Hong Kong Companies Accounting Issues & Declaration of Offshore Income. TAI Kwok Yin Aileen ACCA (HK)

Transcription

1 Hong Kong Companies Accounting Issues & Declaration of Offshore Income TAI Kwok Yin Aileen ACCA (HK) 1

2 Contents I. Accounting Issues of Hong Kong Companies When the company need to prepare the accounts Information and Documents need for preparation of accounts II. Tax Compliance matters Profits Tax Return, Employers Return, Property Tax Return III. Declaration of Offshore Income in Hong Kong Liability to Profits Tax in Hong Kong Apportionment of profits Source of Different Specific profits Deemed Hong Kong sourced Trading receipts 2

3 Accounting Issue of Hong Kong Companies When the Hong Kong company needs to prepare the accounts? When the company had commenced business or trading, either operations in Hong Kong or outside Hong Kong Under Companies Ordinance (S121), company needs to prepare and have its accounts audited by a Hong Kong CPA annually. The 1 st accounts : set from the Date of Incorporation (DOI) up to 18 months. If incorporated 1 Jul 09, 1 st set can be 31 December The next accounts should be 31 Dec

4 Accounting Issue of Hong Kong Companies Information and Documents need for preparing of the accounts Information Choice of Functional and presentation currencies. Major : USD, GBP, CAD, SFR, JPY, AUD, EUR, RMB. Internal control and operation flow charts with personnel involved. Documents (Business records) to prove the occurrence of each trans Trade receivables and Sales Order, Invoice, Delivery Docs. Trade payables and purchases Order, Invoice, Delivery Docs. Cash and bank balances (for receipts and payments) Statements & advices, invoices, Petty cash records and vouchers. Fixed assets (property, plant and equipment) Invoices/receipts Income statement, Investments, Inventories and Borrowings 4

5 Tax Compliance matter of Hong Kong Companies Tax Compliance, Part IX of IRO : Obliged to furnish the IRD with return and provide all the information IRD required ensure IRD has information to determine tax liability. Require to furnish a return for : profits tax (Profits Tax Return); Salaries tax (Individual Tax Return) Information from employer (Employer Return); Property tax (Property Tax Return); Provisional tax details of income that will accrue during a specified future period; or Personal assessment (for Individual) 5

6 Tax Compliance matter of Hong Kong Companies Failure to lodge return before the due date : Issue the estimated assessments; Commence penalty proceedings; Raise the additional assessment. Still needs to complete and submit the return, together with the supporting documents and information. 6

7 Tax Compliance matter of Hong Kong Companies Profits Tax Return ( PTR ) Issue and the due date IRD issues the 1 st PTR 18 months after incorporation. Due date : within 3 months from the date of PTR issued. The annual PTR issues on 1 April of each year. Due date : 1 May. Extension available depending on the financial year end date : 1 April 30 Nov (N code) : No extension, due date 1 May. 1Dec 31Dec(Dcode) 15Aug 1 Jan 31 Mar (M code) 15 Nov The IRD may issue the PTR to BVI or other overseas companies. 7

8 Tax Compliance matter of Hong Kong Companies Profits Tax Return ( PTR ) Notification to IRD Did not received PTR No need to request the issue of PTR nor to submit the annual account However, if has the assessable profits chargeable to Profits Tax Required to inform the Commissioner in writing within 4 months after the end of the basis period IRD will issue a PTR IRO S51(2). Failure to notify IRD will face penalty action if no reasonable excuse. 8

9 Tax Compliance matter of Hong Kong Companies Profits Tax Return ( PTR ) How to complete the PTR? If the company had not commenced business Nil PTR The fiscal year end is 31 March. But, PTR based on the audited accounts of the company s accounting period ending. S51C : Must keep business record for at least 7 years. 1 st set of accounts > 12 months (up to 18 months) related to 2 years of assessment > 2 PTRs need to submit based on 1 st set of accounts profits time apportioned of 2 tax assessment years Claim of offshore profits the claimed amount filled at 9.1 of PTR & Financial data in Part 11 extracted from audited accounts. 9

