Tax Deduction now available on Withholding tax paid

Hong Kong Legislative Council passed the Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021[1] on 2 June 2021. Deduction of foreign tax is covered in the Bill and shall apply starting from the year of assessment 2021/22.

In the past, under DIPN No, 28 (Revised), the Inland Revenue Department (“the IRD”) does not allow tax deduction on foreign tax paid on most type of income (except for interest income). As such, taxpayers who paid tax in Hong Kong as well as Non-DTA jurisdictions (e.g., the US, Australia, Taiwan) would not have tax relief in Hong Kong.

Effective from 2021/22, a new provision, Section 16(1)(ca) of the Inland Revenue Ordinance (“the IRO”), is added to provide deduction on foreign taxes paid by a Hong Kong resident person on its income provided that the following conditions are fulfilled:

Sufficient documentary evidence are available to prove that specified taxes are paid in an overseas jurisdiction; and
The same income is chargeable under Hong Kong Profits Tax.
Section 16(1)(ca) of the IRO is not available for foreign taxes paid in DTA jurisdictions. Instead, these taxpayers should pursue Tax Credit claim under Section 50A of the IRO.

Below is the summary:

Double taxation relief	Paid in DTA jurisdiction	Paid in Non-DTA jurisdiction
Tax Credit	Available	Not available
Tax Deduction (before 2021/22)	Not available	Available for interest income only
Tax Deduction (after 2021/22)	Not available	Available for interest, royalty / licensing fee and services fee

Note: The above table gives a high-level summary on the double taxation relief available. Certain restrictions might be imposed before tax credit / tax deduction is available to taxpayers. It is advised to discuss the details with your tax advisor before implementation of relevant tax plan.

Points to Note
Based on our experience, most corporations are unaware that they are paying double tax on the same income. Professional Accountants in Business (PAIB) should examine carefully the supporting documents of transactions with PRC and overseas parties (both external clients and group companies). Typical documents include agreements, invoices and subsequent settlement.
The next step would be calculating your tax savings in your Profits Tax computation. Tax Credit Claim calculation is not straightforward but could effectively reduce the tax liabilities of Hong Kong corporations.
Our team would be pleased to guide you through the process and answer any enquiries you may have in your mind on double taxation.

[1] Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021:
https://www.legco.gov.hk/yr20-21/english/bills/b202103195.pdf