How to deal with IRD's enquiry. Webster Ng. 12 December Copyright 2014 [All Rights Reserved]

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1 How to deal with IRD's enquiry Webster Ng 2 December 204 Webster Ng Proprietor and founder of Webster Ng & Co. Fellowship of Certified Public Accountant (Practicing) and Hong Kong Certified Tax Adviser (CTA) Vice-President of the Taxation Institute of Hong Kong and member of Taxation Policy Committee Board member of Hong Kong Institute of Accredited Accounting Technicians Limited (HKIAAT) and committee member of Examinations and Accreditation Committee of HKIAAT SME committee member of The Association of Chartered Certified Accountants (ACCA) Fellow member of HKICPA, ACCA, ICAEW and TIHK Member of SCAA and AHKP Founder member of Hong Kong Professionals and Senior Executives Association (HKPASEA) 2

2 Today s Agenda Understanding Inland Revenue Department ( IRD ) structure Characteristics of the enquiry raised from IRD Case studies Practical issues on tax affairs on both PAIB and practitioner Avoid further enquiry 3 IRD - Organisation structure 4

3 IRD - Organisation structure 5 Tax collection information 203/4 Profits Tax - Corporations Stamp Duty 7% Estate Duty 0% Personal Assessment 2% Property Tax % Salaries Tax 23% Betting Duty 7% Business Registration Profits Tax - Unincorporated Businesses 2% Fees 0% Profits Tax - Corporations 48% Profits Tax - Unincorporated Businesses Salaries Tax Property Tax Personal Assessment Estate Duty Stamp Duty Betting Duty Business Registration Fees 6

4 General procedures of Hong Kong profits tax filing Taxpayer files Profits Tax Return IRD issues notice of assessment / statement of loss IRD issues enquiry letters Taxpayer files objection IRD issues additional / protective assessments Taxpayer attends to IRD s enquiry letters Taxpayer proposes settlement Pass to Field audit and investigation team IRD issues Statement of Facts Commissioner s determination Taxpayer appeal to Board of Review / Court Penalty 7 Common topics raised by IRD Offshore Claims Capital v Revenue Cross border payments Deduction Salaries / staff benefits Related party transactions / Hong Kong transfer pricing Tax resident certificate Exchange of information 8

5 Reason of being enquired by the IRD General reason New offshore claim Deduction item Cross border payment Fluctuation in financial results Related party transaction disclosure 9 Reason of being enquired by the IRD Other reasons Information available in financial statements:- effective tax rate comparison of salaries (accounts disclosure v employer s return IR 56B) comparison of financial results amongst the same industry (based on the IRD s internal information) consecutive losses qualified auditor s opinion, in particular some sensitive areas Transactions with taxpayer being enquired / audited Other Information public information (eg Annual report and announcement of listed group, Internet homepage) IPO listing documentations Informer case 0

6 General obligation of taxpayer under IRO Section 5(4) (a) an assessor or an inspector may give notice in writing to such person, or to any other person whom he considers may be in possession or control of information or documents in regard to any such matter as aforesaid, requiring him within such reasonable time as is stated in the notice to furnish all information in his possession or control respecting any such matter, and to produce for examination any deeds, plans, instruments, books, accounts, trade lists, stock lists, vouchers, bank statements or other documents which the assessor or inspector giving the notice considers are or may be relevant for the purpose aforesaid. (b) an assistant commissioner may give notice in writing to such person, or to such other person, requiring him, at a time and place to be named by the assistant commissioner, to attend and be examined, and upon such examination to answer truthfully all questions put to him, respecting any such matter as aforesaid. General obligation of taxpayer under IRO Section 5(4B) Any person who without reasonable excuse, the burden of proof whereof shall lie upon him, fails to comply with the requirements of a notice given to him under subsection (4)(a) or fails to attend in answer to a notice issued under subsection (4)(b) or having attended fails to answer any questions put to him, being questions which under that paragraph may be put to him, shall be liable to a penalty at level 3 recoverable under section 75 as a civil debt due to the Government. Section 68(4) The onus of proving that the assessment appealed against is excessive or incorrect shall be on the appellant. 2

7 Highlights on field audit or tax investigation 4A-A02345-SOS(0) Division Team number B8 : Prosecution Team C6/7 : Anti-tax avoidance Team Nature A : Anti-tax avoidance B : Tax Investigation C : Field Audit 3 Highlights on field audit or tax investigation 4

8 Highlights on field audit or tax investigation Step : Receive IRD s invitation to call Step 2: Understand the case and identify the exposures Step 3: Formulate strategy Step 4: Preparation of the review Step 5: Calculate the settlement basis Step 6: Negotiate with IRD Step 7: Settle the case / Proceed to the Board of Review 5 Highlights on field audit or tax investigation 6

9 Highlights on field audit or tax investigation 7 Strategy/tactic in handling the enquiry Background Issue Approach Preparation / Submission Follow Up Which session of the IRD? Who is the assessor? Date of issue? Any indications on being enquired? Standard / specific enquiry? Any sensitive wordings / quotation of IRO? Any express of IRD s opinion? Any reference to similar / related cases? 8

10 Strategy/tactic in handling the enquiry Background Issue Approach Preparation / Submission Follow Up Items being requested by the IRD? Technical arguments available? Supporting documentation available? Potential assessment years involved? Possibility of being regarded as anti-avoidance case? 9 Strategy/tactic in handling the enquiry Background Issue Approach Preparation / Submission Follow Up IRD s bottom line? Concurrent actions by the IRD? Readiness in proceeding the case? Stand firm or settlement? Overall or specific approach? Necessity in providing all requested documents? Timing? Extension? Additional work other than attending to the enquiry? 20

