How it works
Profits tax is charged on the assessable profits of each year of assessment. Those profits cannot be known until after the year ends, so the IRD raises a provisional tax charge. When the year's assessable profits are later ascertained, the IRD makes an assessment and uses the provisional profits tax already paid to offset the liability[1].
The amount comes from your own return. The notes to the BIR51 say the assessable profits in Part 1 of the return are used to work out both the profits tax for that year and the provisional profits tax for the following year, and that provisional tax charged for a year is allowed against that year's liability[2]. In Item 2 of the return you state the tax payable or repayable, taking both into account[2].
| Part of the charge | Where it comes from |
|---|---|
| Final profits tax for the year just returned | Assessable profits in Part 1 of the return, at the rates in force |
| Less: provisional tax already charged for that year | Allowed against that year's liability |
| Plus: provisional tax for the following year | Worked out from the same assessable profits |
An example of the timing
Take a company whose 2025/26 return shows assessable profits. The assessment that follows charges final tax for 2025/26, deducts the provisional tax already charged for 2025/26, and adds provisional tax for 2026/27 based on the 2025/26 profits[2]. When the 2026/27 profits are later ascertained, the 2026/27 provisional tax is set against the tax actually due for that year[1]. So in its first full cycle a growing business can face two years of tax in one notice, and in a year when profits fall it has paid ahead on profits it did not make.
Paying it
A notice can split the tax into instalments. If the first instalment is not paid by its due date, the second becomes due immediately and the whole unpaid balance is in default[3]. The IRD's recovery action includes a 5% surcharge on the entire unpaid balance[3], and a further 10% surcharge on any amount still unpaid six months after the due date[4]. A business short of cash can apply to pay by instalments, but long instalment periods are not normally approved[4].
Reducing it: holding over
You can apply in writing to hold over all or part of the provisional profits tax on grounds set out in the Inland Revenue Ordinance. The usual one is that the year's assessable profits are, or are likely to be, less than 90% of the previous year's, or of the estimate the provisional tax was charged on[5]. Others include an omitted or wrong loss brought forward and ceasing the business[5]. The application is due by 28 days before the payment date or 14 days after the notice was issued, whichever is later[5].
Saving for it
Some owners put money aside through tax reserve certificates, which the IRD redeems automatically on the due date to pay tax charged on the account holder; they earn interest only when used to pay tax[6].
Before the first return arrives
The IRD generally issues the first Profits Tax Return some 18 months after a new company is incorporated or a partnership starts, though it may issue a provisional profits tax return earlier[7]. A person chargeable to tax who has not received a return must tell the IRD in writing within 4 months after the end of the basis period[7].
The way provisional tax is computed and collected is set by the Inland Revenue Ordinance and the IRD, and their pages below take precedence over this summary.