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INDEX:

Point 1: Director's remuneration taxable globally;

Point 2: Share-based payments may not tax deductible;

Point 3: Value-add tax, withholding tax are directly tax-deductible without need to claim any tax credit if it's before gross profit/loss;

Point 4: Profit Tax Return filling skills: ART 11 - cell 11.3 - Purchases is for physical goods purchases only;

Point 5: PART 9 - cell 9.1 - offshore profit - this figure be after tax adjustment

Point 6: Why Profit Tax Return final page need to fill in the Company's name rather than print it on?

Point 7: Tax issues bounded by court cases need special attention;

Point 8: Caution to Section 16 (G) of IRO;

Point 9: Discussion for second-hand properties' commercial building allowance / industrial building allowance

Point 10: gain from sales of farmer land at New Territories has very high chance to be regards as trading gain rather than as gain of investment

Point 11: Any Hong Kong Import/Export tax?

Point 12: Criteria for exemption for Business Registration or Payment

Point 13: When to use Advance Ruling?

Point 14: What exchange rate to be used when the company's financial statements is present in foreign currency?

Point 15: Hong Kong law case / tax law case search website

Point 16: assessor's power of making judgement, burden of proof on tax payer and the degree of proof required

Point 17: flow chart for R&D expenditure

Point 18: Matter of fact shall be fixed in Board of Review while appeal to court is for question of law

Point 19: discussion on deductible of bad debt 

Point 20: notice Inland Revenue in writing within one month of the date of commencement of business (no matter the entity is company incorporated in Hong Kong or not or is natural person)

Point 21: application of Section 70A Correction of error or omission

Footnote: HK tax glossary - http://www.hktax.net


Point 1: Director's remuneration may be taxable under Hong Kong Salaries Tax event the director are non-HK resident, never visit to Hong Kong, as the power of director / office position of director is granted by Hong Kong Company Ordinance so that wherever the position is taken, taxable under Hong Kong Salaries Tax. But director's salary can be treated in the same way as usual staff's salary.

If director also be shareholder of the company, consider use dividend rather than director's remuneration.

asked by (7.5k points)

20 Answers

0 votes

Point 2: Share-based payments may not tax deductible

1.

Q:

Where an entity fulfills its stock option or share award granted to its employees by issuing new shares, if it recognizes the fair value of the option or new shares so granted as an expense, is that expense allowable for tax deduction?

A:

Not deductible. Regardless of whether the equity instruments granted vest immediately or not, the "expense" recognized for accounting purposes in an equity-settled share-based payment transaction is not an outgoing or expense incurred for the purpose of section 16 of the Inland Revenue Ordinance ("IRO"). The Department follows the authority of Lowry v Consolidated African Selection Trust Ltd. [1940] 23 TC 259 and takes the stance that when an entity fulfills its obligations by issuing its own new shares, the share issue merely involves a movement in the entity's equity reserve account, and not an "outgoing" or "expense" for the purpose of section 16(1) of the IRO.

Also, consider effect of vesting period as following:

7.

Q:

HKFRS2 requires an entity to recognize a liability under a cash-settled share-based payment transaction to pay the supplier of goods or services, although the supplier has not yet become unconditionally entitled to the payment. The entity is also required to re-measure that liability at each reporting date until that liability is settled by cash or debt instruments. Are the expenses thereby arising and the subsequent reversal respectively deductible and taxable for tax purpose?

A:

Any liability recognized under a cash-settled share-based payment transaction before the vesting conditions are satisfied is merely a contingent liability. Accordingly, it is not allowable for deduction. As a corollary, the "incurred" test under section 16 of the IRO is satisfied only when the supplier has become unconditionally entitled to the payment. The subsequent reversal of expenses previously recognized is taxable only to the extent of any amount already allowed for deduction.

Source: https://www.ird.gov.hk/eng/faq/sbpt.htm

answered by (7.5k points)
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Point 3:

Value-add tax, withholding tax are tax-deductible (in the way same as other general tax-deductible expenses rather than refer to any tax credit clauses of IRO) if the tax expenses are before gross profits in income statements.