11 Strategy/tactic in handling the enquiry Background Issue Approach Preparation / Submission Follow Up Wordings / tone? Protective clause? Partial or full reply? Issues appropriately addressed? Sufficient documents? Taxpayer s request for action? 2 Strategy/tactic in handling the enquiry Background Issue Approach Preparation / Submission Follow Up IRD s feedback on the enquiry letter (Formal / Informal) Any further actions to be taken by the IRD? Second enquiry letter? Additional or protective assessments? 22

12 Case study Offshore trading 23 Case study Offshore trading 24

13 Case study Offshore trading Background Profits tax standard enquiry Use of generic terms Part of enquiry may not be relevant to the Company Issue after submission of return No sensitive wordings / IRO reference / initial opinion Issue Mainly on Understanding the mode of operation Obtaining supporting documents for examination 25 Case study Offshore trading Approach Overall approach concerning on:- description on the mode of operation activities and the respective value amongst the supply chain done outside Hong Kong To provide basic transaction documents such as contracts, purchase orders, sales orders, invoices, bank statements / remittance advice. Additional documents such as / fax on negotiation, employment contract and travelling itineraries of relevant employees may need to be provided. To provide commercial reasons to substantiate the offshore arrangement To be furnish to the IRD within a reasonable timeframe to avoid issuing additional assessment 26

14 Case study Offshore trading Preparation / Submission To specify the location of work such as in Country A outside Hong Kong instead of outside Hong Kong To specify the person handling the work such as Mr A of the Company instead of the Company To provide a full reply, instead of a partial, to avoid the IRD s manipulation of the overall picture To ensure the documents related to representative transactions selected by the IRD meet the offshore claim criteria. If not, provide explanation to avoid IRD s further query. Taxpayer to request the IRD to issue the notice of assessment to confirm the position Commercial justification of using of HK company Follow Up To call the IRD after submission To estimate potential implication for six years if disallowed by the IRD Beware of issuance of Estimated Assessment upon six-year time bar 27 Case study Property transaction 28

15 Case study Property transaction 29 Case study Property transaction Background Profits tax specific enquiry Indication to disallow the capital claim (Usual practice of the IRD) Issue Details on transaction Arguments for treating as non-taxable 30

16 Case study Property transaction Approach A detailed review on the tax filing history A good understanding of the case Case analysis before attending to the enquiry Consider possible settlement basis (such as change in intention) General and specific approach in attending to the enquiry Careful selection of supportive information and documents Provide additional supportive information without being requested Identify other tax exposures 3 Case study Related party transaction 32

17 Case study Related party transaction Background Profits tax standard enquiry May or may not be specifically to the Group Transfer pricing consideration Issue Mainly on checking the nature of service fee and computation basis for further actions Approach Specific approach to answer IRD s enquiry Factual information basis without elaboration Follow Up To ascertain the potential implication from profits tax aspect and anti-avoidance aspect To formulate and retrieve documents for commercial justification To estimate potential implication for six years if disallowed by the IRD 33 Case study Transfer pricing 34

18 Case study Transfer pricing 35 Case study Transfer pricing 36

19 Case study Transfer pricing Background Profits tax specific enquiry on transfer pricing Requesting information / documents Indication on IRD s opinion No definite basis requested to justify the arm s length basis Issue Details on transactions Arm s length basis Approach to attend to the enquiry Approach Case analysis before attending to the enquiry General plus specific approach in attending to the enquiry Concentrate on commercial justification / indirect evidences 37 Case study Tax Residence Certificate 38

20 Case study Tax Residence Certificate 39 Case study Tax Residence Certificate Background TRC application standard enquiry Requesting information / documents No indication on IRD s opinion Issue Mainly on checking the existence of the company in Hong Kong Approach Factual information basis with elaboration Pre-application planning 40

21 Practical issues on tax affairs on both PAIB & practitioner Approach Not staying firm Wrong timing for settlement Insufficient communication with the IRD Fail to consider others issues Fail to verify the arrangement before submission Fail to follow up with the IRD 4 Practical issues on tax affairs on both PAIB & practitioner Query Incomplete / incorrect descriptions of the case Unclear statements leading to misunderstanding Documents are unable to justify representations Documents contradicts to representations Inconsistent arguments amongst various replies / documents submitted to the IRD Fail to explain the case from commercial point of view 42

22 Practical issues on tax affairs on both PAIB & practitioner Fail to comply with the IRO resulting in penalty Protracting correspondence with the IRD Fail to reach a settlement with the IRD Exposing to additional issues Leading to field audit and investigation Additional tax and penalty Enquiry for future years 43 Hints to avoid further enquiry Well understanding of the case, issue and position Be prepared for the bottom line Selection of correct approach Proactive communication with the IRD Anticipation of IRD s position Provide supportive sufficient documentation Seek professional to assist in handling the case Well prepare for alternatives Periodical review on the arrangement Remedy actions after settlement 44

23 Disclaimer: - All materials or explanations (not restricted to the following presentation slides) (collectively Material ) have been and are prepared in general terms only. The Material is intended as a general guide and shall not be construed as any advice, opinion or recommendation given by the speaker, his employees and/or agents. The application of the content of the Material to specific situations will depend on the particular situations involved. Professional advice should be sought before the application of the Material to any particular circumstances and the Materials shall not in any event substitute for such professional advice. You will rely on the contents of the Material at your own risk. While all reasonable care has been taken in the preparation of the Material, all duties and liabilities (including without limitation, those arising from negligence or otherwise) to all parties including you are specifically disclaimed