Calculation of Basis Period in Profit Tax for a set up Company in HK in the respective Assessment Year


15 Jan

In this blog we will explore terms that come under the category of profits tax such as basis period, its relation to profit and loss account that are experienced by the taxpayers in their businesses and other affairs. We will discuss how to include this basis period in year-end assessment for profit tax. We will also see how the commencement of the basis period starts. And what the termination means in basis period calculation. We will seeing all these in reference with the examples and relevant sections of Inland Revenue Ordinance to better understand this basis period. 

Ordinary Basis Period

The ordinary basis period for calculating the chargeable profits for an assessment year is the actual profits of the period of accounting in the assessment year. The reference for this statement is taken from the Section 18B (2) of Inland Revenue Ordinance. Where the accounts are created up to the date 31st March, the basis period is the assessment year. The reference for this statement is taken from the Section 18B (1).

Discussing an example, a business is being carried out by set up company in HK named as A Ltd. for a number of years and it prepares its account up to the date 31st March each year. The basis period of A Ltd. for the assessment year 2015 / 16 is from 1st April 2015 to 31st March 2016. The reference for this statement is taken from the Section 18B (1). If accounts are prepared by the A Ltd. up to 31st December each year, then its basis period for the assessment year 2015 / 16 is from 1st January 2015 to 31st December 2015. The reference for this statement is taken from the Section 18B (2).


Commencement 

The basis period for the assessment year in which a business begins depends completely on whether the first date of accounting ends in the year of beginning or the following assessment year. If the first date of accounting ends in the year of beginning, then according to the Section 18C (1) (a) the basis period is the period to the first date of accounting from the date of beginning.

Seeing another example, a company doing business in Hong Kong named as B Ltd. began its business on the date 1st May 2015 and first accounting date of that company ended on the 31st January 2016. For the assessment year 2015 / 16, its basis period is from 1st May 2015 to 31st January 2016. In this case, both the first accounting date and the commencement date fall within the assessment year 2015 / 16.


Where the first date of accounting ends in the subsequent assessment year and the first period of accounting is not more than the period of 12 months, then:

  • For the commencement year, there shall be no evaluation; and
  • The basis period for the subsequent assessment year is from the date of beginning to the first date of accounting. The reference for this statement is taken from the Section 18C (2) of Inland Revenue Ordinance.

Let’s consider an example, a business was commenced by the set up Hong Kong limited company named as C Ltd. on the date 1st January 2015 and first accounting date of this company was 31st December 2015. For the assessment year 2014 / 15, there would be no assessment. From the date 1st January 2015 to 31st December 2015 is the basis period for the assessment year 2015/16.


Where it comes an end to the first date of accounting in the following assessment year and the first period of accounting is more than 12 months, the evaluate able profits shall be calculated for the first assessment year on such foundation as the CIR thinks perfect. The reference for this statement is taken from the Section 18 C (1) (b). Ordinarily, for the year of beginning, the period from the beginning date to the respective accounting date in the beginning year will be chosen by the Inland Revenue Ordinance.

Consider an example, a business having Hong Kong corporation registration commenced as D Ltd. on 1st January 2015. The first date of accounting of the company was 31st March 2016. The adjusted evaluate able profits for the period of 15 months was $15,000 from 1st January 2015 to 31st March 2016. As the first period of accounting was more than the period of 12 months, it is most probable that its first year of assessment is 2014 / 15 and the respective basis period is from 1st January 2015 to 31st March 2015, while its other assessment year is 2015 / 16 and the respective basis period is from 1st April 2015 to 31st March 2016.


D Ltd.

Assessment year 2015 / 16

Basis period: 1st January 2015 to 31st March 2015


Assessment year 2015 / 16

Basis period: 1 April 2015 to 31 March 2016


 

Termination

The period of base for the assessment year in which the business terminates depends on the whether the business begun after or on 1st April 1974.

New business, for the business that begun after or on 1st April 1974, the basis period is the period from the day subsequent the basis period for the previous assessment year to the date of termination. The reference for this statement is taken from thee Section 18D (1) of Inland Revenue Ordinance. The key thing to note here is that, the profit of over the 12 months may be evaluated.

