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Should the Hong Kong Tax Authority Rethink and Clarify how to Follow the “Tax Follows Accounting” Principle?

In Hong Kong, there are two different sets of authority that respectively govern the preparation of financial statements and the determination of assessable profits. Apart from the listing rules and relevant provisions contained in the Companies Ordinance Cap.32, where applicable, the preparation of financial statements is governed by the Hong Kong Accounting Standards (HKAS) and the Hong Kong Financial Reporting Standards (HKFRS) promulgated by the Hong Kong Institute of Certified Public Accountants (HKICPA), whereas the assessable profits for Hong Kong profits tax purposes are determined by the provisions contained in the income tax legislation (i.e. the Inland Revenue Ordinance (IRO) Cap.112) and relevant court decisions. In practice, the ascertainment of assessable profits starts off from the profit before taxation that is reported in the income statement. Taxpayers then make the necessary “book-to-tax” adjustments from the profit before taxation should there be any provisions of the IRO that prescribe a treatment that is different from the HKAS or the HKFRS and arrive at the assessable profits for tax reporting purposes.