Hong Kong Tax Alert: 14 November 2013

Commentary

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We welcome the CFA reaffirming the two cardinal principles of tax law that (i) the word “profits” connotes actual or realized and not potential or anticipated profits; and (ii) neither profits nor losses may be anticipated.

Clients should however note that according to the judgment in this case, it appears that only those provisions for diminution in value of trading stock which are material and permanent in nature would qualify for a tax deduction.

As such, the IRD may challenge deductions for year-end revaluation losses in respect of trading stock which by its nature fluctuates widely (such as the listed securities in NCIL), the argument being that the losses in question are not permanent enough to justify a deduction.

Clients should also note the comments made by Hon To J  in the Court of First Instance (CFI) in NCIL that year-end translation gains in respect of assets held in a foreign currency would not be regarded as being unrealized for tax purposes. In this regard, Hon To J remarked that “[p]roperly understood, [the taxing of translation gains] was not a case of taxing on anticipated profits, but on actual accrued profits valued on balance sheet date.”

Lord Millet NPJ did not express his view on the above quoted comments made by Hon To J in the CFI. As such, the issue of the taxability or deductibility of year-end translation gains or losses especially for non-financial institutions could still remain controversial.

This is the case because the comments made by Hon To J in his judgment of NCIL in the CFI could possibly be regarded as only being a general remark, not forming part of his reasoning for the decision of the issue in dispute in the case. 

The above are by their nature complicated issues and clients should seek professional tax advice where necessary.