Scribd Logo
Upload

Welcome to Scribd!

  • 21 views

    Departmental Interpretation and Practice Notes No. 3 (Revised)

    Uploaded by

    Difanny Koo
    The document provides guidelines on apportioning expenses for profits tax purposes in Hong Kong. It outlines several key principles: [1] Expenses that are incurred for both business and non-business purposes must be apportioned. [2] The objective is to apportion expenses reasonably and equitably based on primary documentation. [3] Specific types of expenses like R&D, patent rights, and fixed assets may require apportionment if used for both Hong Kong and overseas business. [4] Tax rules provide methods to apportion expenses related to share investments and dealing based on factors like turnover, income, or assets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Departmental Interpretation and Practice Notes No. 3 (Revised)

    Uploaded by

    Difanny Koo
    21 views6 pages
    The document provides guidelines on apportioning expenses for profits tax purposes in Hong Kong. It outlines several key principles: [1] Expenses that are incurred for both business and non-business purposes must be apportioned. [2] The objective is to apportion expenses reasonably and equitably based on primary documentation. [3] Specific types of expenses like R&D, patent rights, and fixed assets may require apportionment if used for both Hong Kong and overseas business. [4] Tax rules provide methods to apportion expenses related to share investments and dealing based on factors like turnover, income, or assets.

    Original Title

    DIPN 03

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides guidelines on apportioning expenses for profits tax purposes in Hong Kong. It outlines several key principles: [1] Expenses that are incurred for both business and non-business purposes must be apportioned. [2] The objective is to apportion expenses reasonably and equitably based on primary documentation. [3] Specific types of expenses like R&D, patent rights, and fixed assets may require apportionment if used for both Hong Kong and overseas business. [4] Tax rules provide methods to apportion expenses related to share investments and dealing based on factors like turnover, income, or assets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    21 views6 pages

    Departmental Interpretation and Practice Notes No. 3 (Revised)

    Uploaded by

    Difanny Koo
    The document provides guidelines on apportioning expenses for profits tax purposes in Hong Kong. It outlines several key principles: [1] Expenses that are incurred for both business and non-business purposes must be apportioned. [2] The objective is to apportion expenses reasonably and equitably based on primary documentation. [3] Specific types of expenses like R&D, patent rights, and fixed assets may require apportionment if used for both Hong Kong and overseas business. [4] Tax rules provide methods to apportion expenses related to share investments and dealing based on factors like turnover, income, or assets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 6

    Inland Revenue Department

    The Government of the Hong Kong Special Administrative Region


    of the People's Republic of China

    DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES

    NO. 3 (REVISED)

    PROFITS TAX

    APPORTIONMENT OF EXPENSES

    These notes are issued for the information of taxpayers and their tax
    representatives. They contain the Department’s interpretation and practices in
    relation to the law as it stood at the date of publication. Taxpayers are reminded
    that their right of objection against the assessment and their right of appeal to
    the Commissioner, the Board of Review or the Court are not affected by the
    application of these notes.

    These notes replace those issued on 29 December 1989.

    LAU MAK Yee-ming, Alice


    Commissioner of Inland Revenue

    July 2008

    Our web site : www.ird.gov.hk


    DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES

    No. 3 (REVISED)

    CONTENT

    Paragraph

    Introduction 1

    The principles 3

    Specific expenditures 7

    Inland Revenue Rules 8


    INTRODUCTION

    Section 16(1) of the Inland Revenue Ordinance provides that in


    ascertaining the assessable profits for any year of assessment there shall be
    deducted all outgoings and expenses to the extent to which they are incurred in
    the production of profits chargeable to tax.

    2. Generally, an outgoing or expense is an allowable deduction if it is


    incurred in producing chargeable profits. The words “to the extent to which”
    signify that an outgoing or expense may be apportioned if it is only partly
    incurred to produce chargeable profits. In CIR v. Cosmotron Manufacturing
    Co. Ltd. 4 HKTC 562, Lord Nolan at the Privy Council observed that the
    phrase “for the purposes of the trade” adopted in the United Kingdom Income
    and Corporation Taxes Act 1988 has generally been interpreted in a manner
    consistent with the words “in the production of profits”.

