24 Nov 2009

General Deductions Under The Income Tax Ordinance

by Darren

Under the Hong Kong tax ordinance, in order to ascertain your taxable profits, allowable (general and specific) deductions are subtracted from the taxpayer's taxable receipts A general deduction is allowed for all outgoings and expenses incurred in the production of assessable profits in the relevant year of assessment a general deduction is allowed for all outgoings and expenses incurred by the taxpayer in the production of profits which are chargeable to tax in any period . To be deductible the expenses must have been incurred and must not be prohibited under section 17 of the ordinance. "Outgoings" are sums actually paid out whereas an expense includes a liability to pay. Therefore, deductibility is not necessarily confined to amounts which have actually been paid but are due and payable. Outgoings or expenditure must be incurred in the production of taxable profits if they are to be deductible. To determine if an expense is deductible there have been numerous cases to assist in applying this rule. 2 core examples include: Severance Payments related to cessation of business these have been concluded as deductible as they were made to satisfy contractual and statutory obligations which the taxpayer had incurred in the course of running its business and earning its assessable profits Foreign taxes paid by a Hong Kong taxpayer have been characterized as deductible. The imposition of sanctions by the tax authorities in the relevant jurisdictions for failure to pay the taxes would have forced the taxpayer to cease its operations, the taxes were held to have been paid with a view to producing profits and were deductible. Next we will look at the specific deductions.

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