Is a company officer liable for additional tax under section 82A(1)(A) of the IRO for signing an incorrect corporate tax return?

The Court of Final Appeal has held that in general, the person who files a tax return is the person who is required to file a tax return. Under the system of the Inland Revenue Ordinance, an assessor will give a notice in writing to a person under section 51(1) requiring that person to “furnish” a return. In this case, the notice was given to the company and not to the directors of the company.

The Court of Final Appeal held in 2022 that a director signing a tax return for a corporation is an act of the “corporation” itself, not an act of an “agent on behalf of the corporation”. Therefore, even if a company files an incorrect return without reasonable excuse, the director is not required to sign the return under section 82 of the IRC.

Therefore, even if a company files an incorrect return without reasonable excuse, the director is not subject to a penalty under section 82A(1)(a) of the IRO.

Background

Koo Ming Kown & Murakami Tadao v Commissioner of Inland Revenue [2022]

A local limited company reported that it paid management fees to its parent company for three years of assessment (1996/97, 1997/98 and 1999/2000). The management fee was stated by the company as a deductible expense in the computation of assessable profits for profits tax purposes. The directors of the company also sign the tax returns as directors in each year.

The profits tax calculation is made by the Inland Revenue Department (“IRD”) on the basis of the tax returns and the company pays tax based on the IRD’s assessments.

In 2002, after a tax audit of the company, the IRD concluded that the company’s tax returns for the above-mentioned tax years were incorrect. The company objected to the IRD’s decision and challenged the tax assessment. In June 2012, the company was ordered by the court to go into liquidation.

The IRD invoked section 82A(1)(a) of the IRO to charge the two directors of the company with the additional tax. The reason given by the IRD was that the directors had filed incorrect tax returns on behalf of the company, in which the taxable income was wrongly understated.

The directors appealed to the Court of First Instance against the assessment of the additional tax and obtained a judgment in their favour. The Court of First Instance ruled that it was the company, not the directors, who were required to file the required returns, and that the returns were in fact filed by the company. Therefore, the director was not liable for the additional tax under the IRO.

The IRD appealed the decision to the Court of Final Appeal.

Controversy

The main issue in this litigation is whether the officers of the company (e.g. secretary, manager, director and liquidator) who actually signed the tax return are liable for the additional tax when the corporate taxpayer’s tax return is proved to be incorrect.

The Court of Final Appeal has to decide on the following issues:

Does section 82A of the IRC allow the Commissioner to assess back tax to the secretary, manager, director or liquidator (the signatory) who actually signed the incorrect return of the corporate taxpayer? In particular:

 Does the signatory “file” the return on behalf of the taxpayer in his or her personal capacity, taking into account all the circumstances (including the actual wording used in the return) and the legislative background and purpose? and

Does the Inland Revenue Ordinance (Cap. 112) “require” the signatory (i.e. the secretary, manager, director or liquidator of the taxpayer) to file the return on behalf of the taxpayer?

Court of Final Appeal Decision

The Court of Final Appeal ruled in 2022 that all of the above issues were negated.

The CFA ruled that under section 57(1) of the IRO, the acts required to be done by the company under the IRO are to be done by the directors and others “for their account”, but the section does not require the respondent to file the company’s tax returns. The reasons are: (i) section 57(1) relates to all persons of a particular description and does not specifically specify the directors of the company as the persons who are required to file tax returns in respect of the company; (ii) the wording of “responsible” in section 57(1) does not impose liability for any act and is intended to facilitate the exercise by the tax authorities of their functions in relation to corporations and to bind certain persons. (ii) the wording of “responsible” in section 57(1) does not impose liability for any act which is intended to facilitate the exercise of the functions of the tax authorities in relation to the corporation and to give certain persons the authority to bind the corporation for the purposes of the IRO; and (iii) there are provisions in the IRO which expressly require certain persons to act on behalf of others (including filing tax returns), which was not the case in this case.

The CFA also held that section 82A(1)(a) of the IRO was not intended to maximize the scope of a company’s liability for inaccurate tax return filings because the Ordinance does not impose liability on directors who are not signatories to tax returns. If, as the IRS argued, the legislative intent was to expand the scope of liability under section 82A(1)(a) as far as possible, it is difficult to explain why the emphasis was placed on the actual element of signing the return.

The Court of Final Appeal ruled that the company’s tax return was not required and was not filed by the directors on behalf of the company, and therefore dismissed the IRD’s appeal.

Conclusion

Filing a tax return for a corporation is an important responsibility and needs to be handled with care. If you have any questions, please consult with a tax or legal professional.

This ruling does not mean that company officers are not responsible for filing tax returns for their companies. There are other provisions in the IRC that hold officers personally liable for illegal acts committed by the company. For example, sections 80(4) and 82 of the IRO impose liability on a person who aids, abets or incites a corporation to commit a corporate offence. Offences include assisting a company to deliberately evade tax.