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  Home > Policies > Penalty Policy

Penalty Policy

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A. Introduction

  1. The effective operation of Hong Kong's simple tax system with low tax rates requires a high degree of compliance by taxpayers.  It is also the primary duty of every taxpayer under law to file timely and accurate tax returns to the Inland Revenue Department ("the Department").
  2. If the requirements under the Inland Revenue Ordinance ("IRO") are not complied with, the relevant punitive provisions empower the Commissioner, depending on the nature and/or the degree of culpability of the offence and at his discretion, to institute prosecution, to compound or to assess additional tax (which is a form of penalty) in respect of the offence.  Factors which may affect the course of action to be taken include the strength of evidence, the amount of tax undercharged or would have been undercharged (hereinafter collectively referred to as "tax undercharged"), the sophistication of the scheme and the period of time over which the offence was committed.

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B. Penalty Provisions

1. Punitive actions under Part XIV of the IRO include:
   
 
(a) Prosecution under section 80(1) on any person as an employer who without reasonable excuse fails to comply with the requirements specified under section 52(2), (4) to (7) of the IRO.
   
  The offence is subject to a fine of $10,000 and the court may order the person convicted to do the act which he fails to do.
   
(b) Prosecution under section 80(1A) on any person who without reasonable excuse fails to comply with the record-keeping requirement under section 51C.
   
  The offence is subject to a fine of $100,000 and the court may order the taxpayer to do the act which he has failed to do within a specified time.
   
(c) Prosecution under section 80(2) on any person who without reasonable excuse:
   
 
(i) makes an incorrect return;
(ii) makes an incorrect statement;
(iii) gives any incorrect information;
(iv) fails to furnish a return in time; or
(v) fails to inform chargeability to tax.
   
  The offence is subject to a fine of $10,000 and treble the amount of the tax undercharged.
   
(d) Prosecution under section 82 on any person who wilfully with intent to evade or to assist any other person to evade tax:
   
 
(i) omits from a return any sum which should be included;
(ii) makes any false statement or entry in any return;
(iii) makes any false statement in connection with a claim for any deduction of allowance;
(iv) signs any untrue statement/return;
(v) gives any false answer to any question or request for information asked or made in accordance with the provisions of IRO;
(vi) prepares or maintains any false books of accounts; or
(vii) makes use of any fraud etc to evade tax.
   
  The offence is subject to a fine of $50,000 ($20,000 for an offence committed before 1 August 1994 and $25,000 for an offence committed between 1 August 1994 and 18 July 1995), and treble the amount of the tax undercharged and 3-year imprisonment.
   
(e) Compounding of any of the offences under sections 80 and 82 in lieu of prosecution [sections 80(5) and 82(2)].
   
(f) Assessing additional tax under section 82A in respect of any of the offences in lieu of prosecution [section 82A(1)].
   
2. Penalty actions under section 82A will be taken only after the Department has considered the taxpayer's representations, if one has been made, but found that there is no reasonable excuse for the alleged offence.
   
3. When invoking section 82A, the Commissioner or his deputy will issue a written notice to the taxpayer indicating his intention to assess additional tax and setting out the particulars of the alleged offence.  He will also invite the taxpayer to submit written representations with regard to the proposed additional tax assessment.  The taxpayer will be given a period of not less than 21 days from the date of service of the notice to make his representations.
   
4. The maximum amount of penalty provided under section 82A is treble the amount of the tax undercharged.
   
5. A taxpayer who has been assessed to additional tax has the right to appeal to the Board of Review ("the Board") within one month from the date of issue of the notice of the additional tax assessment. For details, please click here.

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C. Penalty Policy for Assessing Additional Tax under Section 82A

1. Offences which do not involve any wilful intent to evade tax are generally dealt with administratively by the imposition of monetary penalties in the form of additional tax under section 82A of the IRO.
   