Relevant Board of Review case: D43/91 [Link] 

Extra from case: 

Paragraph Held:

  • To the extent to which the overseas taxes were charged on gross receipts and not on net income, they were capable of being deducted when ascertaining the ‘total profits’ for the purposes of section 23B of the Inland Revenue Ordinance. The taxes on gross receipts in all three overseas countries were outgoings or expenses incurred in the production of profits within the meaning of section 16(1) and the same were not excluded by section 17(1B) of the Inland Revenue Ordinance. Accordingly, the taxes paid in Taiwan, the Philippines, and Australia were deductible but with regard to the Australian taxes in part only.
  • Appeal allowed in part. 

Paragraph 2.8

  • The actual outgoings and expenses incurred by the Taxpayer were not used in computing the profits to be brought into charge to tax in each of those jurisdictions.

Paragraph 2.10

  • The question for the Board of Review’s determination is whether the taxes paid by the Taxpayer in each of those jurisdictions should be deducted in arriving at the total profits as defined in section 23B of the Inland Revenue Ordinance.

Paragraph 17

  • In the present case, we are satisfied that the Taxpayer could not have gone on earning income without paying the foreign taxes and that the foreign taxes must be paid whether or not profits were earned, and we conclude that the taxes were paid with a view to producing profits and were outgoings incurred in the production of profits within the meaning of section 16(1) of the Ordinance and that the payment of the taxes was not prohibited by section 17(1)(b) of the Ordinance.
answered by (7.5k points)
0 votes

Point 4:

Profit Tax Return filling skills:

PART 11 - cell 11.3 - Purchases is for physical goods purchases. If the direct cost of sales be subcontracting fee, direct service fee, no need to fill any figures in Purchases of PART 11. But if the Company's detailed income statements has gross profit/loss, even the Purchases cell is "0", you still need to fill the Gross profit/loss cells in PART 11 of Profit Tax Return.

answered by (7.5k points)
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Point 5:

Profit Tax Return filling skills:

PART 9 - cell 9.1 - offshore profit - this figure be after tax adjustment (the adjustment to do on accounting profit to arrive at tax profit). So that in offshore claim tax computation, we still need to include all tax adjustment first as if the Company is onshore.

answered by (7.5k points)
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Point 6:

Question: Why Profit Tax Return final page need to fill in the Company's name rather than print it on?

Answer: It's a double confirmation procedures to confirm the financial data filled in is for the Company. Seems in a court case, a tax payer successfully defended himself by stating that he didn't know he was filling in financial data for his company.

answered by (7.5k points)
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Point 7:

Tax issues bounded by court cases need special attention:

4.       Interest Income's assessablity

(E)       Client’s trust accounts

4.15     Interest income received by a solicitors firm on the deposit held on clients’ accounts was held assessable in CIR v Messrs. Lau, Wong & Chan Solicitors 2 HKTC 470. Although the funds on deposit did not at the material time belong to the solicitors firm, the interest was retained by the firm in consideration for its services to the clients, and was therefore derived from the profession. Thus, the interest income is subject to profits tax.

8.       Exchange Profits' assessability

(B)       Exchange profits on repayment of loans

8.5       It is incorrect merely to look at the use of the loan. If the loan is long term in nature, it is capital even though it may be used for acquisition of current assets (Beauchamp v FW Wooloworth plc (1989) 61 TC 542).

(C)       Temporary credit facilities

8.8       Temporary credit facilities may be regarded as increasing the capital base of a taxpayer if the facilities keep being extended. In D 77/88, a trading company borrowed a US dollar loan from a bank. The borrowing was by means of the taxpayer accepting short-term bills. The bills were rolled over on a monthly basis for three-and-a-half years. The fund derived from the borrowing was placed with its parent company, partly to discharge the cost of goods purchased from the parent company and partly for other purposes. The exchange loss arising on the borrowing was held to be capital in nature.

8.11     Cash at bank of a trading company has been held to be a capital asset. Thus, exchange gains or losses arising from the translation of bank balances are capital in nature, even though the cash may have been derived from trading receipts (CIR v Li & Fung (1980) HKTC 1193).

8.12     However, the cash of a bank is analogous to the trading stock of a trading business, and exchange profits or losses arising therefrom are revenue in nature (CIR v Hang Seng Bank (1972) HKTC 583).

