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Tax Treatment for Defined Benefit Retirement Schemes

The Department issued Departmental Interpretation and Practice Notes No. 23 [DIPN 23] in September 2006. The tax treatment for the components of Net Total recognized in the accounts of an entity participating in a defined benefit retirement scheme as required by Hong Kong Accounting Standard 19 [HKAS 19] and the actual contributions paid to such a scheme was explained in paragraphs 49 to 52 therein. In sum, the Net Total charged as an expense to the accounts would be allowed for deduction subject to a restriction of 15% of the employees' total emolument for the period covered, or would be taken as assessable profits if it was a credit; and the actual contributions paid would not be allowed for deduction.

Following a recent review on this matter, and with the benefit of a legal opinion, it has been concluded that the Net Total is not a provision for payment of contributions to the scheme and is prohibited from deduction under section 17(1)(j) of the Inland Revenue Ordinance. As a result, the Department will adopt the following assessing practice from now on:

(a)   Any component forming part of the Net Total recognized in the profit and loss account or statement of comprehensive income is not deductible or assessable;
(b)   the ordinary annual contributions paid are allowable under section 16(1) subject to the 15% limitation prescribed in section 17(1)(h); and
(c)   the special contributions paid are deductible in accordance with section 16A at the rate of 20% in each of the years starting from the year of payment.

Notwithstanding this revised assessing practice, all assessments made according to the old practice announced in paragraphs 49 to 52 of DIPN 23 cannot be reopened if they have become final and conclusive. If any entity feels aggrieved by the change of the assessing practice, they can write to the Assessor quoting their file reference and provide a computation to show the overall difference in the amounts of assessable profits computed under the two assessing methods. The Assessor will consider deducting the difference from the assessable profits for 2010/11.