importance. Among these principles and practices, the following are of fundamental importance and adopted for tax purpose.
Going concern principle
When preparing the business accounts, we assume that the business will go on in the foreseeable future.
Accrual or matching principle
Expenses incurred but not yet paid for should be taken into account when computing profits. Likewise, the expenses paid for future accounting periods should be carried forward to match the related future revenue and hence they should not deductible when computing the current-year profits.
Revenue versus capital principle
Incomes or gains of a revenue nature are included in the Profit and Loss Account and hence taxable.
Incomes or gains of a capital nature are credited to capital reserves and hence not taxable.
Expenses or losses of a revenue nature are recognized in the Profit and Loss Account and hence deductible.
Expenses or losses of a capital nature, even though they may in some cases be deductible in computing accounting profits, are not tax deductible – and if they have been charged to Profit and Loss Account, they will be added back in computing the assessable profits.
In a nutshell, where the IRO makes a specific provision for a topic, such provision will over-ride the accounting principle or the general commercial practice of that topic.
Source:Hong Kong Inland Revenue Department’s website
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Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax. The principle itself is very clear but its application in particular cases can be, at times, contentious. This guideline note gives a brief explanation of how the principle operates and provides simple examples for illustrative purposes of the tests applied to different types of businesses.
According to Section 18C of Hong Kong Inland Revenue Ordinance, there are three possible cases for the first accounting period:if the first accounts are made up to a day within that year of assessment, the basis period for the year of commencement is from the date of commencement to the date which the accounts are made up.
What are assessable profits? The assessable profits are the net profits (other than profits arising from the sale of capital assets) for the basis period, arising in or derived from Hong Kong, calculated in accordance with the provisions of Part IV of the Inland Revenue Ordinance (“IRO”). IRO does not define “profits”. In business practice, profit means the net profit, or the net gain, or the surplus of incomes over expenses.
Section 14 of the Inland Revenue Ordinance sets out the scope of the charge to profits tax. In addition, Section 15 deems the following to be taxable trading receipts in Hong Kong: Sums received from the exhibition or use in Hong Kong of cinematography or television film or tape, sound recording or their connected advertising materials [Section 15(1)(a)].