9.       Miscellaneous Income's assesablity

(C)       Sale of patent

9.6       The assessability depends on whether the whole or part of the cost on the purchase of the patent has been previously allowed under Section 16E(1). The whole sales proceeds received on the disposal of the previously allowed patent is treated as a trading receipt, notwithstanding that it is the receipt from the sale of a capital asset. If only part of the cost of the patent was allowed previously, the sales proceeds will be apportioned and such apportionment depends on the facts of each case.

Source: https://hkiaatevening.yolasite.com/resources/P5Notes/Chapter9-ProfitTaxReceipts.doc

 

answered by (7.5k points)
edited by
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Point 8:

Careful point for Section 16 (G) of IRO:

"Prescribed fixed asset" can claim allowances on capital expenditures but DOES NOT INCLUDE ANY ASSET IN WHICH ANY PERSON HOLDS RIGHTS AS LESSEE. The definition does not extend to an asset which is leased to any person.

For instant, Hong Kong tax payer provides plant and machinery to Mainland P.R.C. manufacturer free of charge under CONTRACT PROCESSING AGREEMENT. These plant and machinery may can not be classified as "Prescribed fixed asset" but concession given by IRD on 50%:50% on assessable profit.

P.S. discussion: Hong Kong tax payer in recent years may have slim company structure and lots of works subcontracted / seconded to contractors. But the Hong Kong tax payer still holds huge volume of fixed assets, some even be intangible, hard to ground how it's used. It may be questioned that these fixed assets is under right of LESSEE.

Definition of the lease:

Under Section 2 of the I.R.O., lease in relation to any machinery or plant includes:

  • any arrangement under which a right to use it is granted by owner to another person; and 
  • any arrangement under which a right to use the machinery or plant, being a right derived directly or indirectly from a right referred to in paragraph (a), is granted by a person to another person,
  • but does not include a hire-purchase agreement or a conditional sale agreement unless, in the opinion of the Commissioner, the right under the agreement to purchase or obtain the property in the goods would reasonably be expected not to be exercised; (Added 32 of 1998 s. 3)

answered by (7.5k points)

根據《稅務條例》第17(l)(c)條規定,資本性質的任何開支均不得容許扣除。就稅務而言,在決定有關開支是否屬於資本性質,其中所考慮因素包括有關開支是否為了帶來資產或對產生未來效益帶來優勢。(British Insulate and Helsby Cables Ltd v Atherton 10 TC 155.) 未來效益不必是永久的。Henriksen v Grafton Hotel Ltd [1942] KB 184)

Rule introduced by British Insulate and Helsby Cables Ltd v Atherton 10 TC 155:

"But when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion ) for treating such an expenditure as properly attributable, not to revenue, but to capital."

0 votes

Point 9:

Discussion for second-hand properties' commercial building allowance / industrial building allowance:

The tax payer acquired a second-hand properties, the tax written down value brought forward used to start the CBA / IBA's claim can come from 2 ways:

1, last property owner's tax computation. If the last property owner also claim CBA / IBA in his tax computation, use his last year's TWDV C/F as the TWDV B/F;

2, if last property owner didn't claim any CBA / IBA, or the tax payer can't get his tax computation, then the tax payer should deem himself be the first-hand buyer of the property, and already start to claim CBA / IBA from the year that occupation permit was granted to the property.

TWDV B/F = building cost at the year that occupation Permit was granted to the property  - year's notional CBA / IBA claimed from the year that occupation Permit was granted to current year

A simply way to calculate building cost at the year that occupation permit was granted is 50% of first-hand property price.

P.S.: as HK property price surge fast, some tax payer use the latest property acquisition price to replace the first-hand price at the calculation. Hope assessor-in-charge will agree with you in your case.

answered by (7.5k points)
0 votes

Point 10: sales of assets that hold for a long-term but no improvement on it may be regarded as trading rather than investment.

Good sample: farmer land in New Territories hold for over 20 years and sold, the gain has very high chance to be regards as gain from trading.

answered by (7.5k points)

As idea of "Supplementary work done on the property" in the 6 badges of trade, and farmer land (seems) can't be developed under Hong Kong's law.

0 votes

Point 11: Any Hong Kong Import/Export tax?

