Have you and/or your Company submitted Individual Tax Return and/or
Profits Tax Return on time to the Inland Revenue Department ("IRD")
Under Inland Revenue Ordinance Section 51(1), each company is required
to file a tax return, together with profits tax computation. Upon
receiving the tax assessment, it has to pay the tax demanded. In recent
years, the IRD would issue enquiry letters to most of the companies
after they receive the tax returns. Some of the common questions would
be about account disclosure or position adopted in the tax return.
In recent years, the
IRD has more enquiry letters focusing on the offshore claims.
Profits Tax -
Offshore Claim
Offshore claims are now being reviewed every two or three years
by the IRD. In addition, every new claim is being questioned by
the IRD, irrespective of materiality. Sometimes, it might take the
IRD more than one year to review one such claim to have a thorough
view on the operation flow of the applicant. When enquiry is issued
by the IRD, the taxpayer is obligated to provide sufficient documents
to the IRD, such as business and tax registration certificates of
a factory registered in Mainland China and a formal subcontracting
agreement.
For those offshore claim
cases which had been agreed by the IRD, they may be reviewed and
re-examined by the IRD subsequently. One of the common queries is
about related party transactions, including management fee and consultancy
fee, to see if they are at arms' length. It is therefore important
for the companies to have health-checking of the company's operation
every year.
Salaries Tax -
Totality Of Facts" Approach
For individual case, the IRD has also taken a tighter approach in
reviewing individual case.
The IRD used to refer
to the following three factors as stated in the Departmental Interpretation
& Practice Note 10 (Revised) ("DIPN No. 10") to determine
whether the income is subject to Hong Kong Salaries Tax:-
- Contract of employment,
- Residence of employer,
and
- Place of payment
of remuneration.
Instead of a "check-list"
approach used previously, however, the IRD has started to adopt
a "totality of facts" approach recently. Therefore, the
success of a taxpayer's time-apportionment claim cannot be guaranteed
even though the pre-conditions basing on the three factors as set
out in DIPN No. 10 (Revised) are met. In other words, all relevant
factors have to be considered, instead of only the three above factors.
Nowadays more and more
Hong Kong companies have set up factories in Mainland China and
require their staff to work there. For those who work in Mainland
China for a long period of time, there is high chance that they
would be subject to salaries tax in China. Further, as they are
employed by the Hong Kong Companies, they are eligible to claim
tax credit in Hong Kong.
To avoid unnecessary
enquiries by the IRD, the employers should carefully review the
existing employment contracts, the new employment contracts, and
other related documents to ensure no ambiguity in terms of employment.
To conclude, the IRD
is more stringent to review the offshore claims nowadays. It is
important for companies to ensure that they have fulfilled the basic
requirements before making the application. Also, it is important
for the Companies to have health-checking every year.
Contact Point :
Mr. Tammy Lim
(852) 21578383
lim.tammy@cwcccpa.com
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