On 21 March 2018, a two-tiered profits tax regime [the 'Inland Revenue (Amendment) (No. 7) Bill 2017' (“the Bill”)] was passed after LegCo's Third Reading. It was then signed by the Chief Executive on 29 March 2018.
The Bill applies to both corporations and unincorporated businesses commencing from the year of assessment 2018/19 (i.e. tax assessment years commencing on or after 1 April 20181 ). The applicable tax rates are as follows:
| Assessable profits |
Corporations |
Unincorporated businesses |
| First HK$2 million |
8.25% |
7.5% |
| Over HK$2 million |
16.5% |
15% |
The tax rates for the first HK$2 million of assessable profits of corporations and unincorporated businesses (mainly sole proprietorships and partnerships) are reduced by 50%.
The amendment only allows a group of 'connected entities' to nominate one entity to apply the reduced tax rate for a given year of assessment.
In addition, the amendment contains a provision to avoid double benefits to exclude corporations which have elected to be subject to the reduced tax rate for profits derived from their businesses of professional reinsurance, captive insurance, corporate treasury centres and aircraft leasing. Furthermore, interest, gains or profits derived from qualifying debt instruments that are already subject to tax at half-rates under the existing provisions are excluded from the amendment.
Answer:
Although the Bill was signed by the Chief Executive on 29 March 2018, with reference to Question 1, the two-tiered profits tax regime was substantively enacted on 21 March 2018 after passing the Third Reading.
For financial statements with accounting periods that ended before, but authorised for issue, after 21 March 2018
The entity should disclose the nature of the tax changes and provide an estimate of the financial effect of those changes if the impact is expected to be significant, or a statement that such estimate cannot be made2 .
For financial statements with accounting periods that ended on or after 21 March 2018
The change has no impact on the determination of current tax before 1 April 2018 (i.e. for those accounting periods for which the tax assessment year of 2018/19 is not yet applicable, e.g. for a year ended 31 March 2018). Eligible entities should use the reduced tax rate to measure the current tax liabilities arising from their first HK$2 million assessable profit in the year of assessment 2018/19.
The measurement of deferred tax assets and liabilities will be affected by the change for the accounting periods ended on or after 21 March 2018, for financial statements prepared in accordance with HKFRS or HKFRS for Private Entities 3. The change is not applicable for financial statements prepared in accordance with the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (the SME Standard) – as no accounting for deferred tax is required under the SME Standard.
In the first financial accounting year that the deferred tax is calculated using the new tax rates, any adjustment to the deferred tax calculated in the prior year under the rates then in force is accounted for in the current period and not as a prior year adjustment. Accordingly, the comparatives are not restated.
Footnote:
1 The year of assessment is 1 April to 31 March of the next year for tax purposes in Hong Kong. Profits taxpayers are allowed to choose any accounting year end date that may not coincide with the year of assessment. You can refer to https://www.ird.gov.hk/eng/faq/index.htm for Inland Revenue Department's FAQs relating to the two-tiered profits tax regime.
2 Paragraph 21 of HKAS 10 Events after the Reporting Period states that "If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period: (a) the nature of the event; and (b) an estimate of its financial effect, or a statement that such an estimate cannot be made."
Paragraph 10 of Section 32 Events after the End of the Reporting Period under HKFRS for Private Entities states that "An entity shall disclose the following for each category of non-adjusting event after the end of the reporting period: (a) the nature of the event; and (b) an estimate of its financial effect or a statement that such an estimate cannot be made."
Paragraph 8 of Section 17 Events After the End of the Reporting Period under the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard states that "Where non-adjusting events after the end of the reporting period are of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions, an entity should disclose the following information for each significant category of non-adjusting event after the end of the reporting period: (a) the nature of the event; and (b) an estimate of its financial effect, or a statement that such an estimate cannot be made."
3 Paragraph 49 of HKAS 12 states that "When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse."
Paragraph 28 of Section 29 Income Tax under HKFRS for Private Entities states that "When different tax rates apply to different levels of taxable profit, an entity shall measure deferred tax liabilities (assets) using the average enacted or substantively enacted rates that it expects to be applicable to the taxable profit (tax loss) of the periods in which it expects the deferred tax liability to be settled (deferred tax asset to be realised)."
