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In July 2019, the Inland Revenue Department has published an update version of Department Interpretation and Practice Notes (DIPN) No. 28 (Revised) on the provisions relating to deduction of foreign taxes. The changes were made in light of the enactment of Inland Revenue (Amendment) (No. 6) Ordinance 2018. IRD would provide more guidance in DIPN No. 28 (Revised).
Tax on profits is not an outgoing or expenses incurred in producing chargeable profits, the tax is not deductible. Specifically, section 17(1)(g) provides that no deduction shall be allowed in respect of any tax paid or payable under the Inland Revenue Ordinance other than salaries tax paid in respect of employee’s remuneration. However, foreign taxes and duties not calculated by reference to profits will be considered for deduction, for examples, rates levied on properties, vehicle licence fee, duties on commodities or foreign taxes and duties not levied by reference to profits.
Before the enactment of Inland Revenue (Amendment) (No. 6) Ordinance 2018, regardless of whether there was a Double Taxation Agreement (DTA) have been made between Hong Kong and foreign countries, Inland Revenue Ordinance (IRO) section 16(1)(c) provided unilateral relief from double taxation for foreign tax paid on specified interest and gains in the form of a deduction.
The main changes in DIPN No. 28 (Revised) focus on the enactment of IRO section 16(2J), which is effective from the year of assessment 2018/2019, such unilateral relief from double taxation would not apply in relation to any tax paid in a territory if:
(a) the territory is a DTA territory; and
(b) under IRO section 50, tax payable in the territory by a Hong Kong resident person in respect of the profits is to be allowed as a credit against tax payable in Hong Kong by the Hong Kong resident person in respect of the profits.
The key reason for changing is that DTA is intended to provide a comprehensive solution to all tax matters which are within its scope. The international practice is that where a DTA is in place, relief from double taxation should be allowed under the DTA only to the extent contemplated by it. The tax credit approach is adopted by Hong Kong in all existing DTAs. IRO section 16(2J) seeks to ensure that the DTAs will prevail in case of any conflicts between the provisions in the IRO and those in the DTAs.
