• Service: Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 3/14/2014

Hong Kong - “Fair basis” vs. “realization basis” (profits tax) 

March 14: The Inland Revenue Department issued an interim administrative measure, announcing that it will accept profits tax returns for 2013/14 if assessable profits are computed on a “fair value” basis.


Hong Kong’s Court of Final Appeal in a 2013 decision concluded that unrealized gains recognized at year-end are not taxable. The appellate court rejected the Inland Revenue’s position that unrealized profits are not chargeable to tax, notwithstanding that the gains were recognized in the taxpayer’s financial statements in accordance with international accounting standards. Nice Cheer Investment Ltd. v. CIR, FACV 23/2012

Read TaxNewsFlash-Asia Pacific: Hong Kong - Unrealised revaluation gains not taxable

Interim guidance

Following this taxpayer-favorable decision, taxpayers requested that the Inland Revenue accept financial statements prepared on a “fair value” basis for profits tax purpose, for returns to be filed the year of assessment 2013/14. Otherwise, taxpayers could incur substantial costs if profits computed on a fair value basis are required to be recomputed on a realization basis.

The tax authorities currently are studying the judgment, in particular to consider whether there is to be a change in law to allow for continuation of the mark-to-market practice (generally the process of daily revaluation of a security to reflect its current market value instead of its acquisition price or book value).

The interim administrative measure, announcing profits tax returns will be accepted for 2013/14 if assessable profits are computed on a fair value basis, was provided pending the outcome of the authorities’ review of the decision.

The Inland Revenue also will agree to re-compute assessable profits for 2013/14 computed on a fair value basis if the realization basis is subsequently adopted.

Read a March 2014 report [PDF 1.43 MB] prepared by the KPMG member firm in Hong Kong: Nice Cheer Investment Limited v CIR – further developments

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