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 1: 12-WEEK IMPRISONMENT FOR INCORRECT HOLDOVER APPLICATION AND FALSE CLAIM ON SELF-EDUCATION EXPENSES AND DONATIONS
On 10 December 2020, an individual was convicted of willfully with intent evading Salaries Tax. He was held guilty on the following two offenses:-
- 1Holdover Application - Provisional Profits Tax (Year of Assessment 2007/08 to 2010/11): Under-estimation of his income for the upcoming year without reasonable excuses
- 2Expense Deduction Claim (Year of Assessment 2011/12 to 2016/17): False Claim on Self-education expenses and Approved Charitable Donations
On 24 December 2020, he was sentenced to 12-weeks’ imprisonment.
In Holdover Application, the taxpayer claimed himself to be “unemployed” and thus had lower amount of income in the upcoming year. However, the IRD found out that the taxpayer remained to be employed by the same company.
On the other hand, the taxpayer cannot provide documentary evidence to support that he had incurred self-education expenses and made donations during the relevant years.
The total tax undercharged / evaded as a result of the above is around HK$290,000, and thus the amount per year is not particularly significant. However, no matter the amount involved, tax evasion is a criminal offence which could be subject to three years’ imprisonment and a fine of HK$50,000 plus a further fine of three times of tax undercharged / evaded.
Click here for the case details.
Points to note
Provisional Profits/Salaries Tax Holdover Application
Holdover Application is an effective tool to reduce the cashflow burden of taxpayer, particularly under the situation when the business has been ceased or transferred to the another company already. On the other hand, when the individual has ceased its employment in the current year already, it should apply holdover application to reduce its Provisional Salaries Tax liabilities.
While holdover application is usually made before the end of the basis period and thus the final result has not been out yet, the IRD would still expect the taxpayer to exercise due care in predicting its profit / income for the year. Very often we are aware that individuals and corporations were penalised for unreasonable prediction of income / profits during the holdover application.
The IRD would generally issue an enquiry letter for the taxpayer to explain for the under-statement of income / profits. This would be the last chance for the taxpayers to explain the reasons before the IRD decided whether the taxpayer has committed an offence.
Self-education expenses and donations Claim
It is a common misconception in the public that the worst case scenario of false expense claims were pay back the tax under-paid only. They believe they could always claim that they have lost the vouchers and thus there would not be any additional penalties nor surcharges. As such, they tend to take chances in their personal tax filing.
The IRD has already pointed out that it will conduct random checks on personal deduction claims. Many individuals have under-estimated the probability of the random checks and the consequences of false claims.
In particular, Field Audit and Investigation Unit (Unit 4) of the IRD has been actively carrying out investigation on individual taxpayers since year 2021. Under normal circumstances, when tax under-paid was found by Unit 4 case officers, it is very difficult to get away from the penalty and interests. The maximum penalty under the law is 300% tax undercharged while a penalty of 100%-150% tax undercharged would not be a surprise in Investigation cases.
Taxpayers should not under-estimate their consequences for false expense claim, including the possible penalty of imprisonment.
