how to deal with ird's enquiry [相容模式] · strategy/tactic in handling the enquiry...

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How to deal with IRD's enquiry

Webster Ng

12 December 2014


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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)


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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


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IRD - Organisation structure


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IRD - Organisation structure


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Tax collection information – 2013/14

Profits Tax -Corporations

48%

Profits Tax -Unincorporated

Businesses2%

Salaries Tax23%

Property Tax1%

Personal Assessment2%

Estate Duty0%

Stamp Duty17%

Betting Duty7% Business Registration

Fees0%

Profits Tax - Corporations

Profits Tax - UnincorporatedBusinesses

Salaries Tax

Property Tax

Personal Assessment

Estate Duty

Stamp Duty

Betting Duty

Business Registration Fees


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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 attends to IRD’s enquiry letters

IRD issues additional / protective assessments

Taxpayer files objection

IRD issues Statement of Facts

Commissioner’s determination

Taxpayer proposes settlement

Penalty

Pass to Field audit and investigation team

Taxpayer appeal to Board of Review / Court


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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


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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


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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


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General obligation of taxpayer under IRO

Section 51(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.


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General obligation of taxpayer under IRO

Section 51(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 3recoverable 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.


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Highlights on field audit or tax investigation

• 4A1-A012345-SOS(10)

• Division• Team number• B8 : Prosecution Team• C6/7 : Anti-tax avoidance Team• Nature• A : Anti-tax avoidance• B : Tax Investigation• C : Field Audit


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Step 1: 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


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Strategy/tactic in handling the enquiry

Background Issue ApproachPreparation

/ 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?


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/ 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?


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/ 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?


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/ Submission

Follow Up

• Wordings / tone?• Protective clause?• Partial or full reply?• Issues appropriately addressed?• Sufficient documents?• Taxpayer’s request for action?


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/ 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?


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Case study – Offshore trading


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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


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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 email / 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


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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


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Case study – Property transaction


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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


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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


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Case study – Related party transaction


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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


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Case study – Transfer pricing


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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


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Case study – Tax Residence Certificate


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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


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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


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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


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• 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


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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


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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.


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