Hong Kong Tax Alert: 2 April 2013
Notification of chargeability and claiming tax deductions for recharges
Notification of chargeability where no tax returns have been issued.
Taxpayers who are not issued with tax returns but nonetheless have profits chargeable to tax for any year of assessment (before the set-off of losses brought forward) are required to take the initiative to notify the IRD of their chargeability. The notification has to be in writing, addressed to the Commissioner, and submitted within four months after the end of the basis period for the year of assessment concerned.
It should be noted that a taxpayer’s basis period for a year of assessment depends on their accounting year-end date. As a result, the time limit for informing chargeability among taxpayers varies accordingly.
For example, Company A (with an accounting year ended on 30 June 2012) and Company B (with an accounting year ended on 30 September 2012) were required to inform the IRD of their chargeability for the year of assessment 2012/13 on or before 31 October 2012 and 31 January 2013 respectively (i.e., within four months of their respective year-end dates).
Failure to inform the IRD their chargeability within the stipulated time without reasonable excuse will render a taxpayer liable to a fixed fine of up to HK$10,000 and potentially a penalty of up to three times of the tax involved for each offence.
However, there is no need to inform the IRD as to chargeability where a taxpayer has been filing tax returns annually and could reasonably expect that in the normal course of events the IRD would issue a return in the current year. Conversely, if a chargeable taxpayer has previously been advised by the IRD that a profits tax return will no longer be issued on an annual basis, or the taxpayer has recently commenced business, the Commissioner must be notified of chargeability within the stipulated period.
Claiming tax deductions for recharges in respect of share-based payments
In addition to the above, we would also like to draw your attention to matters that you should be aware of when claiming a tax deduction for a recharge in respect of share-based payments.
Box 11.11 of the 2012/13 profits tax return requires taxpayers to state the amount of share-based payments charged to the profit and loss account in accordance with Hong Kong Financial Reporting Standard 2. However, taxpayers should not assume that the amount so charged to the account would necessarily be tax deductible.
In this regard, taxpayers should note the IRD’s new stance on tax deductions for group-recharges of share-based payments posted on its website on 6 March 2012.
Under the IRD’s new stance, subject to there being a written recharge agreement, a company will be allowed a tax deduction in Hong Kong if it is recharged by another group company for the latter employing its own shares to cover share options or awards granted to the employees of the first-mentioned company. This is the case regardless of whether the shares involved are from a new issue of shares or are shares acquired from the market by the latter group company.
This represents a welcome change to the IRD’s previous position of only allowing a tax deduction for a recharge where the shares involved were acquired from the market by the latter group company, but not where the shares were from a new issue of shares.
A tax deduction will however only be granted if the amount recharged is incurred in the production of the profits of the first-mentioned company which are chargeable to tax in Hong Kong, and the recharge is not excessive. Furthermore, the timing for the tax deduction may be different from that when the liabilities for the recharge are incurred and recognized in the accounts.
Whether an amount recharged under an agreement is excessive should be ascertained with reference to all the relevant circumstances. In this regard the IRD has indicated that the open market value of the shares at the date of exercise of the options, or vesting of the shares awards, may be one factor to be considered in evaluating whether the amount recharged is excessive.
As regards the timing for the tax deduction, the IRD takes the position that a deduction will only be allowed at the time when the relevant options are exercised or the shares have vested, i.e., the timing of the deductions will not necessarily reconcile with the date when the liabilities are contractually due or recognized in the accounts.
A note to the 2012/13 return also specifies that details to be provided when claiming a tax deduction for share-based payments include the following:
- The amount claimed in respect of options exercised or shares vested during the basis period and the basis of computation, stating whether the shares involved were from a new issue of shares or were acquired from the market
- The recharge arrangements between group companies
- The amount of deductions previously allowed in respect of share options or awards subsequently forfeited or cancelled during the basis period (if any). The IRD has taken the position that such amounts would be taxable income in the year of forfeiture or cancellation
If you would like to explore whether the IRD’s new stance on share-based payments might help you settle any relevant tax disputes, or how the 2012/13 return should be prepared in this regard, please call your tax executives to discuss.