Money Matter

Hong Kong tax investigation

Article exclusively contributed by
Asia Progress

Paying tax is an unavoidable part of any employer or employee's duties in Hong Kong. Over the next few weeks, Legal Puzzle puts the spotlight on some issues taxpayers may encounter when their taxation affairs are reviewed by the Inland Revenue Department

How has tax investigation been performed by the Inland Revenue Department (IRD) over the past few years? In Hong Kong, tax investigation is carried out by the Field Audit and Investigation Unit, formed by the 1 April 2000 merger of the previously separate Investigation Unit and Field Audit Unit.

The unit's investigation officers are responsible for the in-depth investigation of taxpayers' taxation affairs, including the imposition of penalties and prosecution proceedings in appropriate cases. By 2001/02, there were 11 teams of investigation officers - two of whom are responsible for the criminal investigation of tax evasion. Once a taxpayer is convicted of tax evasion, custodial sentences are imposed, together with the collection of back tax and penalties.

Field audit officers conduct audits on corporate and unincorporated businesses by visiting taxpayers' business premises and reviewing their accounting records in order to ascertain whether the returns that are submitted are correct. The main objective of the field audit officer is to enhance the voluntary compliance of the taxpayer by means of the more visible presence of the IRD officers. By 2001/02, there were 12 teams of field audit officers - two of whom concentrate on anti-tax avoidance.

The major causes of tax investigation or field audit cases are generated from sources such as reports from third parties (for example, competitors or employees) transfers from other IRD units or other government departments, selected projects (such as insurance agency work or motor vehicle trading), consistent late filing or when no return is filed during the year of assessment.

External sources mainly derive from figures in the audited financial statement submitted by the taxpayer to the IRD. These include a significant credit balance in the "due to director's current account", qualified auditor's reports, unreasonable fluctuations in the gross profit ratio or net profit ratio, a significant amount of accounts receivable or accounts payable or sub-contracting charges.

Our next article in Legal Puzzle will examine the ins and outs of profit tax and put a specific case study under the microscope.

Q&A about Hong Kong tax investigation
Q1 How effective are field audits and investigations?
A1 According to the 2001/02 Annual Report of the IRD, the Field Audit and Investigation Unit completed 1,921 cases and assessed back tax and penalties of about HK$2.1 billion (table 1):
Results 1998/99 1999/00 2000/01 2001/02
Number of
cases completed
1,812 1,874 1,920 1,921
Understated earnings
and profit (HK$ million)
9,075.20 10,232.30 9,310.80 8,940.90
Average understated earnings
and profit (HK$ million)
5.0 5.5 4.8 4.7
Back tax and penalties
assessed (HK$ million)
2,171.30 2,318.90 2,154.80 2,101.50
Back tax and penalties
collected (HK$ million)
2,074.70 2,147.80 1,962.40 1,787.60
Table 1: Sourced from the IRD annual report

Before the merger of the Field Audit and Investigation Unit in 2000, the Field Audit completed 948 cases in 1999/00 and collected about HK$1.2 billion of back tax and penalties (table 2). The average discrepancies' detection rate of the Field Audit Unit was above 95 percent from 1996/97 to 1999/00.
Results 1996/97 1997/98 1998/99 1999/00
Number of cases completed 912 915 911 948
Understated earnings
and profits (HK$ million)
3,989.4 4,845.0 5,245.2 6,283.4
Back tax and penalties
collected (HK$ million)
1,145.1 1,126.6 1,176.2 1,194.4
Table 2: Sourced from the IRD annual report

Q2 How do tax investigation procedures work?
A2 Tax investigation procedures are composed of five major steps, as detailed below. The duration of an overall investigation will largely depend on the completeness of information that the taxpayer has available, as well as the complexity of the case. On average, a field audit case should be settled within six months in order to settle for a lower penalty, while investigation cases may last longer. The upcoming issues will elaborate on the investigation procedure and how to deal with tax review processes.

Taken from Career Times 12 December 2003

(Last review date: 23 August 2013)

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Disclaimer: The opinions expressed in this article are those of the contributor.

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