A listed company with a large group of subsidiaries received an inquiry from the Inland Revenue Department ("IRD") regarding the low onshore tax rate in Hong Kong.
The IRD had reviewed a few years of the annual reports of the listed company and might not fully understand the operations of the group and decided to challenge the overall taxable amount payable in Hong Kong for the past seven years.
The company engaged a large accounting firm to handle the cases for two years with the exchange of some letters and required a lot of submission of documents. The progress was slow.
When we were engaged, we took a proactive approach to understand IRD concerns and their discoveries. With that knowledge, we understood that the IRD might not fully understand the operation of the listed group and counted on the overall gross profit to assess the taxable amount for seven years.
However, from our in-depth on-site discussion with the management, we managed to find the relevant facts to prove to the IRD that most of the income was subject to mainland China tax and not subject to Hong Kong tax though some onshore issues were still being challenged.
In the end, we agreed with the IRD with the significant reduction of the initial taxable amount and the agreement with a lower penalty level with a good reason without receiving one more letter from the IRD.
Takeaway: when a client has a tax investigation, do understand the logic from the IRD first. To cooperate with the IRD to address their concerns and give them relevant information as quickly as possible. The longer the time drags on, the client may need to pay a higher penalty and interest.
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