IRD Tax Desk Audit / Tax dispute with the IRD

Typical IRD Tax Desk Audit case and Tax Dispute with the IRD

After submission of Profits Tax Returns and Individual Tax Returns by the corporate and individual taxpayers, the IRD may issue enquiry letters to the taxpayers to obtain information and supporting documents to ascertain the tax treatments on income and expense. Tax dispute between taxpayers and the IRD is common in Hong Kong.

Examples of typical tax issues for corporate taxpayers are:

· Non-taxable capital claim on profits from long-term investments

· Non-taxable offshore claim on profits

· Deductibility of expenses (such as legal and professional fees and expenses attributable to offshore profits)

· Depreciation allowances

Examples of typical tax issues for individual taxpayers are:

· Share-based payments received

· Severance payments received after termination of employment

· Allowable deductions claimed (such as self-education expenses and home loan interest)

· Personal allowances claimed (such as additional dependent parent and grandparent allowance)

The IRD usually requires a taxpayer to reply to the enquiry letter within one month from the date of issuance of such letter.

Desk Audit vs. Field Audit

A desk audit may start by requesting additional details on income or expenses listed in the tax return, or asking about a property transaction. These audits can progress to a tax field audit or investigation, particularly if serious tax issues arise or the information provided is deemed inconsistent or unreliable by the IRD.

A tax field audit or investigation involves the Hong Kong Inland Revenue Department (IRD) thoroughly examining a taxpayer’s financial records and tax positions to verify compliance with Hong Kong's tax laws and regulations.

A field audit with the IRD is much more serious that a desk audit.

Protective Assessment

An IRD tax assessor may issue an additional assessment if a taxpayer liable for tax has either not been assessed or has been under-assessed. Normally, this assessment should be made within the relevant tax year or within six years following that year. However, if the under-assessment or lack of assessment is due to fraud or wilful evasion, the period for issuing an additional assessment is extended to up to ten years after the end of the pertinent assessment year.

Protective Assessment is an additional assessment issued by the IRD just before the end of six years after the end of that year of assessment to protect the revenues of the IRD as the IRD cannot issue additional assessment / protective assessment after the statue of limitation (i.e., normally six years).

The amount of tax charged under protective assessment somehow shows the seriousness of the tax dispute case and the attitude of the IRD towards the taxpayer. Timely objection of protective assessment is suggested as it is well within the expectation of the IRD, rather than an uncooperative act.

Our Services

We provide the following services to our clients:

· Apply for extension for the reply to enquiry letter to have more time to gather information and documents and to prepare the reply

· Understand the tax in dispute and advise on the chance of success in the tax dispute with the IRD

· Prepare the reply to enquiry letter with arguments and justifications on the tax treatment

· Follow up with the IRD assessor via various telephone discussions and notify the result

· Object against the additional assessment / protective assessment issued by the IRD