In general, imports into HKSAR are tax-free except:

  1. motor vehicles for use on the road which are subject to a First Registration Tax administered by the Transport Department; and

  2. the four types of dutiable commodities which are subject to excise duties, irrespective of whether they are imported or locally manufactured. These goods are liquors, tobacco, hydrocarbon oil and methyl alcohol.
    There is no tax or excise duty on exports from HKSAR.

answered by (7.5k points)

For Re-export certificate of origin, see:

0 votes

Point 12: Criteria for exemption for Business Registration or Payment

Refer to: https://www.ird.gov.hk/eng/tax/bre_erp.htm

Extra: Eligible person for exemption from payment:

Exemption from payment of Business Registration fee and levy 

    Eligible persons

  • You can apply for exemption from payment of business registration fee and levy if the average monthly sales or receipts of your business do not exceed the following limit:-
  • For businesses mainly deriving profits
    from the sale of services
    $10,000
    For other businesses$30,000
  • For existing businesses, the above average monthly sales or receipts shall be the monthly average over the 6 months preceding the application. For new businesses, it shall be the estimated average over the first 6 months of business.
  • Exemption cannot be granted to companies incorporated or required to be registered in Hong Kong under the Companies Ordinance.
  • If 2 or more businesses are carried on by the same proprietor or partners, none of those businesses is entitled to the exemption. See examples below :
    (a)If Mr A carries on two sole proprietorship businesses X and Y at the same time, neither X nor Y is entitled to the exemption.
    (b)If Mr A and Mr B carry on two partnership businesses C and D at the same time, neither C nor D is entitled to the exemption.
    (c)If Mr A and Mr B carry on a partnership business E and at the same time, Mr A and Mr C carry on another partnership business F, E and F are not considered to be carried on by the same person.
    (d)If Mr A carries on a sole proprietorship business G and at the same time, Mr A and Mr B carry on a partnership business H, G and H are not considered to be carried on by the same person.
answered by (7.5k points)
0 votes

Point 13: When to use Advance Ruling?

Advance Rulings is for address questions of uncertainty regarding the application of provisions of the Inland Revenue Ordinance.

Answer: Advance Ruling is useful for: 

  • Transfer pricing (IRD will ask a fee for site visit and assure the pricing is proper);
  • Accumulated tax loss can be carried forward or not for business or part thereof transferred or carried on by anther person. Or amalgamation; and
  •  Accumulated tax loss can be carried forward or not when a business changing its business mode.

For ordinary transaction's tax issue, you may not get a better result from Advance Ruling compared with ordinary way, i.e., submitting tax computation after the transaction happened.

For Transfer pricing, Accumulated tax loss' advance ruling, all fact mattering tax already be there currently when executing advance ruling.

Advance ruling may also for cases with circumstances that not cover by previous tax cases.

It's not easy to prepare enough information/documents for Advance Ruling, and the fact in the application should be clear. Most clients' request for Advance Ruling is try to let assessor help on judge "under my contract, it's not royalty income, right?" Assessor will reject such kind of application in fact. Please see the extract from DIPN 31 below.

[Above is personal opinion]

[Below is public resources and rules]

IRD's website for Advance ruling cases (more kinds of business involved other than Transfer pricing and sales of business, etc.):

https://www.ird.gov.hk/eng/ppr/arc.htm

Procedure and guidance for Advance Ruling (DIPN 31):

https://www.ird.gov.hk/eng/pdf/e_dipn31.pdf

Hereby requirement paragraph extracted from DIPN 31:

11. Pursuant to section 2 of Part I of Schedule 10, the Commissioner may decline to make a ruling if:

  • (a) the application seeking the ruling would require him to determine or establish any question of fact. In this regard a ruling will not be available on matters that are a pure question of fact, for example, whether or not the gain arising from the disposal of property is chargeable to tax;
  • (b) he considers that the correctness of the ruling would depend on the making of assumptions, whether in respect of a future event or any other matter; 
  • (c) the matter on which the ruling is sought is subject to an objection or appeal, whether in relation to the applicant or any other person; or 
  • (d) the matter on which a ruling is sought is the subject of a return which has been or is due to be lodged.

answered by (7.5k points)
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Point 14: What exchange rate to be used when the company's financial statements is present in foreign currency?

