Zihona:Case Study (HK Taxation)
本页为 林爽的技术笔记本 之一部分。
Question:
A new client, Mr Mui, informs you that he has recently received a query from the Inland Revenue Department regarding the source of funds used to purchase two flats in 2000. He also tells you that he has not properly disclosed the profits of his unincorporated trading business in his profits tax returns for the last five years. Although Mr Mui now wants to disclose his true profits to the department, he has not kept proper books and records from which you could prepare revised accounts.
(a) What obligations are contained in the Inland Revenue Ordinance in regard to keeping business records?
(b) What penalty and prosecution action (if any) could be taken against him by the Inland Revenue Department?
Our Study:
(a) obligations in the Inland Revenue Ordinance regarding
Business records keeping
According to the Inland Revenue Ordinance s51(c)(1), anyone who is carrying a business in Hong Kong should keep sufficient records (meaning, all the records listed below) in the English or Chinese language of his income and expenditure, so that the assessable profits can be readily ascertained by the IRD for a period of at least 7 years.
As Mr. Mui is having an unincorporated trading business in Hong Kong, he has the obligations to keep the following records for at least 7 years, after the conclusion of the business transactions.
The business records mentioned includes the followings: 1. Books of accounts recording receipts and payments, or income and expenditure; 2. Vouchers, bank statements, invoices, receipts; 3. Records of the assets and liabilities of the person in relation to that trade, profession or business; 4. Records of all entries from day to day of all sums of money received and expended in relation to that trade, profession or business; 5. If he trade, profession or business involves dealing in goods, the followings should be kept: i. Record of all goods purchased, and all goods sold in the carrying on of that trade, profession or business showing the goods, and the sellers and buyers in sufficient detail to enable the Commissioner to readily verify the quantities and values of the goods and the identities of the sellers and buyers, and all invoices relating thereto; ii. Statements of trading stock held by the person at the end of the accounting period and all records of stocktaking’s from which any such statement of trading stock has been prepared; 6. and if he trade, profession or business involves the provision of services, the records of the services provided in sufficient detail to enable the Commissioner to readily verify the entries.
(b) penalty & prosecution action (if any) could be taken By the Inland Revenue Department
I. Offenses of Mr. Mui
1) Improper business records
According to the Inland Revenue Ordinance (IRO) s51(c)(1), Mr. Mui, who is operating an unincorporated trading business in Hong Kong has the obligation to keep proper books and records of at least 7 years as stated in part A in the previous page. However, he has not done so in the last five years.
2) Filing false profits tax returns
It is the duty of the Mr. Mui, as a taxpayer, under the law (according to s80 of the IRO) to file timely and accurate tax returns to the Inland Revenue Department (IRD). As Mr. Mui has failed to properly disclose the profits of his unincorporated trading business in his profits tax returns for the last five years, unless he has a reasonable excuse (according to s80 (1)) or else he may be found guilty of this offence. Reasonable excuse mentioned above does not include ignorance of law or carelessness, according to Board of Review case D90/01
II. Penalties under the IRO
For the above offences, unless Mr. Mui can satisfy the Inland Revenue Department (IRD) with 'reasonable excuse', or else the IRD could take the following prosecution action against Mr. Mui, and he may be subjected to the following penalties.
1) Improper business records
Since under s 80(1A) Mr. Mui (if proven without reasonable excuse), having failed to comply with the record-keeping requirement under s 51C, can be subjected to a fine of $100,000 (at level 6) and the court may order him to produce genuine business records within a specified time.
2) Filing false profits tax returns
Since under s 80(2) Mr. Mui (if proven without reasonable excuse), having made an incorrect tax return, can be subjected to a fine of $10,000 and treble the amount of the tax undercharged. Under s 80(1 AB), anyone who knowingly or recklessly makes a statement of the kind referred to in subsection (1AA)(a), including the profit tax returns, which is false or misleading shall be guilty of an offence: Penalty could be fined at level 3 – $50,000.
3) Filing false profits tax returns on purpose
Under s 82, if Mr. Mui is proven by the IRD that he has willfully, with intent to evade tax by the followings: (i) omits from a return any sum which should be included; (ii) makes any false statement or entry in any return; (iii) makes any false statement in connection with a claim for any deduction of allowance; (iv) signs any untrue statement/return; (v) gives any false answer to any question or request for information asked or made in accordance with the provisions of IRO; (vi) prepares or maintains any false books of accounts; or (vii) makes use of any fraud etc to evade tax. Then, he can be subjected to a fine of $50,000 (at level 3), and further fine the treble amount of the tax undercharged and 3-year imprisonment.
4) Tax evasion by fraud – Criminal Offense
Tax evasion is a criminal offence under Common Law and the Criminal Procedure Ordinance (e.g. LEE Kwok-keung v CIR), as cheating the public revenue is contrary to the Common Law
III. Maximum Penalty
The maximum penalty is the sentence of 3 years' imprisonment and a fine of $50,000 on each charge, plus a further fine equivalent to three times the amount of tax undercharged.
IV. Prosecution action by IRD
Current Situation Mr. Mui received a query from the Inland Revenue Department regarding the source of funds used to purchase two flats in 2000, and the funds may be sourced from his unincorporated trading business’ profits in the last five years.
Investigation Penalty actions under s 82A will be taken only after the IRD has considered the Mr. Mui 's representation, if one has been made, but found that there is no reasonable excuse for the alleged offence. When invoking s 82A, the Commissioner or her deputy will issue a written notice to Mr. Mui indicating her intention to assess additional tax (subjected to penalties) and setting out the particulars of the suspected offence. She will also invite Mr. Mui to submit written representation with regard to the proposed additional tax assessment. Then, Mr. Mui will be given a period of not less than 21 days from the date of service of the notice to make his representation.
In investigating for the accuracy of his profit tax returns, the IRD may require him to submit past business records, and Mr. Mui may be found guilty under IRO s80 if he cannot provide them.
Appeal The IRD will let Mr. Mui appeal to the Board of Review within one month from the date of issue of the notice of the additional tax assessment, if Mr. Mui has been assessed to additional tax. A similar case to Mr. Mui’s situation is the Board of Review case D71/91, where the defendant has failed to keep proper accounting records and file false profit tax returns in his unincorporated business. If Mr. Mui cannot prove to IRD that he has reasonable excuse for not filing correct tax returns as in the above case, then his appeal would most likely fail.
Court If Mr. Mui is successful in his appeal, the Commissioner or her deputy will decide whether or not to take the case further to the court. If the Commissioner has reasons to believe that Mr. Mui is evading tax the IRD may charge him criminal offense (e.g. LEE Kwok-keung v CIR).
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