Consider an example, a company doing business in Hong Kong named as E Ltd. begun its business on the date 1st May 1989. It prepared its accounts each year to 31st December. It terminated its business on 30th November 2015. Last assessment year of the company was 2015 / 16 and the basis period was from the date 1st January 2015 to 30th November 2015. Its previous assessment year was 2015 / 16 with the corresponding basis period of 1st January 2014 to 31st December 2014.

 

Seeing another example similar to this, a company having Hong Kong corporation registration named as F Ltd. begun its business on 1st January 1994. That company prepared its accounts to 31st December each year. Business was terminated on 31st March 2016. The last assessment year of company was 2015 / 16 and the basis period was from 1st January 2015 to 31st March 2016. The total basis period consisted of 15 months. Its previous assessment year was 2015/16 with the corresponding basis period of 1st January 2014 to 31st December 2014.


Old business, for the businesses that begun before the 1st April 1974, in order to determine the last basis period in termination of business there are two defined sets of rules.

Business that terminated before 1st April 1979, the basis period in the assessment year to the date of termination is 1st April according to the Section 18D (2) of Inland Revenue Ordinance if:

  • There is no successor as long as business is concerned; or
  • There may be a successor to the business, but the reason of termination was the proprietor’s death.

Another company named as G Ltd. begun business on 1st January 1972 and accounts were made up by it to 31st December each year. It terminated its business on 30th November 1978. This company had no successor at all. For the period from 1st January 1978 to 30th November 1978, the profits of amount $121,000 was adjusted by it. During the assessment year 1978 / 79 the business was terminated by it and the respective basis period was 8 months from 1st April 1978 to 30th November 1978.


G Ltd.

Assessment year 1978 / 79

Basis period: 1st April 1978 to 30th November 1978

Evaluate able profit before the devaluation allowance



If none of the condition as described earlier is satisfied, the basis period for the last assessment year will follow the rules and regulations for the new business.     

Business that terminated or will terminate after or on 1st April 1979, the basis period is also similar as for the business that terminated before the 1st April 1979. But, the overreach of the ‘related profits’ over the ‘transitional amount’ will be accumulated to the regulated profit for the final year of assessment. The reference for this statement is taken from the Section 18D (2A) of Inland Revenue Ordinance. The meanings of the ‘related profits’ is the profits for the period from the date following the previous date of accounting to 31st March of the year of assessment of the foregoing year of termination. The meanings of the ‘Transitional amount’ is the profits from the date following the date of normal accounting in the year of finance 1974 / 75 to 31st March 1975. In the case if loss was experienced during the period, there will be no transitional amount.

The basis period under the Section 18D (2A) is the same as that under the Section 18D (2A) (para 9). Only an extra amount, being the difference between ‘transitional amount’ and ‘related profit’, is included in the chargeable profits.

Consider an example, a company named as H Ltd. begun its business in the year 1970. Accounts were prepared to 30 September each year. Its regulated profits for the following periods accounting are:

      

 Period of Accounting

Regulated profits


$

Year ended on the date 30th September 1973

40,000

Year ended on the date 30th September 1974

42,000

Year ended on the date 30th September 1975

48,000


It terminated business on the date 30th June 2015 and its tax-regulated profit was of amount $90,000 for the period from 1st October 2014 to 30th June 2015. There was no inheritor to the business. The evaluation for the assessment year 2015 / 16 will be totally based on the basis period of 3 months from the date 1st April 2015 to 30th June 2015. The reference for this statement is taken from the Section 18D (2) of Inland Revenue Ordinance.

H Ltd.

Assessment year 2015 / 16

Basis Period: 1st April 2015 to 30th June 2015


$

Profit for the basis period


30,000

Add: pertinent profit under the Section 18D (2A) of Inland Revenue Ordinance for the period from 1st October 2014 to 31st March 2015



60,000

Less: the amount of transition for the period from the date 1st October 1974 to 31st March 1975



(24,000)


Overreach of pertinent profit over the transitional amount

36,000


Evaluate able profit before the devaluation allowance (30,000+36,000)

66,000


      

Loss Involved

The principle is also to ascertain the losses accessible that are not given more than once and these losses must be thankful.

If company named as M Ltd. begun business in 1970, the CIR is most probably to assess the M Ltd. as follows:   

Assessment year 2014 / 15

Basis period: 1st January 2014 to 31st December 2014

Evaluate able profit before the devaluation allowance $80,000 * (6 months / 12 months) - $35,000

$5,000



The loss of amount $35,000 is fully utilized and no loss is premised to be carried forward.


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