Newsletter

In June 2020, the IRD issued a revised Departmental Interpretation Practice Notes No. 42 to clarify the tax deduction on an expected credit loss (“ECL”) provided for financial instruments under HKFRS 9.

Under 3-stage approach, the application of tax deduction on ECL is not subject to the deduction rule for bad debts under Section 16(1)(d) of the Inland Revenue Ordinance (“the IRO”). The ECL should be treated as deductible only if the financial instrument is credit-impaired (i.e. stage 3). For financial instrument not credit-impaired (i.e. stage 1 and 2), the ECL will unlikely to be deductible. The tax treatment of ECL of financial instruments is summarized as follows:-

Stage of ECL

Tax treatment on ECL

Subsequent reversal of ECL

Relevant Inland Revenue Ordinance

Stage 1 and 2

Non-deducible

Non-taxable

Section 18K(2)

Stage 3

Deductible

Taxable

Section 18K(3)

Points to Note
For cases using simplified approach, the deduction criteria is similar to that of Section 16(1)(d) of the IRO which requires taxpayer to prove to the IRD’s satisfaction that the debt has become bad and reasonable recovery actions have been taken to recover the debt. Please consult your auditor and tax advisor for details and implication on your company.

You may also be interested in
article-image
tag
HONG KONG TAX
09 August 2021
Inland Revenue Ordinance Section 15F – Double Taxation Risk on MNC with Research & Development (R&D) functions in Hong Kong
article-image
tag
HONG KONG TAX
09 August 2021
Tax Relief Measure: Conditional Surcharge Waiver (i.e., Interest-free) for tax payments by instalment
article-image
tag
HONG KONG TAX
18 August 2021
[Court Case Study] Payment for “going away quietly” NOT subject to Salaries Tax
article-image
tag
HONG KONG TAX
18 August 2021
8.25% Tax Rate available for Hong Kong Insurance Business corporations
article-image
tag
HONG KONG TAX
22 March 2022
Lenient approach by the IRD on application deadline of tax credit claim
article-image
tag
HONG KONG TAX
01 May 2022
Deductibility of Keyman Insurance Policy
article-image
tag
HONG KONG TAX
27 May 2022
PROPOSED PROFITS TAX EXEMPTION FOR FAMILY OFFICE BUSINESS
article-image
tag
CHINA TAX
31 July 2022
LIMITATION ON USE OF CAPITAL FOR WHOLLY FOREIGN OWNED ENTERPRISE (“WFOE”) IN MAINLAND CHINA
article-image
tag
CHINA TAX
31 July 2022
RECENT COURT CASES OF FOREIGN EXCHANGE VIOLATION
article-image
tag
CHINA TAX
31 July 2022
HIGHER BENEFITS BUT STRENGTHENING SUPERVISION ON HIGH AND NEW TECHNOLOGY ENTERPRISE (高新科技企業)