10 Tax Compliance matter of Hong Kong Companies Profits Tax Return ( PTR ) What documents we need to file The duly signed PTR either by secretary or manager or director The duly signed audited accounts by the independent auditor No audit by BVI or overseas company, the company s accounts should be lodged with its return together with a certificate from the company s tax representative. Tax computation based on the duly signed audited accounts Also required for BVI or overseas companies. Show clearly the amount of offshore profits deducted from the assessable profits in the tax computation 10

11 Tax Compliance matter of Hong Kong Companies Employers Return of Remuneration and Pensions Form B.I.R.56A ( ER ) S52(2) Issue and the due date IRD issues the 1 st ER 18 months after incorporation. Due date : within 1 month from the date of ER issued. The annual ER issues on 2 April of each year. Due date : 2 May. How to complete the ER and what forms we need to file with? If no employees Nil BIR56A (without IR56B form) If has employees BIR56A + IR56B form (1 for each) BIR56A how many employees and IR56B form name, place of residence and the full amounts of remuneration employee received. Both of BIR56A and IR56B forms need to be signed when submission. 11

12 Tax Compliance matter of Hong Kong Companies Employers Return of Remuneration and Pensions, Form B.I.R.56A ( ER ) Obligations of Employers (under Inland Revenue Ord) Employing taxpayer Required to furnish IR56E form within 3 months of engagement of any new employee <S52(4)> Upon ceasing to employ taxpayer Must notify the Commissioner in writing by IR56F form not less than 1 month before the termination of service of any employee <S52(5)> Upon employee leaving Hong Kong S52(6) : Must notify the Commissioner in writing by IR56G form by not later than 1 month before the employee s expected date of departure S52(7) Required to give notice to the IRD to withheld all moneys payable to the employee for a period of 1 month from the date on which the IR56G was given. 12

13 Tax Compliance matter of Hong Kong Companies Property Tax Return ( PPTR ) Issue and the due date If the company owned (solely or jointly or co owned) the rental property situated in Hong Kong complete and file the PPTR within 1 month. Obligation If has the assessable profits chargeable to Property Tax Required to inform the Commissioner in writing within 4 months after the end of the basis period IRD will issue a PPTR IRO S51(2). Failure to notify IRD will face penalty action if no reasonable excuse. Keep records of not less than 7 years IRO S51D 13

14 Tax Compliance matter of Hong Kong Companies Failed to fulfill obligations offences Failure to comply with requirements to make returns and provide accurate information Failure to comply with information requirements Maximum : Level 3 fine HK$10,000 May be ordered to fulfill his or her obligations within a specified time. Incorrect information (lack of intention to evade tax) Alevel3fine HK$10,000; Further fine of treble the amount of tax undercharged 14

15 Tax Compliance matter of Hong Kong Companies Failed to fulfill obligations offences Fraud and wilful evasion Summary Conviction ALevel3fine HK$10,000; Additional fine of up to treble the amount of tax undercharged; and Imprisonment for 6 months Convicted on indictment ALevel5fine HK$50,000; Additional fine of up to treble the amount of tax undercharged; and Imprisonment for 3 years 15

16 Declaration of Offshore Income in Hong Kong Liability to Profits Tax in Hong Kong (S14(1)) Hong Kong s basis of taxation on profits from business Adopts a territorial basis Pre conditions for liability to Profits tax (Under IRO) Engaged in a trade, business or profession; Trade Every trade and manufacture; and every adventure and concern in nature of trade (Ord). Badges of trade : Six identifying features to consider engaging a trade. Business Agricultural undertaking; poultry and pig rearing; the letting or sub letting of premises by the company; and the sub letting by any other person of premises held under a lease or tenancy other than from the government S2(1) of IRO. Profession Involves the idea of an occupation requiring either purely intellectual skill or of any manual skill, or surgery. Carried on that trade, business or profession in Hong Kong; and Whether the business activities were carried out in Hong Kong, such as Agent Their profits must have arisen in or been derived from Hong Kong Source of Profits 16