    THE PRINCIPLES

    3. In Ronpibon Tin (NL) v. FCT 4 AITR 236, it was recognized that two
    kinds of expenditure require apportionment. The first is expenditure in
    respect of a matter where distinct and severable parts are devoted to making
    profits and other parts are devoted to some other end. The second kind of
    apportionable expenditure is a single outlay that serves both the profit making
    purpose and some other purpose indifferently.

    4. Godfrey J agreed in Anthony Patrick Fahy trading as A.P. Fahy &


    Co. v. CIR 3 HKTC 695 that if an outgoing or expense had a dual purpose,
    partly of a domestic or private nature and partly for business purpose, it was
    not allowable to the extent that the outgoing or expense was a domestic or
    private character. He ruled that there could not be any sensible apportionment
    of medical expenses if those elements of the purpose could not be distinguished
    and the expense was one indivisible matter.

    5. In CIR v. Hang Seng Bank Ltd. 3 HKTC 351, Lord Bridge said that if
    a taxpayer derived profits partly within Hong Kong and partly outside Hong
    Kong, the gross offshore profits should be scaled down to bear their fair share
    of the general expenses of the business.
    6. In an apportionment, the objective is to find a basis which is
    reasonable and equitable. Whilst the method adopted by an Assessor is open
    to objection and appeal, the taxpayer has to adduce primary documents in
    support that the expenditure was truly incurred in the production of chargeable
    profits. Ledgers are secondary and not primary documents per Chu J in
    SO Kai-tong, Stanley trading as Stanley So & Co. v. CIR 6 HKTC 38.

    SPECIFIC EXPENDITURES

    7. Research and development payments or expenditures are


    apportioned under section 16B(2) where the relevant payments or expenditures
    are made or incurred outside Hong Kong and the trade is carried on partly in
    and partly out of Hong Kong. Expenditures on patent rights are apportioned
    under section 16E(2) where the rights are purchased partly for use in and
    outside Hong Kong. The deduction allowable will be determined after having
    regard to the extent of the use in Hong Kong. Apportionment of expenditure
    on prescribed fixed assets is required by section 16G(2) where the asset is
    partly used in the production of chargeable profits.

    INLAND REVENUE RULES

    8. Rules 2A, 2B and 2C of the Inland Revenue Rules provide the


    methods for apportionment of expenses in general, interest and management
    expenses in relation to the holding of share investments. Under Rules 2A, 2B
    and 2C, apportionment should be made on a basis that is most reasonable and
    appropriate in the circumstances of the case. Apportionment can be based on
    turnover, gross profit, income or assets.

    9. The following methods adopted in practice are largely based on


    Rules 2A, 2B and 2C:

    (a) If trading profits are derived partly within Hong Kong and
    partly outside Hong Kong, expenses directly attributable to
    the profits arising outside Hong Kong are to be disallowed
    and an apportionment will be made of such expenses as are
    partly one and partly the other. The basis of such

    apportionment may be on turnover or gross profit or such


    basis as is most appropriate to the activities of the trade.

    (b) If profits are derived from trading and also from share
    investments in the form of dividends, then -

    (i) interest on money borrowed and used for the purpose


    of acquiring the share investments is not allowable for
    deduction; and

    (ii) administration and general expenses as applicable to


    the receipt of the non-taxable dividends are allowable
    for deduction unless the extent of activities involved in
    the management and supervision of the investment
    portfolio and the collection of dividends is relatively
    appreciable.

    (c) Apart from any other profit earning activities, if the person is
    engaged in share dealing, then -

    (i) no attempt is made to split any interest paid in respect


    of the share investments and the whole sum is allowed
    as against the profits arising from the buying and
    selling of stocks and shares and no portion is treated as
    applicable to the earning of the non-taxable profits
    from dividends; and

    (ii) a small fraction of such expenses in supervision and


    management will normally be disallowed as applicable
    to the earning of the non-taxable dividends since the
    portfolio in these case, which would involve time and
    expense, is large.

    (d) Where there is a substantial investment portfolio, which


    would involve a degree of supervision and management as
    well as clerical and accounting records, it is a question of
    ascertaining the direct expenses and of allocating a proportion
    of the management, clerical and general expenses properly

    attributable to those activities. Unless a more suitable basis


    is available, Rule 2C provides for taking a percentage of the
    total cost of the portfolio as the measure of the disallowable
    expenses. The percentage is not to exceed -

    (i) 1/8% where the investments are held at least partly for
    share dealing purposes;

    (ii) 1/2% in other cases.

    You might also like