FAQ : Deduction for Environmental Protection Facilities

Q1	What Environmental Protection Facilities are eligible for the tax deduction?
A1	Schedule 17 of the Inland Revenue Ordinance sets out a list of specified Environmental Protection Facilities which are eligible for deduction. The list mainly includes machinery or plant required under schemes or ordinances administered by the Environmental Protection Department and some renewable energy installations. Eligible Environmental Protection Facilities do not include any machinery or plant in which any person holds rights as a lessee under a lease.

Q2	Will the list of specified Environmental Protection Facilities be expanded to cover new Environmental Protection Facilities developed through technological advancement?
A2	Section 16H(3) of the Inland Revenue Ordinance empowers the Secretary for Financial Services and the Treasury to amend the list of specified Environmental Protection Facilities under schedule 17 by notice published in the Gazette after consulting the Director of Environmental Protection.

Q3	Will environmental protection installations forming part of a residential building qualify for the proposed deduction?
A3	Industrial or commercial building covers all types of building, including a residential building. Deductions can be claimed for environmental protection installations forming part of a residential building under the profits tax regime. For example, a company which lets out residential units in the normal course of its business will be able to claim the deduction in respect of the relevant environmental protection installations.

Q4	Is the tax deduction limited to newly acquired specified Environmental Protection Facilities?
A4	Tax deduction is not limited to new purchases or installations. Specified Environmental Protection Facilities already in use by a business are also eligible for the deduction. The reducing value or residue of expenditure of the facilities under the depreciation allowance regime will be treated as specified capital expenditure for which deduction will be given accordingly. Existing Environmental Protection Facilities that are of the type listed in Schedule 17 but which do not meet the specification requirements yet, may be registered according to the requirements. The facilities will qualify for the deduction after registration is complete.

Q5	What are the differences in tax treatment of specified Environmental Protection Facilities before and after the enactment of the new provisions?
A5	For specified Environmental Protection Facilities which are machinery or plant, the first year deduction in effect is increased from 60% to 100%. For specified Environmental Protection Facilities which are additions to a building or structure, the deduction of cost is accelerated by shortening the write-off period from 25 years to 5 years.

Q6	Starting from which year of assessment will tax deduction be given for Environmental Protection Facilities?
A6	As from the year of assessment 2008/09, taxpayers may claim the deduction under profits tax in respect of the specified capital expenditure incurred on Environmental Protection Facilities. Specified capital expenditure does not include any capital expenditure incurred under a hire-purchase agreement.

Q7	How would the deduction be given for the specified capital expenditure incurred on Environmental Protection Facilities?
A7	For eligible facilities which are machinery or plant, 100% deduction of cost is allowed in the year of purchase. This is the same as the deduction presently allowed for prescribed fixed assets, which are mainly manufacturing and computer equipments. For eligible facilities which are installations forming part of a building or structure, the cost is allowed for deduction over a 5-year period starting from the year of purchase, i.e. 20% in each of the years.

Q8	How can a taxpayer elect for the new tax deduction on existing Environmental Protection Facilities?
A8	A taxpayer shall make an election in writing and lodge it within one month after the date of the relevant notice of assessment. If the taxpayer makes such an election in its Profits Tax Return, the Department would consider it when raising the assessment.