tax
talk - March 2001
The Inland Revenue Department (IRD) has been paving the way for self-assessment. Apart from educating taxpayers to comply with tax rules and regulations, the IRD has also increased its manpower in the field and investigation divisions.
In general, the IRD will impose penalties on taxpayers when there is evidence of elements of dishonesty or fraudulence involving the use of artificial or fictitious devices, or where the transactions were false or unsubstantiated. The typical circumstances in which penalties will be imposed include:
- Omission or understatement of income/profits.
- Adjustment of false or fictitious expenses.
- Failure to notify chargeability to tax.
In addition, the IRD may take legal action against overly aggressive tax avoidance cases, provided there is sufficient admissible evidence to prove the taxpayer has committed an offence under sections 80(2) or 82 of the Inland Revenue Ordinance (IRO).
The scale of penalty to be imposed on a taxpayer is based on his degree of culpability and the nature of the evasion plus a computation of commercial restitution. The penalty ranges from 15-300 percent of tax undercharged.
Taxpayers are encouraged to disclose full information and work out reasonable proposals for the IRD's consideration. In recognition of their degree of cooperation, field audit/anti-avoidance and investigation cases closed within three to six months from the respective date of initial interview will likely be classified as full voluntary disclosure cases, and the penalty loading will be reduced accordingly.
The IRD will impose penalty on those taxpayers who, without reasonable excuse, fail to report their chargeability or submit tax returns on time. The penalty loading ranges from 10 percent of tax undercharged for the first offence, to more than 50 percent of the tax undercharged, where a taxpayer has committed three or more offences in five years.
To avoid unnecessary imposition of penalty by the IRD, taxpayers should comply with the requirements under the IRO.
Back to topThe Secan & Ranon Case
In December 2000, the Court of Final Appeal overturned the decision of the lower court that permitted Cheung Kong Group to deduct $1.4 billion in interest on the South Horizons and Laguna City developments. In its ruling, the court said that the interest incurred by Cheung Kong Group was not deductible until realisation of the development.
The two sides were disputing the payment deadline of interest deduction for tax purposes. Cheung Kong Group capitalised interest charges in the accounts - that is, interest charges were added on to work in progress, such that a big loss was not shown for the year of development. A portion of the capitalised interest was expensed in the accounts as cost of sale when actual sales were made. Despite the capitalisation, Cheung Kong Group claimed that the tax deduction should not be deferred until the actual sales, but that the capitalised interest was deductible in the year in which the interest was incurred.
The Court held that assessable profits must be ascertained in accordance with accepted principles of commercial accounting as modified to conform to the Inland Revenue Ordinance. Capitalisation of interest was one of the alternative bases permitted under accepted principles of commercial accounting. Where Cheung Kong Group had elected to capitalise interest, the IRD was both entitled and bound to ascertain the assessable profits on the same basis as adopted by the group. The interest was deductible only when it was expensed as cost of sales in the accounts. Cheung Kong Group could not bring forward deduction of the capitalised interest.
Back to topTo fulfil its commitments under the Sino-US bilateral agreement on its accession into the World Trade Organisation (WTO), and to implement the WTO agreement on Trade-related Investment Measures, the Chinese government, on 31 October 2000, amended the following three Foreign Investment Enterprise (FIE) incorporation laws:
1. The PRC Wholly Foreign-owned Enterprise Law,
2. The PRC Sino-foreign Equity Joint Venture Enterprise Law, and
3. The PRC Sino-foreign Co-operative Joint Venture Enterprise Law.
The three FIE incorporation laws have been changed in the following areas after the amendments:
- FIEs are no longer required to maintain a balance of foreign exchange. The current foreign exchange system monitored by the State Administration of Foreign Exchange is considered to be adequate.
- FIEs are no longer required to purchase raw materials, fuel and other materials from the domestic market in China, but can source raw materials on their own.
- FIEs are no longer required to export all or most of their manufactured goods out of China. The State still encourages FIEs to export their products, but they are now allowed to sell their products in the domestic market in China.
These amendments enable China to adjust its conditions on foreign investment to conform to the WTO requirements, and abolish those laws that are in conflict with WTO rules. The amendments to the three FIE incorporation laws came into effect on 31 October 2000, the date of their promulgation, and apply to both existing, and new FIEs, set up after this date. FIEs may import raw materials freely, to develop the domestic market in China, and are entitled to apply for 100 percent domestic sales in China.
Back to topThe 2000 US tax filing and payment deadlines are on their way. Taxpayers should note these deadlines to avoid interest and penalties. The following due dates apply to US citizens and residents living abroad:
US Tax Filing and Payment Deadlines
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Due dates |
Action |
|
April 16, 2001 |
|
|
June 15, 2001 |
|
|
August 15, 2001 |
|
|
September 17, 2001 |
|
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January 15, 2002 |
|
The Hong Kong fiscal year-end is approaching. The deadline for tax filings is one month after the tax return issue date. However, business taxpayers covered by the block extension granted to tax representatives are given the following due dates:
HK Tax Filings Extended Due Dates
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1) Corporations & Partnerships |
|
|
Profits tax returns |
|
|
Accounting year end |
Extended due dates |
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01/04/00 - 30/11/00 |
May 2, 2001 |
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01/12/00 - 31/12/00 |
July 31, 2001 |
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01/01/01 - 31/03/01 |
November 15, 2001 |
|
Employers' returns |
May 2, 2001 |
|
2) Individuals & Sole Proprietorships |
|
|
Composite tax returns |
|
|
- without sole proprietorship business |
June 30, 2001 |
|
- with sole proprietorship business |
October 3, 2001 |
The aim of Tax Talk is to alert taxpayers to recent developments. The information is general in nature and it is not to be taken as a substitute for specific advice. Accordingly, Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on information contained herein without further consultation with ourselves.
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