Do you know even if you have appointed your tax representative or accountant to file tax for you, as a taxpayer, you are responsible for the documents submitted to the IRD? Below is some basic but essential information on filling in Profits tax returns.
Can I directly copy the financial statements when filing tax returns?
a) How to fill in tax returns if financial statements are prepared in foreign currencies?
If company’s financial statements are prepared in foreign currencies, when filing tax, one has to convert the amount of foreign currency into HK dollars. The exchange rate can be found in the “Average Exchange Rates of Major Foreign Currencies” used by the IRD. Furthermore, taxpayers have to state the conversion rate used to convert to HK dollars in Part 7 in the Profits tax return.
b) How to state cents in Profits tax return?
In the daily operation of a company, cents are commonly paid or received. Also, when preparing accounts and financial statements, decimal places will be used. However, taxpayers have to exclude cents and fill in exact numbers of HK dollars. Therefore, the cents shown in financial statements can be rounded up when filling out tax returns.
Can I submit the Profits tax return only?
If the company satisfies all the conditions of being regarded as a Small corporation, taxpayers can submit the tax return only, without other documents. However, the IRD may require the company to submit audited financial statements, profits tax computation and related schedules, and other related documents and information. Therefore, it is best to prepare all the related documents before submitting the tax return.
What is a “Small corporation”?
The company’s gross income for that year of assessment does not exceed HK$2,000,000, while it is not a permanent establishment in Hong Kong of a non-Hong Kong resident person for that year of assessment, and it is not a ship-owner. Also, the company does not obtain, claim or pay:
- to a non-resident person any sum for the use of intellectual property specified in section 15(1)(a), (b) or (ba) of the IRO or for the assignment of a performer’s right specified in section 15(1)(bb) of the IRO during the basis period for that year of assessment.
- assessable profits pursuant to section 20AE, 20AF, 20AX and/or 20AY of the Inland Revenue Ordinance (IRO) for that year of assessment.
- any interest, profits/loss arising from short/medium term debt instruments (issued before 1 April 2018) as defined in section 14A(4) of the IRO.
- any profits/loss of a professional reinsurer, an authorized captive insurer, a specified insurer or a licensed insurance broker company as defined in section 14AB of the IRO.
- any qualifying profits of a qualifying corporate treasury centre as defined in section 14C of the IRO.
- any qualifying profits of a qualifying aircraft lessor or a qualifying aircraft leasing manager as defined in section 14G of the IRO.
- any qualifying profits of a qualifying ship lessor or a qualifying ship leasing manager as defined in section 14O of the IRO.
- any double taxation relief pursuant to an arrangement specified under section 49(1) or 49(1A) of the IRO for that year of assessment.
- debt treatment for an arrangement for that year of assessment as an originator or a bond-issuer of a specified alternative bond scheme under section 40AB of and Schedule 17A to the IRO.
- deduction for distribution arising from a regulatory capital security for that year of assessment.
- tax concession in respect of eligible carried interest as provided in Schedule 16D to the IRO for that year of assessment.
As the above tax regulations are less common for general SMEs and more complicated, we will explain them in detail later. We can first consider the total gross income for “Small corporation”.
How to calculate gross income?
Total gross income means all types of income, including operation income, interest income, income generated from selling assets, etc.
Can all entities apply for the two-tiered profits tax rates?
Since the year of assessment 2018/19, there have been two types of tax rates in Hong Kong. One is the corporation rate (16.5% for corporations and 15% for unincorporated businesses). Another one is the two-tiered profits tax rates regime as follows:
|Assessable Profits||Corporations||Unincorporated Businesses|
|Any part of assessable profits over $2,000,000||16.5%||15%|
If your company has one or more connected entities, the two-tiered profits tax rates would only apply to the one which is nominated to be chargeable at the two-tiered rates. (In general, one will nominate the entity with higher assessable profits). Other connected parties will use the corporation rate for calculation.
How to fill in the Industrial Classification Code？
For easier classification of businesses of different companies, in addition to principal business activity and product or service, the IRD will require taxpayers to fill in the Hong Kong Standard Industrial Classification Code. Taxpayers can find out the respective company classification from the Hong Kong Census and Statistics Department website.
Although companies generally appoint a tax representative or accountant to file tax, it does not mean that taxpayers have no responsibility for the documents submitted to the IRD. A deeper understanding of tax, stronger protection for yourself.
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