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How the Inland Revenue Department begins an investigation case – How to investigate a tax avoidance case

After the tax bureau has opened the taxpayer’s file, to understand his business operations and personal asset affairs, whether it is an on-site audit or an in-depth investigation, the tax bureau staff will send a letter to invite the taxpayer to make an appointment for the first meeting. At that time, taxpayers will need to bring relevant information such as bank account monthly statements, company accounting books, investment documents, property transaction details, etc…

During the initial interview, the IRD investigators will explain to the taxpayers the penalties related to the tax regulations and ask the taxpayers to automatically inform taxpayers if they have reported incorrect income, expenses, or allowances on their tax returns. If the taxpayer cooperates so that the case can be settled as soon as possible, the Inland Revenue Department will consider this point as a mitigating factor when assessing the penalty.

After the meeting, the tax office staff will send a record of the meeting to the taxpayer. Taxpayers must read carefully as this record may become evidence in litigation. To confirm that there is no disagreement before signing the confirmation. Otherwise, for their own benefit, the taxpayer must submit the disagreement in writing to the Inland Revenue Department.

When investigating tax avoidance cases, the IRD personnel will pay special attention to the transactions between the contact companies. If a local company has a transaction with a related overseas registered company, the Inland Revenue Department auditors will investigate in detail:

• Are the fees paid by the local company to the overseas company deductible?

• What expenses does the local company have to generate profits for the overseas company

• Are overseas company profits subject to Hong Kong Profits Tax?

• Whether the transaction between the local company and the overseas company is conducted in accordance with general commercial principles

Inland Revenue Department staff will also be on the lookout for potential price-shifting schemes by local companies and contacts with non-Hong Kong residents. It appears that taxpayers with these plans will be requested by the Inland Revenue Department for documents for review. When checking documents, the IRD will:

• Analyzing the pricing offered for buying and selling goods or services

• Consider the contractual terms of the transaction, the type of goods or services

• Evaluate whether the transaction is reasonable according to the economic and commercial risk-taking situation at that time

The above information is for reference only. If in doubt, we welcome your tax inquiry

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