In our September 2022 Issue of Newsletter, we will discuss Hong Kong Tax Update on COVID-19 and two recent prosecuted tax evasion cases published by the Inland Revenue Department (“IRD”).
3. [Income Omission] 14-month Jail Sentence and Fine for a Businessman Convicted of Omitting Company Turnover and Property Rental Income of less than HK$1 Million
Property Rental Income omission is a common offence of Hong Kong Taxpayer
A businessman (the Taxpayer) was charged with 15 counts of willfully with intent evading tax by omitting turnover of his sole-proprietorship business from his tax returns for over 10 years of assessment from 2002/03 to 2013/14 and rental income of his parking space from his tax returns for 3 years of assessment from 2011/12 to 2013/14, contrary to section 82(1)(a) of the Inland Revenue Ordinance (IRO) (Cap. 112). He pleaded not guilty to the relevant charges. And after trial, he was convicted on all of the 15 tax evasion charges, sentenced to 14 months’ imprisonment plus a further fine of HK$822,781, which is equivalent to the amount of the tax evaded.
Under-statement of Business Turnover
The Taxpayer was the proprietor of a company which collaborated with a publisher and carried on its business on the publication of a watch magazine. The Company was responsible for soliciting customers for advertisements and was entitled to 40% of the total advertising revenue.
Tax was evaded for over 10 years. A total of 53 issues of the watch magazine were published from which the Company was entitled to advertising income of HK$11 million. However, the Taxpayer reported income of HK$5 million only. The total amount of tax evaded was HK$819,437.
Non-reporting of Property Rental Income
The Taxpayer declared that he did not lease out any solely owned properties during the concerned years. In reality, a small amount of rental income has been derived from the self-owned car parking space. The tax evaded was $3,344.
Points to note
This is the second case within 3-month time being prosecuted by IRD under criminal offence, tax evasion with willful intent. The previous one is in July 2022, in respect of over-claiming of deductible expenses and allowances by an insurance agent, as mentioned in Issue 2 of October 2022 Newsletter and the recent one is in October 2022, in respect of under-reporting of taxable income by a businessman mentioned herein.
It is worth to note that both cases are similar that the tax involved was not of a huge amount but the degree of seriousness is substantial to be sentenced imprisonment due to continuous deliberate false declaration in various tax return revealed by IRD under investigation.
The 6-year time limit does not apply in the case of fraud and willful evasion. In this case, we reasonably believe that the IRD has extended the period of investigation to 10 years (the maximum allowable period in the case of fraud and willful evasion). As such, it is important to cooperate with the IRD’s assessor in the case of investigation to minimize the chance of being considered as fraud or willful evasion.
The amount of bank-in in both personal / business bank accounts far exceed the amount of reported taxable income. This is a common catalyst for tax investigation as the Field Audit and Investigation Unit (Unit 4) of the IRD has the right to obtain the Bank Statements of suspected taxpayers.
Cross-Checking with your Customers / Suppliers and External Documents:
Tax returns submitted would be verified and crossly matched with various information and/or documents available to the IRD (e.g., tenancy agreement for stamp duty purpose). Meanwhile, the IRD will also check with the tax reporting information of customers and suppliers to confirm the sales and purchase amounts of taxpayers under investigation. Such possible inconsistency and/or misstatement could be identified for further examination, such as desk audit, field audit and tax investigation, to be conducted by IRD.