17 Declaration of Offshore Income in Hong Kong Liability to Profits Tax in Hong Kong (S14(1)) Cont d Basic principles for determining the source of profits (DINP21) Matter of fact It is a hard, practical matter of fact depending on nature of the profits and the transactions which give rise to profits. The operations test Broad guiding principle : One looks to see what the taxpayer has done to earn the profits and where he has done it Gross profits from transactions By reference to the gross profits arising from individual transactions. Only consider those business activities which directly produce the gross profits. Place where decision is made The place where day to day investment/business decisions take place (not usually the deciding factor) Business presence overseas No business presence overseas and the principal place of business is located in Hong Kong, profits earned are likely to be chargeable in Hong Kong. 17

18 Declaration of Offshore Income in Hong Kong Apportionment of profits The traditional approach Apportionment is not an option and that the dominant geographical source must be determined. Possibility of apportionment introduced where the gross profits arising from an individual transaction from different locations, the source of profits must be located. IRD s acceptance of apportionment Applied for manufacturing profits or service fee income and not for trading profits. In general, made on a 50:50 basis. Claims for general expense must be scaled down in the ratio that the offshore profits bear to the total. 18

19 Declaration of Offshore Income in Hong Kong Source of Specific profits Profits of trading firms (wholly taxable or non taxable) Theplacewherethecontractsforpurchaseandsalesareeffected(legally executed, covers negotiation, conclusion and execution) Following recent Court of Appeal judgment, look at the totality of facts. The relevant facts are considered : the nature and quality of the activities Irrelevant facts are also considered General practice Contracts of purchase and sales effected in HK taxable in HK Either the contract of purchase or the contract of sales effected in HK > taxable in HK However, the totality of facts to determine the source of profits. Sales made to HK customer = contract effected in HK taxable in HK Effecting purchase and sale contracts not required travelling outside & carried out in HK via telephone, or other electronic means (such as internet) contracts effected in HK taxable in HK 19

20 Source of Specific profits Cont d Profits of manufacturing business The place of manufacture Declaration of Offshore Income in Hong Kong Profits from sales of goods manufactured in HK taxable in HK Profits from sales of goods manufactured partly in HK and partly outside only taxable the part of profits that derived from the sales of goods manufactured in HK The place where the manufactured goods are sold is not relevant. Manufacturing under a processing or assembling arrangement with an entity in the Mainland of China Hong Kong manufacturer : materials, technical know how, management, production skills, design, skilled labour, training, supervision, etc. Mainland entity ; the factory premises, land and labour for processing, manufacturing or assembling the goods. allow apportionment of profits on the sale of the good concern on 50:50 basis Manufacturing by an independent sub contractor in the Mainland of China Arm s length basis & minimal involvement not taxable of Manufactured profits. Taxable for the sale of the goods 20

21 Declaration of Offshore Income in Hong Kong Source of Specific profits Cont d Sale or purchase commission Theactivity:thearrangementofthebusinesstobetransacted the place where activities performed. Performed in HK taxable in HK Other profits (from real estate, securities, travel services, etc) Rental receipts from real property taxable if property located in HK Profits from sale of real property taxable if property located in HK Profits from purchase & sale of listed shares taxable if stock exchange where the shares are bought and sold is located in HK Profits accruing to a business (other than a financial institution) from the sale of securities issued outside HK and not listed on exchange taxable if contracts of purchase and sale are effected in HK Service fees taxable if services performed in HK 21

22 Declaration of Offshore Income in Hong Kong Source of Specific profits Cont d Other profits (from real estate, securities, travel services, etc) Cont d Royalties received by a business taxable if relevant activities carried out in HK Royalties on intellectual property received from HK by a non resident taxable if intellectual property is used in HK Interest accruing to a business (other than a financial institution) taxable if the lender provided funds in HK to the borrower 22

23 Declaration of Offshore Income in Hong Kong Deemed Hong Kong sourced Trading receipts (S15(1)) Receipts from the exhibition or use of films, tapes or recordings Royalties from intellectual property rights Grants, subsidies or other financial assistance Rent from leasing movable property Interest income Refunds of contributions to retirement schemes Gains from bills of exchange of certificates of deposit 23

24 Declaration of Offshore Income in Hong Kong Deemed Hong Kong sourced Trading receipts (S15(1)) Cont d Consideration for the transfer of the right to receive income Debts incurred then released 24

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