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Jul-08-2009 Meet Deadlines to Avoid Penalties

By Roddy Sage

The Inland Revenue Department (“the Department”) appears to have become so frustrated with delinquent taxpayers and those that persistently miss tax filing deadlines that it has resorted to issuing a standard letter advising taxpayers that for such offences the Department is allowed to raise penalties of up to 3 times the amount of unpaid tax that becomes due. If nothing else this clearly gets the message across to taxpayers that the filing obligations under Part IX Inland Revenue Ordinance are mandatory and not optional.

Most profits tax returns (applicable to person carrying on business in Hong Kong) are sent to ‘active’ taxpayers on or around 1st April with a stated time limit for completion of one month. However, the Department will grant taxpayers an extension of time to file their returns depending on their accounting date e.g. if a corporate taxpayer is represented by a tax agent and the taxpayer has been included in the block election scheme the following automatic extensions apply;

 
Accounting Date                                                 Extended Due Date
 
1st April 2008 - 30th November 2008                No extension
(Accounting Date Code “N”)
 
1st December 2008 - 31st December 2008      15th August 2009
(Accounting Date Code “D”)
 
1st January 2009 - 31st March 2009                  16th November 2009
(Accounting Date Code “M”)
 
Applications for further extensions beyond these dates can be made but are only likely to be accepted in exceptional circumstances.
 
Taxpayers, who have recently commenced to carry on a business in Hong Kong and who are in receipt of a profits tax return for the first time during the year will receive an automatic extension of three months in which to file the return. The Department have indicated that it is their normal practice to issue a first profits tax return to a taxpayer approximately 18 months after the company’s Business Registration Certificate has been issued.
 
The one exception to these basic rules is that companies falling within the ‘M” category, and which will file an allowable loss, can apply by 31st October 2009 or in exceptional cases 16th November 2009, for an extension to 1st February 2010.
 
The Department also wishes to emphasise the need to ensure that returns are complete and that all the supplementary forms and information are provided. It is equally important to appreciate that all Hong Kong incorporated companies (with the exception of companies whose total gross income for the year does not exceed HK$500,000 and dormant companies) are required to have their financial accounts audited and that a profits tax return which does not incorporate the audited accounts will be deemed invalid. Another issue that is not always appreciated by taxpayers is that despite the currency of the statutory accounts the profits tax return and attached schedules must be translated into Hong Kong dollars.
 
No taxpayer wishes to receive letters from the Department however, it should be accepted that the Department will ask questions if the profits tax computation does not provide sufficient information to evaluate the accuracy of the taxpayer’s calculation of its profits tax liability. To facilitate the assessment of the Profits Tax return the Department has stated that returns must be accompanied by schedules and explanations in respect of the following; 
 
  • Extraordinary gains and losses
  • Interest expenses
  • Interest claimed to have an offshore source
  • Offshore profits and appointment of related expenses
  • Fees paid (name, addresses and nature e.g. management, service or consultancy and copies of accounts and Profits Tax computation of the service company, if it is a related company within the terms of Departmental Interpretation & Practice Notes No.24)
  • Sub-contractors’ fees (names, addresses and amounts)
  • Legal and professional fees (names and nature of services)
  • Repairs and improvements
  • Commission payments
  • Bad debt provisions and write-offs
  • Leasehold improvements
  • Movements in reserves and provisions
  • Purchase and sale of capital assets, including properties 
The position is slightly different for individuals with salaries tax returns being sent out at the very beginning of May with an extension granted to 4th July for those individuals participating in a block extension scheme operated by their tax agent and to 5th October for these individuals preparing and filing accounts for a sole proprietorship. 
 
The Department, in their desire to both improve the timing and efficiency of the filing procedures openly encourages taxpayers and their representatives to use the Department’s electronic filing scheme; to do so the taxpayer or his agent must first register with the Department and obtain a password.
 
These basic rules and time limits are not considered particularly onerous. However, there is a need to ensure that year end financial accounts are prepared on a timely basis and, when appropriate, arrangements are made to have the financial accounts audited in time to meet the taxpayer’s obligations under the Inland Revenue Ordinance.
 
Should you have any questions I will be happy to assist you but in conclusion I would like to reiterate the Department’s warning that, “Taxpayers who have persistently filed late returns are almost certain to face penalty action.”
 
To read more of Roddy's posts, visit: www.roddysrant.com
  

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