Hong Kong Tax – Field Audit and Investigation

The Field Audit and Investigation Unit of Inland Revenue Department (IRD is responsible for conducting tax field audits and investigations on businesses and individuals with a view to fight against possible tax evasion and avoidance.

In field audit, the IRD officers visit taxpayer’s business premises and examine the accounting records kept by the taxpayer in order to see if the reported profits are correct.

Tax investigation is an in-depth examination where tax evasion is suspected. It usually covers 6 years of assessment prior to the year of assessment in which the investigation commences. In the case of fraud or willful evasion, the investigation can be extended to cover 10 years of assessment.

Besides cases being selected on a random basis, the IRD has indicated that the field audit and investigation works are largely targeted at areas where non-compliance is apparent. Field audit or investigation is normally initiated where there are characteristics or indications of non-compliance, such as:

(a) the accounts of a company with heavily qualified auditors report;
(b) a business, having regard its nature of the business and operation, has an unreasonably low turnover or profit percentage;
(c) persistent failure to lodge or late lodgment of tax returns;
(d) failure to keep proper business records; and/or
(e) failure to provide material information as requested.

Moreover, where non-compliance is prevalent in a trade or industry, field audits or investigations are more likely undertaken in respect of the trade or industry concerned.

A field audit or investigation can be a consuming exercise. Get your accounts in order and avoid possible characteristics or indications of non-compliance.