Please calculate period average exchange rate by referring to IRD's exchange rate table:

https://www.ird.gov.hk/eng/tax/bus_aer.htm

answered by (7.5k points)
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Point 15: Hong Kong law case / tax law case search website

Website 1 (for Hong Kong law case): https://www.hongkongcaselaw.com/

Website 2: http://www.hklii.hk/eng/

Website 3 (with UK tax case): https://library.croneri.co.uk/

answered by (7.5k points)
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Point 16: assessor's power of making judgement, burden of proof on tax payer and the degree of proof required

Relevant Inland Revenue Ordinance (Cap. 112) clauses (extra only):

Section: 68 (4)

The onus of proving that the assessment appealed against is excessive or incorrect shall be on the appellant. 

(Replace35 of 1965 s. 34)

the degree of proof required is on "a balance of probabilities" under civil law, rather than in criminal proceeding, the degree of proof required is on namely “beyond reasonable doubt”.

A prosecution of tax evasion is a criminal proceeding.

(PS: at IRO, we saw some "to the satisfaction of the assessor", I think when should satisfaction of the assessor be reached is bound by "a balance of probabilities")

answered by (7.5k points)

Assessor has power to make assessment according to his judgement.

Relevant Inland Revenue Ordinance (Cap. 112) clauses (extra only):

Section: 59 

Heading: Assessor to make assessments

(2) Where a person has furnished a return in accordance with the provisions of section 51 the assessor may either—  

(Amended 49 of 1956 s. 43)

(a) accept the return and make an assessment accordingly; or

(b) if he does not accept the return, estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly.

(Amended 49 of 1956 s. 43; 19 of 1996 s. 11)

(c) (Repealed 56 of 1993 s. 24)

(3) Where a person has not furnished a return and the assessor is of the opinion that such person is chargeable with tax, he may estimate the sum in respect of which such person is chargeable to tax and make an assessment accordingly, but such assessment shall not affect the liability of such person to a penalty by reason of his failure or neglect to deliver a return.

(Amended 49 of 1956 s. 43)

(4) In the case of profits from a trade or business, if accounts of such trade or business have not been kept in a satisfactory form, the assessor may assess the profits or income of such trade or business on the basis of the usual rate of net profit on the turnover of such trade or business, and the Board of Inland Revenue may prescribe the amounts of such usual rates of profits in particular classes of trade or business.

(Amended E.R. 1 of 2012)

0 votes

Point 17: flow chart for R&D expenditure

Source: HKICPA Aplus Volume October 2018 page 45 (Link: http://app1.hkicpa.org.hk/APLUS/2018/10/pdf/44_large_source.pdf)

answered by (7.5k points)
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Point 18: Matter of fact shall be fixed in Board of Review while appeal to court is for Question of law

Relevant Inland Revenue Ordinance (Cap. 112) clauses (extra only):

Section: 69 

Heading: Appeal against Board of Review’s decision: leave to appeal

Extract: 

(e) leave to appeal must not be granted unless the Court of First Instance is satisfied—

  • (i) that a question of law is involved in the proposed appeal; and
  • (ii) that—
    • (A) the proposed appeal has a reasonable prospect of success; or
    • (B) there is some other reason in the interests of justice why the proposed appeal should be heard;

Example of Matter of fact: the debt is bad or not? 

answered by (7.5k points)
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Point 19: discussion on deductible of bad debt 

For Ordinance's aspect:

Relevant Inland Revenue Ordinance (Cap. 112) clauses (extra only):

Section: 16(d)

Heading: Ascertainment of chargeable profits

(d) bad debts incurred in any trade, business or profession, proved to the satisfaction of the assessor to have become bad during the basis period for the year of assessment, and doubtful debts to the extent that they are respectively estimated to the satisfaction of the assessor to have become bad during the said basis period notwithstanding that such bad or doubtful debts were due and payable prior to the commencement of the said basis period:

Provided that—

  • (i) deductions under this paragraph shall be limited to debts which were included as a trading receipt in ascertaining the profits, in respect of which the person claiming the deduction is chargeable to tax under this Part, of the period within which they arose, and debts in respect of money lent, in the ordinary course of the business of the lending of money within Hong Kong, by a person who carries on that business; (Amended 7 of 1986 s. 12)
  • (ii) all sums recovered during the said basis period on account of amounts previously allowed in respect of bad or doubtful debts shall for the purposes of this Ordinance be treated as part of the profits of the trade, business or profession for that basis period;

 For Board of Review / Court case's aspect:

  • The Commissioner of Inland Revenue (Applicant) and Right Margin Limited (Respondent)

Court of First Instance(Inland Revenue Appeal No. 4 of 2016) 

The case indicates that when considering whether a debt is bad or irrecoverable, the applicable test is what a reasonable and prudent businessperson would have concluded, based on the facts and circumstances of a case and on the balance of probabilities. 

