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Hong Kong introduces use of fair value accounting treatment of financial instrument for tax purposes

Executive summary

The Hong Kong Government introduced the Inland Revenue (Amendment) (No. 7) Bill 2018 (the Bill). Under the Bill, if taxpayers make an election, the accounting profits or losses, i.e., unrealized profits and losses, recognized on financial instruments would generally also be treated as the taxable profits or losses.

The provisions of the Bill will apply for a taxable year beginning on or after 1 January 2018.

Detailed discussion

Legislative background

Under Hong Kong Financial Reporting Standard 9 (HKFRS 9), certain financial instruments are required to be accounted for on a fair value basis.

As held in a 2013 tax case,1 unrealized profits or losses should be non-taxable or non-deductible for tax purposes. However, many taxpayers have expressed a desire to file their tax returns on a fair value basis which would enable them to eliminate tracking transactions on a realization basis for tax purposes.

In response to these requests, the Hong Kong Inland Revenue Department has accepted tax returns filed on a fair value basis as an interim administrative measure since the taxable year ended on or after 1 April 2013.

To provide more clarity and certainty, the Bill is introduced to codify the interim administrative measure into law.

Key provisions of the Bill

Election required – specific provisions for transition and exit arrangements

Under the Bill, taxpayers are require to make an election to choose the fair value stated in the financial statements pursuant to HKFRS 9 basis for tax purposes.

Once the election is made, it applies to all subsequent years until one of the following two conditions exists:

  1. When the taxpayer ceases to prepare their financial statements under HKFRS.
  2. The Commissioner of Inland Revenue approves taxpayer’s revocation of the election.


The Bill includes certain exceptions, some of which are listed below:

Anticipated uncollectible amount associated with financial assets

HKFRS 9 requires entities to recognize a write-off for an uncollectible amount for various types of financial assets, including loans and trade receivables (that are not measured at fair value), regardless of whether the actual write-off event has occurred.

The Bill specifies that a write-off loss under HKFRS 9 for loans made in the ordinary course of a money-lending business in Hong Kong and trade receivables would be deductible, provided that the financial assets are credit-impaired.2

Disposal of equity instruments measured at fair value through other comprehensive income

The Bill specifies that for equity instruments, changes in fair value as reflected in other comprehensive income (OCI) will only be taxed or allowed as a deduction in the year of disposal.

Fair value changes in financial liabilities attributable to an entity’s own credit risk

Under the Bill, changes in fair value recognized in OCI will be taxed or allowed as a deduction in the year the financial liabilities are removed.

Tax treatment of convertible debt securities

The Bill provides that the part of the discount/premium that is attributable to the equity component of the convertible debt securities is not tax deductible.

Dividends on preferred shares treated as interest-like expenses not tax deductible

Consistent with the current practice, any interest, discount, premium or expense recognized by a person under HKFRS 9 of preferred shares is not tax deductible.

Imputed interest under HKFRS 9 is ignored

The Bill excludes any imputed interest as taxable income or deductible expense.


1. Nice Cheer Investment Limited v CIR FACV 23/2012.

2. Under HKFRS 9, a financial asset is credit-impaired when one or more events, such as significant financial difficulty of the issuer or borrower, default, and bankruptcy filing, that have a detrimental impact on the estimated future cash flows of that financial asset have occurred.

EYG no. 011942-18Gbl

Download this Tax Alert as a PDF file.

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