What are assessable profits? The assessable profits are the net profits (other than profits arising from the sale of capital assets) for the basis period, arising in or derived from Hong Kong, calculated in accordance with the provisions of Part IV of the Inland Revenue Ordinance (“IRO”).

IRO does not define “profits”. In business practice, profit means the net profit, or the net gain, or the surplus of incomes over expenses. It follows that profits concern determining incomes and expenses.

What profits are assessable? Assessable profits are the accounting profits determined in accordance with Generally Accepted Accounting Principles as adjusted to conform with the provisions of IRO. The Hong Kong Institute of Certified Public Accountants has, from time to time, issued Statements of Standard Accounting Practice to standardize the accounting treatments of various topics of importance. Among these principles and practices, the following are of fundamental importance and adopted for tax purpose.

Going concern principle

• When preparing the business accounts, we assume that the business will go on in the foreseeable future.

Accrual or matching principle

• Expenses incurred but not yet paid for should be taken into account when computing profits. Likewise, the expenses paid for future accounting periods should be carried forward to match the related future revenue and hence they should not deductible when computing the current-year profits.

Revenue versus capital principle

• Incomes or gains of a revenue nature are included in the Profit and Loss Account and hence taxable.
  
  
• Incomes or gains of a capital nature are credited to capital reserves and hence not taxable.
  
  
• Expenses or losses of a revenue nature are recognized in the Profit and Loss Account and hence deductible.
  
  
• Expenses or losses of a capital nature, even though they may in some cases be deductible in computing accounting profits, are not tax deductible – and if they have been charged to Profit and Loss Account, they will be added back in computing the assessable profits.

In a nutshell, where the IRO makes a specific provision for a topic, such provision will over-ride the accounting principle or the general commercial practice of that topic.

Source：Hong Kong Inland Revenue Department’s website

- https://www.ird.gov.hk/eng/tax/bus_pft.htm
- https://www.ird.gov.hk/eng/pdf/dipn21.pdf