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From Bad to Worse — the Non-deductibility of Bad Debts in Hong Kong

In the course of the global financial crisis of 2008-2009, many businesses suffered from the problem of delinquent debts. While the Hong Kong profits tax provisions seek to recognise such economic losses by allowing a tax deduction, the manner in which they apply to commonly occurring transactions can result in tax deductions being unavailable. In regard to this, most of the discussion among tax professionals in Hong Kong relates to the difficulties of showing when a bad debt loss is incurred.1 However, the less frequently discussed issues concerning when the deductibility provisions can fall short of the economic losses arising from various types of transactions, often in the group context, are where taxpayers will likely find themselves coming unstuck. These issues, which came to the fore following the recent global economic crisis, are likely to arise again if existing global economic uncertainties persist. Taxpayers need to be mindful of the limitations on deductibility, and policy makers should take it upon themselves to address the longstanding deficiencies in the legislation.