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Hong Kong Revises Practice Notes on Deduction of Foreign Taxes

The Hong Kong Inland Revenue Department has published a revised version of Departmental Interpretation and Practice Notes (DIPN) No. 28 on provisions relating to foreign tax deduction. The revisions were made in light of Inland Revenue (Amendment) (No. 6) Ordinance 2018, which was published in the Official Gazette in July 2018 (previous coverage).

The main revisions to DIPN No. 28 concern the enactment of section 16(2J), which provides that with effect from the year of assessment 2018/19, unilateral relief from double taxation (tax deduction) provided under section 16(1)(c) is not available in relation to any tax paid in a territory if:

  • the territory is a double taxation agreement (DTA) territory; and
  • under section 50, tax payable in the territory by a Hong Kong resident person in respect of the profits is to be allowed as a credit against tax payable in Hong Kong by the Hong Kong resident person in respect of the profits.

As noted in DIPN No. 28, the reason for the change is as follows:

The reason for denying a deduction under section 16(1)(c) is that a DTA is intended to provide a comprehensive solution to all tax matters which are within its scope. The international practice is that where a DTA is in place, relief from double taxation should be allowed under the DTA only to the extent contemplated by it. The tax credit approach is adopted by Hong Kong in all existing DTAs. Section 16(2J) seeks to ensure that the DTAs will prevail in case of any conflicts between the provisions in the IRO and those in the DTAs. Therefore, if the foreign tax is paid in a DTA territory and the relevant DTA provides relief from double taxation by way of tax credit, a Hong Kong resident person can only apply for a tax credit under section 50. For a non-Hong Kong resident person who is not covered by the relevant DTA, it may seek unilateral relief from its residence of jurisdiction or bilateral relief under the DTA between its residence jurisdiction and the DTA territory (if any).

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