Oct. 2013 - Case study: Section 82 of the Inland Revenue Ordinance

THE CASE

The Government has issued a press release concerning a prosecution case under Section 82 of the IRO. A former Senior System Engineer of a bank was convicted of four charges of evading property tax and salaries tax on 4 September 2013 at Fanling Magistrates’ Courts.The defendant owned and leased out a residential property during the years of assessment 2009/2010 and 2010/2011. He omitted to report the rental income of HK$190,800 and made false statements in claiming deduction of home loan interest of HK$234,500 in respect of the residential property in his tax returns for the two subject years. The total amount of tax evaded was HK$25,140 only.The defendant was sentenced on 2 October 2013 to perform 160 hours’ community service and fined a total of HK$75,420, which is equivalent to three times the sum of tax evaded.

PROSECUTION UNDER IRO

Tax evasion is a criminal offence and if the prosecutor can prove beyond doubts that a person acted willfully with intent to evade or to assist any other person to evade tax, on conviction under Section 82, the maximum penalty is three years’ imprisonment and a fine of HK$50,000 plus a further fine equivalent to three times the amount of tax evaded.

Currently, there are four tax investigation sections in the Inland Revenue Department (“IRD”), one of which is the prosecution section focusing on criminal investigation of tax evasion. The prosecution section will examine cases under investigation with prosecution potential and will refer the reports to the Department of Justice for legal advice if they consider that there is sufficient evidence to prove that the person acted with willful intent to evade or assist any other person to evade tax by:

(a) Omitting any taxable income from a tax return; or

(b) Making any false statement or entry in a tax return; or

(c) Making any false statement in connection with a claim of deduction or allowance; or

(d) Signing any untrue statement / return; or

(e) Giving any false answer to any question or request for information asked by the Assessor; or

(f) Preparing or maintaining or authorizing the preparation of false books or accounts or records; or

(g) Making use or authorizing the use of any fraud, art, or contrivances.

OUR OBSERVATIONS

One may think that the IRD is aiming at “big fishes”. It may be true for field audits and tax investigations but certainly not prosecutions under Section 82. The IRD considers that prosecutions under Section 82 serve the purpose of educating the public to enhance a high degree of compliance by taxpayers, rather than collecting back duty.

The IRD reported 29 convicted cases under Section 82 of the IRO since 2001 on its website. It may be interesting to note that 11 cases out of 29 concerned the omission or understatement of rental income, out of which 3 cases also involved the false statements in connection with claim for home loan interest notwithstanding only small amount of tax was involved in these cases.

OUR HONG KONG TAX AUDIT & INVESTIGATION SERVICES

Mazars has a team of professional tax consultants with IRD experience to assist clients in handling tax audits and investigations. We assist our clients througout the whole course of the tax audit and investigation – from performing review of clients’ tax position, accompanying clients to attend interviews with officers of the IRD, attending to enquiries from the IRD to formulating settlement proposals and negotiating with the IRD. In addition to helping clients to minimize the amount back tax and penalties required to settle the tax audits and investigations, we also aim at achieving early settlement of the cases so that our clients could focus back on their normal business as soon as possible.

For clients who would like to identify potential tax issues and take early actions before they become the IRD’s targets of tax audits and investigations, we provide tax health check services at the end of which recommendations for minimizing potential tax exposure are made.