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Hong Kong Publishes Further Revision to Practice Notes on Deduction of Foreign Taxes

The Hong Kong Inland Revenue Department has published a further revision of Departmental Interpretation and Practice Notes (DIPN) No. 28 on provisions relating to the deduction of foreign taxes. Although the latest version is still dated July 2019, it includes certain changes as compared to the version first published in July.

One of the changes in the latest revision is the addition of the following under the section on tax on profits or income: foreign taxes on profits or income (e.g. withholding tax on royalties, licensing fees, service fees and management fees), subject to the provisions in section 16(1)(c), are not deductible.

Section 16(1)(c) provides unilateral relief from double taxation through the allowance of a deduction of tax of substantially the same nature as tax imposed under the IRO that has been paid outside Hong Kong. Through amendments made by the Inland Revenue (Amendment) (No. 6) Ordinance 2018 and explained in DIPN No. 28, the relief provided under section 16(1)(c) is restricted if Hong Kong has a double taxation agreement (DTA) with the territory in which tax has been paid. This change was made to avoid conflicts between provisions in the IRO and those in DTAs.

Another change in the latest revised version is the addition of the following under the section on other taxes and duties: Since goods and services tax and value added tax paid in foreign jurisdictions are not in the nature of profits tax or income tax, such taxes will be deductible under section 16(1) if they are incurred in the production of chargeable profits.

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