Koo Ming Kown & Murakami Tadao v CIR [HCIA1/2017]
Background of the case
The two appellants, being the directors of a Hong Kong incorporated company (“the Company”) signed on the profits tax returns (“PTRs”) for the Company. The Inland Revenue Department (“IRD”) subsequently reviewed the case and disallowed the deduction claims on management fees and legal and professional fees and raised additional tax assessments.
As the Company was lack of financial resources, it did not settle the outstanding tax liabilities in the full amount and was subsequent wound up pursuant to a petition brought by the Commissioner of Inland Revenue. As the IRD could not recover the whole amount of tax from the Company, it takes actions to recover more by imposing penalties to the directors of the Company as they were the signatories of the PTRs pursuant to Section 82A(1)(a) of the Inland Revenue Ordinance.
Held in favour of
Board of Review
Commissioner of Inland Revenue
Court of First Instance (“CFI”)
Court of Appeal (“COA”)
Court of Final Appeal
The judges of both CFI and COA held in favour of the directors on the basis that it was the corporation, as the taxpayer, which is the only person obliged under the law to file a PTR. The officers of the corporation should not be liable to file an incorrect tax return.
The Commissioner of Inland Revenue has appealed against the decision of COA and the final decision is yet to come.
Points to note
While pending the final results from the Court of Final Appeal, the good old days for PTR signatories has been past. In March 2021, the legal framework for tax filing has been revised.
The concept of “Service Provider” has been introduced. New Penalty provisions have been introduced against Service Providers who have committed certain offences without reasonable excuse when they file the tax return for the taxpayers (i.e., the corporation).
Service Provider is currently restricted to the person who signed on the tax return on behalf of the corporation. Tax representatives are currently not considered as Service Provider. However, we are aware that some of the professional firms (e.g., company secretarial firms) would also sign the tax returns on behalf of their clients. As such, they should be aware of potential legal consequences for any non-compliance in the tax return filing.
In view of the attitude of the IRD in the above court case, we reasonably believe that the IRD would exercise its rights to impose penalty on the Service Provider when it could not recover the whole amount of outstanding tax liabilities from the corporation. The penalty will now be extended to individual level (i.e., officer of the corporation) rather than limited to the taxpayer itself (i.e., the corporation).
On a separate matter, section 429(1) of the Hong Kong Companies Ordinance, Cap. 622 (“CO”) stipulates that a company’s director must, in respect of each financial year, lays before the company’s annual general meeting, a copy of the reporting documents (i.e., financial statements) for the financial year within the period specified in Section 431 (e.g., 9 months after the end of that accounting reference period for private company).
Although company’s directors would not be personally liable to penalty due to incorrect tax filing if they are not the signatories; they could be liable to a fine of up to HK$300,000 if they fail to take all reasonable steps to secure compliance with Section 429(1) of the CO.