In the middle of August 2019, the Hong Kong Inland Revenue Department (IRD) revised Departmental Interpretation and Practice Notes No. 28 regarding Deduction of Foreign Taxes (“DIPN 28”). The updated version replaced the one issued on 19 July 2019.
The revised DIPN 28 is divided into two parts, namely the general rules on deduction of foreign taxes under section 16(1) and the special rules under the revised section 16(1)(c) on deduction of foreign taxes paid on specified interest and gains that are deemed to be taxable in Hong Kong.
For profits tax purposes, all outgoings and expenses not capital in nature, to the extent to which they are incurred in the production of chargeable profits, are allowable for deduction under section 16(1). Under the general rules, the IRD expressed the view that foreign income taxes imposed on gross income (e.g. WHT imposed on gross royalties, service fees and management fees) are no longer be deductible under the general deductibility rules of section 16(1).
However, under the special rules, Section 16(1)(c) was revised and Section 16(2J) is added. In this regard, with effect from the year of assessment 2018/19, the unilateral relief from double taxation would not apply in relation to any tax paid in a territory by a person in respect of the profits referred to in section 16(1)(c) if (1) the territory is a DTA territory and (2) that a Hong Kong tax resident will be allowed to claim a tax credit in Hong Kong in respect of the tax payable in that territory on those profits.