Source / Reference:

Board of Review's Published Decisions: https://www.info.gov.hk/bor/en/docs/v32f_HCIA_4_2016.pdf

HKICPA's introduction article for this case: http://app1.hkicpa.org.hk/APLUS/2018/02/pdf/48_large%20source.pdf

IRD's introduction article for this case: https://www.ird.gov.hk/eng/pdf/2018/HCIA4_2016.pdf

EY's introduction article for this case: https://www.ey.com/Publication/vwLUAssets/EY-hong-kong-tax-alert-9-jan-2018-fs/$FILE/EY-hk-tax-alert-issue-2-2018-fs.pdf at page 3

(additional points in EY's article: Legal recovery actions may not necessarily have to be taken before a provision for bad debt is admissible)

  • (2017-18) VOLUME 32 INLAND REVENUE BOARD OF REVIEW DECISIONS - Case No. D15/16

Source: https://www.info.gov.hk/bor/en/docs/D1516.pdf

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Point 20: notice Inland Revenue in writing within one month of the date of commencement of business (no matter the entity is company incorporated in Hong Kong or not or is natural person)

If a company commences to carry on business, no matter the company is incorporated in Hong Kong or not, it is required under the Business Registration Ordinance to notify the Commissioner of Inland Revenue in writing within one month of the date of such commencement. Failure to comply with the above requirements may lead to prosecution. The maximum penalty is $5,000 and imprisonment for one year.

For company incorporated in Hong Kong, please fill in the form in following link and submit to Inland revenue:

https://www.ird.gov.hk/chi/pdf/irbr200.pdf

For non-Hong Kong company, please see Point 14: Registration of Non-Hong Kong Company in Hong Kong CR in link:

http://www.hkaudit.net/?qa=144/company-secretary-practical-miscellaneous-points-summary

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Point 21: application of Section 70A Correction of error or omission

BASIC: 

Section 70 extract: Where no valid objection or appeal has been lodged within the time limited ... the assessment ... shall be final and conclusive ...

Section 70A extract: 

(1)  Notwithstanding the provisions of section 70, if, upon application made within 6 years after the end of a year of assessment or within 6 months after the date on which the relative notice of assessment was served, whichever is the later, it is established to the satisfaction of an assessor that the tax charged for that year of assessment is excessive by reason of an error or omission in any return or statement submitted in respect thereof, or by reason of any arithmetical error or omission in the calculation of the amount of the net assessable value (within the meaning of section 5(1A)), assessable income or profits assessed or in the amount of the tax charged, the assessor shall correct such assessment: (Amended 56 of 1993 s. 29)

Provided that under this section no correction shall be made to any assessment in respect of an error or omission in any return or statement submitted in respect thereof as to the basis on which the liability to tax ought to have been computed where the return or statement was in fact made on the basis of or in accordance with the practice generally prevailing at the time when the return or statement was made.

ADVANCE:

[Case No. D6/91] Section 70A can be applied when tax payer subsequently has different view / opinion on tax matter. The different view / opinion can be either on matter of fact or on matter of law. (My understanding is a wrong view /opinion is a kind of error or omissions defined in Section 70A. Application: offshore entitle to claim but not claim in previous year can be re-claimed by applying Section 70A)

[Case No. D52/99] Change of intention (e.g., on properties is held for rental or investment) where a deliberate choice had been made is disallowed.

[Case No. D82/95] errors should be happened inadvertently and did not extend to a deliberate act. (My understanding is if a tax payer intentional falsely overstate a company's profit for some kind of purpose, no restatement on the overstatement subsequently.)

answered by (7.5k points)
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