Legislative proposal for tax deduction of foreign taxes charged on a gross income basis

Many stakeholders have lobbied the Government to reinstate the Inland Revenue Department’s (IRD’s) previous assessing practice of allowing a tax deduction for foreign taxes charged and paid on a gross income basis in respect of all types of income. Stakeholders note that the reinstatement of this practice, which had applied up until July 2019, would benefit taxpayers.

To address some of their concerns, the Government recently introduced the Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021 (the Bill) that seeks to:

(a) allow a tax deduction of foreign taxes that were charged on a gross income basis in respect of non-interest types of income (e.g., royalties) and paid in a jurisdiction that does not have a comprehensive avoidance of double taxation arrangement with Hong Kong (i.e., paid in a non-Hong Kong’s CDTA jurisdiction). Both Hong Kong and non-Hong Kong resident persons would be eligible for this deduction;

(b) allow a non-Hong Kong resident person to claim a tax deduction of foreign taxes that were charged on a gross income basis in respect of all types of income and paid in a Hong Kong’s CDTA jurisdiction; and

(c) impose new restrictive conditions that a non-Hong Kong resident person can only claim a tax deduction in Hong Kong of foreign taxes paid referred to in (a) and (b) above to the extent such foreign taxes are unrelieved for double taxation (by deduction or otherwise) in the residence jurisdiction of the non-Hong Kong resident person.

Subject to the enactment of the Bill into law, the proposed legislative amendments will apply from the year of assessment beginning on or after 1 April 2021, i.e., not retrospective to reinstate any of the IRD’s previous assessing practice.