Mr Chan has owned a garment trading business, Man On Trading, for over ten years, largely doing business with the European and US markets. Since 1998, he has operated a factory in Guangzhou employing over 200 workers. The business has been quite successful, although Mr Chan's property market investments have depreciated by over 70 percent. Fortunately, he still maintains quite a healthy cash flow and can sustain the mortgages on his properties and his business as a whole.
Over the past few months, Mr Chan's friend and business partner Mr Lee, who is also in the garment trading business, has complained that he is having trouble with the Inland Revenue Department (IRD) regarding his company's profit tax over the past six years. Mr Lee is so frustrated that he is not able to concentrate on his normal business, since he is spending a great deal of time with his professional advisor on dealing with the IRD. In fact, many of Mr Chan's friends have received enquires from the IRD about their business operations over the past years - in particular those with offshore claims. Until recently, however, Mr Chan received no correspondence from the IRD and he thought that this was because his business was not as sizeable and thus not as interesting to the IRD.
Last month, Mr Chan received some correspondence from the IRD, entitled file no. 4C1-B123456-HYT(5), inviting him to visit the IRD to discuss his taxation affairs for the years of assessment between 1996/97 and 2001/02. Although the file number differed from his company's usual Profit Tax file number, Mr Chan thought that it only referred to a normal periodic tax review. But, once he entered the interview room, he realised that it was more serious than he had thought, since two assessors were there with a pile of files. They questioned him about his company's daily operations. This included very detailed business transactions - in particular his business operations in China and the relationship between his Hong Kong company and the Guangzhou factory. He tried his very best to explain his business operations. However, not being a professional accountant, he could not answer some accounts-related issues. As one of the assessors noted everything he said during the meeting, Mr Chan became very nervous and felt great pressure to answer each and every question.
At the end of the meeting, one of the assessors asked Mr Chan to confirm whether the signature on the profit tax return for the past six years was his and also whether the profit or loss figure on the profit return was accurate. He was so scared that he only admitted that the signature was his. The assessor therefore requested a site visit, to review his business books and records and thus reconcile the profit or loss figure in the profit tax return.
In later articles, we will go through Mr Chan's case in detail. We will explain how the IRD handles an investigation and how taxpayers should handle cases professionally.
|Q1 ||Is the IRD file number shown any indication of Mr Chan's case?|
|A1 ||In his case, the file number indicates that the case is under tax investigation. All sole proprietorship and partnership business file numbers are prefixed such as: 6C4-12345467, 6E4 - 5678901 etc. The second part of the file number is the Business Registration number of the taxpayer. File numbers of cases under tax investigation review are changed, for example, to: 4C1-123456-HTY(5). |
|Q2 ||Does the IRD assessor have the right to visit a taxpayer's office and review his books and records?|
|A2 ||Yes, in most tax investigation cases it is the assessor's practice to visit the client's office to review and examine the books and records for the year of assessment under review, as well as transactions during the latest period. In the event of a prosecution, the assessor will have a warrant to seize all the company's accounting documents, business-related documents and bank statements listed on the warrant. |
|Q3 ||Under what circumstances will the IRD investigate a taxpayer's file?|
|A3 ||Most IRD investigations are:|
1. The result of third party reports; or
2. Internal transferals (such as estate duty);
3. Project-based (such as motor vehicle trading); or
4. Due to continuous late filing of profit tax returns.
|Q4 ||Should Mr Chan attend the meeting alone?|
|A4 ||The IRD does not request taxpayers to have tax representatives at meetings. However, it is always advisable to attend the meeting with a professional who is experienced in handling such cases to avoid any unnecessary mistakes during the initial meeting, since the IRD prepares meeting notes which serve as relevant documents for the settlement of cases. |