Aside from structuring your business in advance and reviewing your tax planning strategies on a regular basis, companies should be conducting a tax planning review prior to year-end, as such a review can help to identify opportunities to save taxes. This is equally true in Hong Kong as it is in other countries. Although each country has its own tax rules and anti-avoidance legislation, there are various tax planning strategies that corporations may consider:
| 1. |
Reviewing fixed assets
policies
In addition to ensuring that assets are properly categorised to achieve the maximum write off in value for tax depreciation purposes, companies should consider advancing capital commitments in order to take the depreciation allowance one year earlier. In order to maximise this tax benefit, companies should ensure that they purchase the assets that would receive the highest tax depreciation rates first.
For example, if a Hong Kong company is planning to purchase fixed assets just after its year end, it should consider bringing forward expenditure on such assets as computer equipment, or
"prescribed fixed
assets" first, as they qualify for 100% deduction in the year the expenditure is incurred. In contrast, expenditures for industrial buildings or commercial buildings receive a much lower level of depreciation
allowances.
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| 2. |
Advancing repairs and maintenance
expenditures
Bringing forward revenue expenditure, such as repairs and maintenance, will advance the tax relief to the year in which the expenditure is incurred.
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| 3. |
Bad and doubtful
debts
Different countries have different rules for treating bad and doubtful debts. Hong Kong allows bad trading debts to be written off for tax purposes only if all the appropriate steps have been taken to recover the debts. Therefore, companies should review their outstanding debts prior to the fiscal year-end and ensure they have sufficient documentation in place to justify any bad debt provisions that are
made.
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| 4. |
Accrued
expenditure
Following the issue of the Hong Kong Inland Revenue Department's Departmental Interpretation and Practice Note No. 40 (DIPN 40) on the treatment of prepaid or deferred revenue expenditure, companies should ensure that they have made an accrual for all expenditure incurred during the year. Our Spring 2003 edition of Tax Talk contains an article entitled
"DIPN 40 ─ Prepaid or deferred revenue
expenses..." which explains the provisions of DIPN 40 in more detail.
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| 5. |
Bonuses
If your company has a bonus programme based on the year's performance, try to evaluate the performance and determine bonus amounts in the fourth quarter, instead of waiting until after the year-end. Even if the bonus will be paid subsequent to year-end, the bonus expense will be deductible for the company if accrued before year-end.
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By considering the above measures, companies may obtain a permanent tax saving or tax deferral.
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