A Practical Guide to Tax Audit and Investigation in Hong Kong

Chapter 1 Introduction

• Tax Evasion
• Tax Avoidance
• How field audit/investigation cases are initiated
• Departmental Interpretation and Practice Notes No. 11 (October 2007) (“DIPN 11”)
• Full Voluntary Disclosure
• Penalty Policy
• Field Audits and Investigation Unit 
• Field Audit and Investigation Cases Handled in 2014-15
• Period covered by an Audit & Protective Assessment 
• Process of an Audit 
• Difference between Field Audit and Investigation
• File Number

Chapter 2 The Initial Interview

• Tax Representative and Secrecy Provision of the IRO
• Preparation for the Initial Interview
• Incorrect Returns
• Accounting Records
• Questions Asked
• Commencement of the interview
• Full Voluntary Disclosure
• Details of other income
• Family background
• Private Assets and Liabilities
• List of Bank Accounts - Business and Private
• Living expenses
• Money held in trust
• Windfall profits 
• Remittances
• Review of Past returns
• Record of Interview
•  After the Initial Interview

Chapter 3 Power of IRD to Obtain Information and Documents

• Statutory power to obtain information for audit/investigation purpose
• Section 51(4)(a), IRO
• Accounting Papers and Advice Papers
• Section 51(4)(b) Examination by an Assistant Commissioner
• Exchange of Information (“EoI”)
• DIPN47 - IRD’s practices in relation to EoI
• Trade business or other secrets
• Legal professional privilege
• Disclosure Rules (s49(6))
• Non-compliance
• Reasonable excuse
• Legal Professional Privilege
• Self - Incrimination
• Statement of Assets and Liabilities (s51A)
• Search Warrant (s51B)
• Information from Other Government Departments or Public Bodies s52(1)

Chapter 4 Methods of Determining the Understatement

• Specific or Indirect Approach
• Direct Method (Specific Omission)
• Failure to notify chargeability s51(2)
• Accounting r ecords
• Adjustments to tax computations
• Prosecution
• Where accounting records are incomplete
• Assets Betterment Statement (“ABS”)
• Bank Deposit Method
• Business Economics (Percentage Computation) Method 
• Projection Method
• Gross Profit Method
• Trading business - Cash trade
• Service income
• Factors affecting the accuracy of the Gross Profit Ratio
• Report by the Tax Representative
• Deposit for Tax

Chapter 5 Assets Betterment Statement

• Format of an ABS
• Periods Covered in an ABS
• Loans from Other Persons
• Living Expenses
• Unidentified Withdrawals
• Cash in Hand
• Gambling Wins
• Investments
• Discrepancy and Head of Charge
• Non-trading Profits/Income
• Opportunity for Comment by the Taxpayer
• What Evidences are Required?
• Negotiation

Chapter 6 Sample ABS - Sole Proprietor

• Illustration of an ABS of a Sole Proprietor
• Revision o f ABS1
• Acceptance of the ABS and Issue of Assessments

Chapter 7 Assets Betterment Statement — Partnership and Corporation

• Partnership
• Illustration
• Corporation
• Illustration 

Chapter 8 Process of Audit, Protective Assessments and Hold over of Tax under Objection

• Bank Analysis 
• Examination of Accounting Records
• Obtaining Information from Third Parties
• Performance Pledge 
• Protective Assessments and Alternative Assessments
• Hold over of tax pending settlement of objection
• Recovery of tax under objection

Chapter 9 Anti-Tax Avoidance and Technical Adjustments to Assessments

• Anti-Tax Avoidance
• Offshore Companies
• Transfer Pricing and Offshore Companies 
• Profits from Property and Share Transactions
• Rental income from Real Properties
• Manufacturing in Mainland China
• Bad Debt
• Entertainment Expenses
• Interest expenses 
• Management and Consultancy Fees
• Private and domestic expenses

Chapter 10 Negotiation and Settlement

• Conclusion of an Audit
• Letter of Settlement 
• Penalty
• Approval by Top Management
• Issue of Assessments and Penalty
• Finality of Assessments
• Installments
• Cases Which Cannot Be Settled

Chapter 11 Offence and Penalties in Taxation

• Levels of Fine
• Compounding
• Failure to Supply Information or to Answer Questions
• Keeping Business Records 
• Tax Evasion Offences

Chapter 12 Penalty Policy of the IRD

• The IRD’s Penalty Policy - Field Audit/Investigation Cases
• Category of Disclosure and Work Involved 
• Late Returns
• IRD’s Penalty Policy – Non-investigation/Field Audit Cases 
• Salaries tax and Property tax Cases
• Personal Assessment Cases

Chapter 13 Tariff of Penalties

• Starting point — 100%
• Late Returns Cases (infringing s51(1))
• Tariffs in Board Cases
• Salaries Taxpayers
• Profits Taxpayers
• Property Tax
• Late Returns
• Failure to Notify Chargeability to Tax

Chapter 14 Section 82A — Additional Tax 

• Section 82A — The Offences and Penalty
• Failure to Submit Tax Return (s51(1) or (2A) or Notify Chargeability to Tax (s51(2))
• Right to Make Written Representation
• Deceased Person
• Appeals to the Board of Review
• Not liable to Additional Tax
• The amount of additional tax exceeding the amount for which he/she is liable under s 82A
• Excessive in the Circumstances
• Cannot Go Back to the Basic Tax
• Onus of Proof 
• Procedure on Appeal 
• Appeal to the High Court
• Increase in Penalty by the Board
• Section 82A Additional Tax — Criminal Penalty

Chapter 15 Prosecution for Tax Evasion

• Section 80(2)
• Section 82 Fraud or Wilful Evasion
• Compounding
• Section 82 or Section 80(2)?
• Assisting Others to Evade Tax
• Signing any Return or Statement without Reasonable Grounds for Believing the Same to Be True (s82(1)(d))
• Mandatory Custodial Sentences
• Decision to Prosecute
• The Level of Penalty
• Possibility of Prosecution for Tax Evasion

Chapter 16 Miscellaneous Issues Arising in an Audit

• Payment of Tax and Penalty
• Protective Assessments
• Current Year Return
• Partnership
• Directors of a Corporation
• Deceased Person
• Spouses

Chapter 17 Mentality and Attitude of Taxpayers

• Keeping Proper Accounts
• Tax Advice
• Stress of an Audit
• Reaction to an Audit
• Protective Assessments
• Basis of Settlement.
• Attitude and Approaches during an Audit
• What Should a Taxpayer Do and What Not to Do
• After t he Audit
• Professional Fees

Chapter 18 Case Studies

• Omission of Income and Overstatement of Purchases
• Excess Deposit and Gross Profits Approach
• R Wong Yue Hung Johnson (1992) 3 HKTC 733
• The Queen v Ng Wing Keung, Paul (First Defendant “D1”) and Choi Sin-biu (Second Defendant “D2”) 4 HKTC 264 (see Appendix A) 
• HO Lui 3 HKTC 289 (see Appendix B) 
• Yip Kam Sing DCC640/1994, 4 HKTC 68 (see Appendix C) 
• HKSAR v Chan Kin-man Ivan 5 HKTC 535 (see Appendix D )
• Asia Master Ltd v CIR [2006] HCAL 114/2005 (see Appendix E )

Appendix A
Appendix B 
Appendix C 
Appendix D
Appendix E 
Frequently Referred Parts of Inland Revenue Ordinance (Cap 112)
Table of Cases 
Table of Legislation 
Subject Index