Previously in our article of Frequently Asked Questions About Auditing and Profit Tax Return, we had a brief introduction towards Profit Tax Return. Even though Hong Kong is named as one of the most tax-friendly systems in the world, let’s face it, as a business owner, it remains pretty complicated. You may even be subjected to financial penalties for failing to file the correct documents or within the correct time frame. In this article, we will take a closer look at Hong Kong’s profit tax system and aim to alleviate your confusion and get you prepared for the audit.
What you will learn from this article:
1. Hong Kong’s Two-tiered profits tax regime
The Inland Revenue Department (IRD) has introduced a two-tiered profit tax rate regime on December 29, 2017. With the aim to maintain a simple and low tax regime, as well as promoting economic development, the introduction of the two-tiered profit tax regime intends to reduce the tax burden on enterprises, with a particular focus on SMEs in Hong Kong.
For corporations, the tax rate for the first HK$2 million of assessable profits will be 8.25%, and the remaining profits will be taxed at the existing 16.5% tax rate.
2. Profits Tax Return Filing Timeline
Corporations, partnerships, trustees, and bodies of persons facilitating trade, profession or business in Hong Kong are legally required to be subjected to tax on all profits derived from Hong Kong.
If you have recently formed a company in Hong Kong, you will receive your first Profit Tax Return approximately 18 months after the date of incorporation.
You are required to submit your Tax Return (BIR51 or BIR52 or BIR54) along with an audit report to the IRD (The Inland Revenue Department) within 3 months from the day of the issue. Thereafter, your Profit Tax Return will be issued by the IRD on the first working day of April every following year. You are required to complete and file an audit report every year, within 1 month of the date of issue.
3.1. Profits Tax Return
There are three series of Profits Tax return forms:
- Profits Tax Return – Corporations (BIR51)
- Profits Tax Return – Persons Other Than Corporations (BIR52)
- Profits Tax Return – In Respect Of Non-Resident Persons (BIR54)
3.2. Audit Report
- A certified copy of the Statement of Financial Position / Balance Sheet
- Profit & Loss Accounts
- Tax computation
In Hong Kong, only a Certified Public Accountant (CPA) can perform the audit. In order for the CPA to perform a proper audit, correct management accounts are needed.
3.3. Checklist of Required Documents
- Audited financial statements of subsidiary companies
- Copy of original Profit Tax Return from the IRD
- All financial statements
- All sales/service agreements, employment contract, tenancy agreement
- All purchase invoice
- Receipt for all expenses
- Bank statements (The auditor might ask you to sign a confirmation form which will be sent to the bank to obtain the bank balance)
- All sales invoices with the corresponding receipt
- Copy of any special license like SFC License and Property Agent License (if any)
- Copy of company registration documents:
- Updated business registration certificate
- Incorporation certificate
- Articles of association
- Annual Return
An audit report is required even if the company has not generated any income. If the company has not yet commenced, you are allowed to report to the IRD as “not yet commenced” by the absence of an audit report. Once the business has been launched, you will be required to submit back the first and subsequent years’ financial statements to the IRD.
4. Basic Period
Profit tax is levied based on the assessable profit, excluding deductible expenses and tax-exempt incomes.
While dividends (profits arising from the sale of capital assets and interest on deposits placed in authorised financial institutions) can be exempted from tax, there are other expenses that can be deducted from the assessable profit.
Expenses that are incurred by the taxpayer in the production of chargeable profits are allowed as deductions (Reference to section 16 of the I.R.O.).
Generally speaking, business expenses relating to your day to day business operations are deductible as your operating expenses, for example:
- Rent paid on business premises for business premises
- Light, water and telephone charges for business premises
- Employer’s mandatory and voluntary contributions to MPF schemes (Deduction limited to 15% of the total emoluments)
- MPF mandatory contributions if self-employed (applicable to the sole proprietor or partner)
- Severance or long service payments at the termination of employment
- Bad or doubtful debts
- Repairing costs for premises, machinery and plants used in producing profits
- Replacement costs of implements and utensils used in producing profits
- Donations to approved charities valuing no less than $100 but not exceeding 35% of the adjusted assessable profits.
6. Penalties for Late Submission
The Inland Revenue Department (“IRD”) may take punitive actions for failure to file the profits tax return by the due date:
- Compound Offer
- Additional Tax (which is a form of penalty) in respect of the offence
- Estimated Assessment