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Debate on Depreciation Allowance Claims on Manufacturing Plant and Machinery Used in Import- Processing Arrangements

Plant and machinery play an important role in manufacturing operations. For tax purposes, capital expenditure on plant or machinery is usually allowed in the form of depreciation allowances. The current practice of the Inland Revenue Department (IRD) in denying the depreciation allowance claim on manufacturing plant and machinery by Hong Kong companies in their import-processing arrangements in mainland China, in accordance with section 39E of the Inland Revenue Ordinance (IRO), is considered unfair; this is because an additional tax burden is being imposed on some taxpayers who comply fully with the tax requirements. In this article, we discuss the following: 1. The history of cross-border processing businesses; 2. S e c t i o n 3 9 E , i t s i n t e n t , a n d r e c e n t developments; 3.Our observations regarding the impact on import processing businesses; and 4. Interpretation of section 39E.