In a previous article, we examined the case of Mr Chan, an employer whose business practices and tax declarations had become the subject of an investigation by the Inland Revenue Department (IRD). To understand the situation fully, the first step taken by the IRD assessor was to review the salary payments made by Mr Chan to his employees over the previous six years. The company's HR manager was, therefore, asked to provide the personnel file of selected members of staff and to include details of employment contracts, BIR56A and IR56B forms (stating remuneration and pensions paid by the employer), and travel schedules.
In addition, if salary payments had been made through the bank, the assessor wanted to see details of the bank accounts into which payments had been deposited. For salaries paid by cheque, information was requested to confirm the number and date of the cheques and the name of the bank on which they were drawn. Furthermore, if any of these payments had also included an amount in lieu of notice, for long service, or as a result of severance, the assessor wanted to check the details regarding the basis of calculation and to confirm whether the payments had been made in accordance with the provisions of the Employment Ordinance.
Mr Chan, as the taxpayer under investigation, was prepared to cooperate fully with the assessor and provide all the information requested. However, he also felt obliged to explain that, since his company's merchandisers and quality controller needed to travel frequently to visit factories in mainland China, a substantial part of their work was not performed in Hong Kong. Therefore, Mr Chan reasoned, their salaries should not be subject to Hong Kong tax and, for this reason, no Employer's Return had been filed for them.
The assessor did not totally agree with this point of view and, before drawing any conclusions, decided to review in more detail the travel schedules, employment contracts, total time away from Hong Kong, and the method of payment for the staff concerned. It was also explained to Mr Chan that, according to the IRD's Note 32, there are clear rules relating to the stay of a Hong Kong taxpayer in mainland China. The assessor drew attention to the three conditions which determine the tax status of such an employee. If the period or periods of stay do not exceed a total of 183 days in one calendar year, if the remuneration is paid by an employer who is not a resident of mainland China, and if the remuneration is not borne by a permanent establishment or a fixed base which the employer has in China, then the employee's salary will be subject to Hong Kong tax.
During the course of the investigation, the assessor also noticed that the company regularly provided a number of fringe benefits for staff. However, none of these had been reported on the Employer's Return. When questioned about these, Mr Chan said that they were mainly intended as gifts from the company in recognition of good performance or as birthday presents. Consequently, he did not view them as part of anyone's salary and believed they should not be reported as taxable income. Hearing this, the assessor referred to the IRD's Note 16. This makes it clear that, if a benefit can be converted into money by sale (i.e. it has an obvious second-hand value), it should be regarded as part of an employee's income and should be subject to income tax.