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0 votes

Exchange gain/loss' tax capital/revenue in nature follows the nature of these items arising the exchange gain/loss.

Exchange gain/loss from trade receivable/payable should be revenue in nature.

Exchange gain/loss from shareholders' long-term loan to the company with no movement for many years can be capital in nature.

Someone are of the opinion that exchange gain/loss from current accounts with related companies can be not revenue in nature (seems can't say it's capital in nature?)
asked by (10.5k points)

3 Answers

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For exchange gain / loss' realized or not consideration, please also refer to:

Unrealized profit be non-taxable?


while in DIPN 42's opinion, unrealized exchange gain/loss should be taxable/deductible.

DIPN 42's link: https://www.ird.gov.hk/eng/pdf/e_dipn42.pdf

answered by (10.5k points)
0 votes

8.       Exchange Profits' assessability

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).

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


answered by (10.5k points)
0 votes

Possible queries when tax department asks information for income statement's exchange item:

I refer to the Company's accounts for the captioned year of assessment and should be grateful if the Company could apply the following informaion:-

Loss on Exchange USD XX,XXX

  1. An analysis showing how the amount of each year of assessment was arrived at
  2. Details of the transactions giving rise to the losses on exchange, in particular how they were incurred in relation to the turnover generated or trading activities of the Company;
  3. The accounting entries involved to record such transactions in the Company's books of accounts.
  4. Your reasons for considering that the amounts are deductible under Profits Tax.
answered by (10.5k points)