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Hong Kong Tax Alert Summary (31 March 2020, Issue No. 2)

Core Content

This tax alert provides updates on the 2019/20 profits tax filing season, the notification of chargeability for taxpayers not issued with a tax return, and the tax treatment of leases under HKFRS 16.

2019/20 Profits Tax Filing Deadlines

• The filing season for the fiscal year ending 31 March 2020 (year of assessment 2019/20) has been postponed from 1 April to 4 May 2020.
• The earliest filing date for returns is 30 June 2020.
• Filing deadlines vary depending on the taxpayer’s accounting year-end:

• The block extension scheme applies to taxpayers who are professionally represented, allowing for extended filing deadlines.

Notification of Chargeability

• Taxpayers not issued with a tax return but with profits chargeable to tax (before loss set-off) must notify the IRD in writing.

• Notification must be submitted within four months of the end of the basis period for the year of assessment.

• The basis period depends on the taxpayer’s accounting year-end.

• Consequences of failure to notify within the stipulated time include:

  • A fixed fine of up to HK$10,000.
  • A penalty of up to three times the tax involved for each offense.

• Exceptions:

  • If the taxpayer has been filing returns annually and reasonably expected a return to be issued, no notification is required.
  • If previously advised by the IRD that no returns will be issued, or if the taxpayer is newly commenced, notification is mandatory.

Tax Treatment of Leases under HKFRS 16

• HKFRS 16 replaces HKAS 17 and applies to annual periods starting on or after 1 January 2019, with earlier application allowed.

• It introduces a single lessee accounting model, requiring recognition of right-of-use (ROU) assets and lease liabilities for all leases over 12 months, unless the asset is of low value.

• Depreciation charges and imputed interest on lease liabilities are tax deductible under section 16(1) of the Inland Revenue Ordinance (IRO), provided the payments are revenue in nature.

• Capital vs. Revenue Nature:

  • Determined primarily by law (IRO and case law), not accounting treatment.
  • If the legal form and substance of lease payments represent rentals for periodic use, they are revenue in nature and tax deductible.

• Outstanding Issue:

  • Whether the IRD would accept taxpayers claiming deductions based on actual rental payments rather than the sum of depreciation and imputed interest.

• Reinstatement Cost:

  • If the lessee is obligated to reinstate premises, the depreciation charges related to this cost are not tax deductible under section 17 of the IRO.
  • The reinstatement cost itself is also not eligible for industrial or commercial building allowances.

• Adjustments to Retained Earnings:

  • Adjustments made in the first year of HKFRS 16 adoption are generally tax deductible.
  • A negative adjustment to retained earnings is deductible, while a positive adjustment is taxable.
  • This is based on the case Pearce v. Woodall-Duckhall Ltd, [1978] 51 TC 271.

Key Takeaways

• Filing Deadlines: Postponed to 4 May 2020, with extended deadlines based on accounting year-end.
• Notification Requirement: Mandatory for taxpayers not issued with a return, with varying time limits.
• HKFRS 16 Impact: Accounting treatment under HKFRS 16 is not directly relevant for tax purposes; legal nature of payments is key.
• Tax Deductibility: Depreciation and imputed interest on lease liabilities are tax deductible unless related to reinstatement costs.
• Retained Earnings Adjustments: Generally tax deductible, with exceptions for positive adjustments.

Contact Information

• Ian McNeill – Deputy Asia-Pacific Tax Leader
  Email: ian.mcneill@hk.ey.com
  Phone: +852 2849 9568

• David Chan – Tax Leader for Hong Kong and Macau
  Email: david.chan@hk.ey.com
  Phone: +852 2629 3228

• Paul Ho – Tax Leader for Hong Kong
  Email: paul ho@hk.ey.com
  Phone: +852 2849 9564

• Wilson Cheng, Tracy Ho, Chee Weng Lee, May Leung, Ada Ma, Grace Tang, Karina Wong, Sunny Liu, Michael Stenske, Ivan Chan, Lorraine Cheung, Sam Fan, Becky Lai, Carol Liu, Albert Lee, Robert Hardesty, Jeremy Litton, Martin Richter, Kenny Wei, Adam Williams, Jo An Yee, Lorraine Cheung, Ami Cheung, Robin Choi, Jeff Tang, Paul Wen – Various EY tax professionals in Hong Kong and China.

Disclaimer

• This document is for general informational purposes only.
• It is not intended to be used as accounting, tax, or legal advice.
• Taxpayers should consult their tax advisors for specific guidance.