Deferred Tax in Hong Kong
Deferred tax in Hong Kong is governed by HKAS 12 Income Taxes, issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
Key Concepts
Temporary Differences: These are the differences between the carrying amount of an asset or liability in the financial statements and its tax base. They arise due to timing differences in the recognition of income and expenses for accounting and tax purposes.
Deferred Tax Liability: This arises when the carrying amount of an asset or liability exceeds its tax base. It represents the future tax payable when the temporary difference reverses.
Deferred Tax Asset: This arises when the carrying amount of an asset or liability is less than its tax base. It represents the future tax reverses.
Recognition of Deferred Tax Assets
Deferred tax assets are recognized only when it is probable that taxable profits will be available against which the deferred tax asset can be utilized. If an entity has a history of tax losses, a deferred tax asset is recognized only it exists or there is convincing evidence of future taxable profits.
Measurement of Deferred Tax
Deferred tax is measured at the applicable tax rate that is expected to apply to the period when the asset is realized or the liability is settled. The tax rate used should be the enacted tax rate at the reporting date.
Changes in Tax Rates
Changes in tax rates are accounted for by re-measuring deferred tax assets and liabilities using the new tax rate. The resulting adjustment is recognized in profit or loss, unless it relates to a business combination, in which case it is accounted for as part of the acquisition accounting.
Disclosure
Entities are required to disclose information about deferred tax assets and liabilities, including the reconciliation of the opening and closing balances, the major components of the deferred tax balances, and the movement in the deferred tax provision.
Example: Deferred Tax Liability
Let's consider a company in Hong Kong that purchases a piece of equipment for $10,000. For accounting purposes, the equipment is depreciated over 5 years using the straight-line method, resulting in annual depreciation of $2,000. However, for tax purposes, the company is allowed to deduct 60% of the cost in the first year, followed by 20% in each of the subsequent four years.
Year 1:
Accounting Depreciation: $2,000
Tax Depreciation: $6,000
Temporary Difference: $4,000 (Accounting Depreciation - Tax Depreciation)
Deferred Tax Liability: $4,000 * 16.5% (Assumed tax rate) = $660
Year 2:
Accounting Depreciation: $2,000
Tax Depreciation: $2,000
Temporary Difference: $0
Deferred Tax Liability: $660 (No change as the temporary difference has reversed)
Year 3-5:
Accounting Depreciation: $2,000
Tax Depreciation: $2,000
Temporary Difference: $0
Deferred Tax Liability: $660 (No change)
Explanation:
In Year 1, the accounting depreciation is lower than the tax depreciation, creating a temporary difference. This difference will reverse in future years as the accounting depreciation exceeds the tax depreciation. As a result, the company will have to pay more tax in the future, leading to a deferred tax liability.
This is a simplified example. In reality, there may be other factors to consider, such as changes in tax rates, carryforward of losses, and specific tax regulations applicable to the company's industry.
How Bestar can Help
Bestar can assist with deferred tax matters by providing comprehensive accounting and tax services. Our experienced team can help you:
Calculate and manage deferred tax liabilities and assets: We will accurately calculate your deferred tax liabilities and assets based on your financial statements and tax regulations. This ensures that your financial reports reflect the true tax implications of your business operations.
Identify and mitigate potential deferred tax risks: Bestar can help you identify potential risks related to deferred tax, such as changes in tax laws or regulations, fluctuations in asset values, and shifts in business operations. We can then recommend strategies to mitigate these risks and minimize your tax burden.
Ensure compliance with tax regulations: Bestar can help you ensure compliance with all relevant tax regulations related to deferred tax. This includes staying up-to-date on the latest changes in tax laws and regulations and ensuring that your financial records are properly maintained and audited.
Prepare and file tax returns: Bestar can help you prepare and file your tax returns, including any necessary adjustments for deferred tax. This ensures that your tax returns are accurate and submitted on time.
Represent you in tax audits and disputes: If you are ever audited by the tax authorities or involved in a tax dispute, Bestar can represent you and advocate for your interests. We have extensive experience handling tax audits and disputes and can help you navigate the process and achieve a favorable outcome.
By leveraging Bestar's expertise in deferred tax, you can ensure that your business is compliant with all tax regulations and minimize your tax liabilities. This can help you save money and improve your overall financial performance.
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