Tax disputes arise mostly because there is a disagreement between the taxpayer and the Hong Kong Inland Revenue Department (IRD).

One of the most disputed areas is regarding source or taxability of income.

The Hong Kong tax system follows the territorial source system. That means only income arising in or derived from Hong Kong is subject to Hong Kong tax.

A controversial tax issue is whether an income is indeed sourced in Hong Kong and taxable, a.k.a. whether an offshore non-taxable status can be obtained.

A number of tax dispute cases regarding this matter are reviewed under tax audit and investigations each year. Some tax disputes and ex officio field audits have been put forward to the Board of Review (i.e. a tax tribunal) and Courts for determination.

Additionally, there is an increasing number of tax disputes regarding late objections against tax assessments issued by the Inland Revenue Department (IRD).

In this article, we dive deeper into these two causes of Hong Kong tax disputes.

Tax dispute on whether income is sourced in Hong Kong

Taxpayers often think that their income will not be liable to Hong Kong tax if their business activities are not carried out in Hong Kong, underpinned by the fact that they have no office, staff, customers and suppliers in Hong Kong.

However, the above is in general not enough for obtaining an offshore non-taxable status from the IRD.

It is also required, amongst others, to have sufficient and appropriate supporting documents, such as transaction documents and correspondences regarding its business operation.

In recent years, the IRD has been more and more stringent when reviewing an offshore non-taxable claim. Such claims would potentially be rejected by the IRD if amongst others:

• The information and evidence supplied to the IRD are insufficient, unfavourable or contradictive to the offshore non-taxable claim; and/or
• The reply to the IRD’s enquiries is not handled with proper care.

Likely to protect tax revenue, the IRD is sometimes quite aggressive in assessing offshore non-taxable claims. They might apply various tests, such as totality of fact tests, contract tests, and operation tests, with different emphases (e.g. substance over form or form over substance).

Is your offshore non-taxable claim denied by the IRD? Then you may lodge an appeal to the Commissioner of Inland Revenue and then to the Board of Review/Courts.

Throughout the process of claiming offshore non-taxable status, it is important to have in-depth and comprehensive knowledge of Hong Kong tax laws, in particular case laws.

The tax professionals at HKWJ Tax & Law have a successful track record of claiming offshore non-taxable status.

Tax audit and investigation regarding Hong Kong-sourced income

There is a possibility that an offshore non-taxable claim case will be transferred by the IRD to their tax field audit and investigation unit for review.

If the IRD finds that an incorrect tax claim is lodged, without reasonable excuse, penalties and/or interest will potentially be charged.

Read more about tax audits here.

Disputes on late objections

The IRD may issue estimated, additional, or protective tax assessments to taxpayers after the completion of the tax returns, or due to various other reasons such as:

• Late tax return filing; or
• Absence of tax return filing; or
• Upcoming 6 years’ statutory time limit for issuance of a tax assessment.

If you as a taxpayer do not agree with the tax assessment, you can lodge an objection to the IRD. However, this must be done within 1 month after the date of the notices of assessment.

In case you fail to object within 1 month, it will render the tax assessment final and conclusive.

However, there may be some situations where taxpayers are unable to lodge an objection by the 1-month deadline, for example:

• Failed delivery of the tax assessment;
• Issuance of the tax assessment was overlooked by the taxpayer or their tax representative(s);
• Sickness of the relevant person;
• Loss of taxpayers’ contacts by the tax representatives;
• Miscommunication between taxpayers and their tax representatives.

Nevertheless, some taxpayers will still lodge a late objection to the IRD. In that case, it is recommended to maintain all relevant documentary evidence to substantiate the late objection.

Whether such a late objection should be accepted by the IRD is often a dispute.

According to the tax laws and practice, it is uncommon for a late objection to be accepted, unless there are (very) exceptional reasons.

When not accepted, the tax demanded in the tax assessment will become final payable and a late payment surcharge will be imposed if the tax payment is in default.

To mitigate the chance of late objection disputes with the IRD, it is important to ensure your correspondence address with them is up-to-date.

When engaging a tax representative, ensure to appoint a competent and well-organised party as tax representative, as their role is crucial. Moreover, it is advised to maintain a good communication channel with your tax representative.

How HKWJ can help

Tax disputes such as obtaining an offshore non-taxable status or lodging a late objection have to be handled with care, to prevent further escalation.

As your legal and tax representative, HKWJ Tax Law & Partners can assist you in managing and resolving tax disputes with the IRD during any stage of the process.

Our services include but are not limited to:

• Assist with preparing and filing of an objection (including late objection)
• Assess and advise whether there is merit for litigation/whether litigation is appropriate
• Advise, assist and represent in appeal and litigation procedures

Contact us now for a confidential initial consultation with our tax professionals.