In our February 2022 edition, we will continue to study three issues about Hong Kong Certificate of Residence (CoR) in the 2020 Annual General Meeting between the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Inland Revenue Department (“IRD”).
3. Lenient approach by the IRD on application deadline of tax credit claim
IRD may still accept late Tax Credit Applications under CDTA Mutual Agreement Procedure (“MAP”) under CDTA
In the 2020 Annual General meeting with the IRD, HKICPA brought up a situation that taxpayer may have to recognize all the royalty income to be received from an overseas licensee throughout the whole licensing period (say 10 years) at year 1 in accordance with HKFRS 15 while actual payment would be received over 10 years.
In this regard, while Tax Credit can only be claimed after overseas withholding tax is paid (i.e., actual royalty income is received), taxpayers should observe the below application deadline under Section 50(9) of the Inland Revenue Ordinance (“IRO”):
- (a) within 6 years after the end of the year of assessment; or
- (b) within 6 months after Hong Kong tax assessment has been issued on the income which had already been assessed to foreign tax, whichever is later.
In the above case, the application deadline would be six years after the end of Year 1. In other words, Tax Credit on foreign tax payable in Year 7 to Year 10 cannot be claimed as the due date has already been lapsed.
Having said the above, the IRD confirmed that it will adopt lenient approach in considering the Tax Credit claim application timing. Where a claim for tax credit could not be timely made under the IRO, the taxpayer might present a case for Mutual Agreement Procedure (“MAP”) under the relevant CDTA. Under section 50AAB(6) of the IRO, any MAP solution reached should be given effect despite any provision in the IRO.
Points to note
In reality, based on our experience, the timing of Tax Credit claim is extremely crucial. While MAP could eventually help solve the issue, it took significant amount of time and effort for the taxpayers to resolve the double taxation issues. Below are some of the issues we encounter in our daily work:-
- We encountered a case that there was a delay in recognition of royalty income and preparation of audited financial statements. The income was recognised 6 years after the withholding tax had been paid. It led to much difficulties in Tax Credit claim. Taxpayers should pay strong attention to application deadline for the tax credit claim.
- Whenever additional tax is charged (e.g. due to transfer pricing adjustment or dispute with tax authorities) for any prior year of assessment, you are reminded to submit the tax credit claim within 6 months after the additional assessment is made.
- If the tax subsidies or refunds were received by a taxpayer some time after tax credits had been granted, the taxpayer has the obligation to notify the IRD on the over-claimed tax credit within 3 months after the tax subsidies or refunds were provided under Section 50AA(5) of the IRO.
- You should remind the overseas withholding agents to provide you with all the tax receipts once they receive them from the tax authorities. No tax credit would be available without the tax receipts.
