Hong Kong Tax Prosecution Cases

Hong Kong Inland Revenue Department is taking more stringent approach in handling tax evasion and avoidance cases. The number of Field Audit & Investigation Cases has skyrocketed in year 2021 as compared to prior years. It not only reviewed taxpayer submission (e.g., audited report, tax computation) to select cases for investigation, but also researched on taxpayer financial information via Investment Records, Internet and Social Media (e.g., FaceBook).

On the other hand, more and more individual taxpayers were sentenced to imprisonment cases due to personal tax evasion. With the latest law amendments, besides the corporation itself, Profits Tax return signatories would also be personally liable to the penalties on incorrect Profits Tax return. Please refer to our August 2021 tax update for details.

Taxpayer should be mindful of their criminal liabilities, especially when they are under investigation by the IRD. In view of the potential severe consequences, they are encouraged to seek for professional opinion from tax advisors where necessary.

In our December 2021 Newsletter, we will study two recent prosecution cases in the IRD’s website. Taxpayers should not repeat the mistakes made by these offenders.

Case 2: 6-WEEK IMPRISONMENT TO BOTH DIRECTORS FOR FALSE CLAIM ON LIMITED COMPANY EXPENSES

On 7 April 2020, two individuals who are the directors and shareholders of a company was convicted of two charges of tax evasion. In particular, the company has claimed tax deduction on bogus payments in the total sum of HK$199,000, resulting in tax underpaid of around HK$35,000.

The bogus payments comprised both “computer and internet expenses” and “salaries and commission expenses”.

Through this court case, we would like to highlight that:-

1. Despite the small amount of tax involved, the consequences of tax evasion could still be serious; and
2. For Salaries and commission expenses, the IRD would generally expect the company to report the recipient in the Relevant Returns (i.e., Form IR56B and IR56M respectively). The corresponding income would be subject to Hong Kong tax in the hands of the staff or consultants if the relevant services are provided in Hong Kong.

Click here for the case details.

POINTS TO NOTE
A common catalyst to trigger Field Audit and Investigation case from the IRD would be the mismatch of staff costs reported in the Employer’s Return (Form IR56B) and Box 12.10 of Profits Tax return (Form BIR 51).

The mismatch reveals there is a possibility of loss of revenues of the IRD since the total taxable income of the staff is less than the staff cost tax deduction claimed by the company.

More importantly, it also reveals that there could be defects in the internal control and accounting system of the company. Other errors leading to under-reporting of taxable profits may also happen.

Based on our observations, we summarise below some of the common reasons leading to mismatch in staff cost reporting:-

1. Non-reporting of costs of staff working outside Hong Kong in IR56B*
2. Non-reporting of costs of part-time staff in IR56B
3. Inconsistent disclosure in treating some personnels of the company as External Consultants (Consultancy fees) or Internal Staff (Staff costs)
4. Non-reporting of staff quarters and director’s benefits in IR56B
5. Inconsistent disclosure in the employer of the staff (For staff who work for more than 1 companies within a group)

* An employer should report remuneration paid to its staff in Employer’s Return (IR56B), no matter whether the staff work in Hong Kong or not.