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| HK Changes Tax Practice On Prepayments |
by Mary Swire, Tax-News.com, Hong Kong
Thursday, August 26, 2010
Hong Kong’s Inland Revenue Department (IRD) has issued a new amendment
to its practice notes to clarify, in the situation where a profits tax return
is filed by a foreign company, what accounting standards are acceptable for
the preparation of financial statements.
The purpose of the practice note in question is to outline the views of the
IRD in relation to the treatment of “prepaid or deferred revenue expenses
(prepayments)”, i.e. cash disbursements or the incurring of liabilities
which, in accordance with accounting principles, are carried forward and charged
to a company’s profit and loss account in the period to which they actually
relate. Examples are the prepayments of rent, insurance premiums and interest.
Whilst the IRD’s position is that financial statements should be prepared
in accordance with the financial reporting standards prescribed by the Hong
Kong Institute of Certified Public Accountants (HKICPA), it is recognized that
the accounts of companies incorporated outside Hong Kong (and the branches of
such companies) which are carrying on business in Hong Kong may be prepared
on the basis of standards which vary from those in Hong Kong.
In such a case, in so far as any prepayment is affected, the IRD will now generally
accept an accounting treatment which is in accordance with the relevant financial
reporting standard of the “home” jurisdiction or standards issued
by the International Accounting Standards Board, and which are consistent with
determining the true profits or losses of the business.
If the home jurisdiction does not have an applicable financial reporting standard,
an adjustment of the accounting profits should be made in the profits tax computation
to reflect the manner in which the financial reporting standards prescribed
by the HKICPA would have applied to the prepayment.
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