Tax updates from the APAC region

Hong Kong enacts two-tiered profits tax regime

Amie Cheung of Hong Kong accounting firm member Lawrence Cheung CPA reports that the two-tiered tax rates in the table below become effective from the year of assessment 2018/19 (i.e. the financial year ending between 1 April 2018 and 31 March 2019).

In order to prevent income splitting, the new law contains restrictive provisions prescribing that “connected entities” can only elect a single entity as eligible for the two-tiered regime for a given year of assessment.

Enhanced tax deduction for qualifying R&D expenditure

To encourage more enterprises to conduct R&D activities in Hong Kong, new law was enacted to provide for enhanced tax deduction for expenditure incurred by enterprises on a qualifying R&D activity.

R&D expenditure is classified into two categories:

Key features of the new law:

The Inland Revenue Department recently released practice note DIPN 55 which sets out its interpretation of the R&D tax concession, the practical application of the concession and documentation requirements.

A “qualifying R&D activity” is:
(a) an activity in the fields of natural or applied science to extend knowledge;
(b) an original and planned investigation carried on with the prospect of gaining new scientific or technical knowledge and understanding; or
(c) the application of research findings or other knowledge to a plan or design for producing or introducing new or substantially improved materials, devices, products, processes, systems or services before they are commercially produced or used.

DIPN 55 clarifies that the R&D activity is not required to be wholly carried on in Hong Kong, but only local Hong Kong expenditure may qualify for the enhanced deductions.