2. In general, section 82A penalties are imposed by the Department on the following  three categories of cases:
   
 
(a) Profits Tax cases;
   
(b) Salaries Tax and Property Tax cases;
   
(c) Personal Assessment cases.
 
3. A field audit / investigation might have been conducted in relation to cases falling within the above categories.  Field audit / investigation conducted would heighten the chance of section 82A penalty being imposed and would have a material impact on the level of penalty assessed.
   
4. Taxpayers will be advised of the category and / or the group of penalty loading applicable to them in the relevant additional tax assessments.

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D. Section 82A Penalty Policy for cases involving Field Audit & Investigation

1. This part applies to profits tax, salaries tax, property tax and personal assessment cases where a field audit or investigation has been conducted.  The most common offences for this type of cases are -
   
 
(a) Omission or understatement of income or profits;
   
(b) Making incorrect statement in connection with a claim for any deduction or allowance;
   
(c) Failure to notify chargeability to tax.
   
2. The scale of penalty to be imposed on a taxpayer is basically a function of the nature of omission or understatement of income or profit, the degree of his co-operation or disclosure and the length of the offence period. For the purposes of maintaining consistency in penalty calculation, the following penalty loading table is used:

 

Category of Disclosure and Work Involved
Nature of Omission / Understatement (see Note 1 below) Full Voluntary Disclosure Disclosure with FULL Information Promptly on Challenge  Incomplete or Belated Disclosure Disclosure
Denied
Normal Loading Max. incl. C.R. Normal Loading Max. incl. C.R. Normal Loading Max. incl. C.R. Normal Loading Max. incl. C.R.
Group (a) 15 60 75 100 140 180 210 260
Group (b) 10 45 50 75 110 150 150 200
Group (c) 5 30 35 60 60 100 100 150
(see Notes 2 and 3 below)
Note 1 : Group (a) - cases where the taxpayers show intentional disregard to the law and adopt deliberate cover-up tactics involving the preparation of a false set of books, padded wage rolls and fictitious entries or multiple omissions over a long period of time.
   
  Group (b) - cases with slightly less serious acts of omission resulting from recklessness including the "hand in the till" type of evasion, failure to bring to account sales of scrap, and sheer gross negligence.
   
  Group (c) - cases where the taxpayers fail to exercise reasonable care and omit profits/ income such as lease premium, one-off commission, etc.
   
Note 2 : The penalty loading is expressed as a percentage of the tax undercharged.
   
Note 3 : For cases completed after 30 November 2003, the CR (commercial restitution) is at 7% per annum monthly compounded for periods up to and including 30 November 2003 and at the best lending rate monthly compounded for periods after 30 November 2003.
   
3. To conclude that a taxpayer has intentionally disregarded the provisions of the IRO requires a finding that the taxpayer consciously decided to disregard clear obligations imposed on him. Such a finding may be based on direct evidence on the taxpayer's intention (such as an admission) or may be inferred from the taxpayer's behaviour. Recklessness is gross carelessness. A taxpayer will be found to have behaved recklessly if his conduct clearly showed disregard of, or indifference to, consequences that are foreseeable by a reasonable person as being a likely result of his actions. It is not necessary for a finding of recklessness that the taxpayer should have been acting dishonestly, nor that the taxpayer intended to bring about the consequences that his actions caused. The reasonable care test requires a taxpayer to take the care that a reasonable, ordinary person would take in all the circumstances of the taxpayer to fulfil the taxpayer's tax obligations.
   
4. The percentages in the penalty loading table in paragraph D2 are for general guidance only.  The penalty imposed may be adjusted upwards or downwards depending on the circumstances of each case.  The following table contains the general aggravating and mitigating factors to be considered in determining the ultimate penalty:
   
Factors for Consideration Mitigating Aggravating

1. Background of the Taxpayer and Sophistication of the Business

  • being illiterate or having a low standard of education
  • sophisticated taxpayers
  • simple and unsophisticated business
  • established and sophisticated business

2. Attitude of the Taxpayer

  • genuine concern, seriousness, responsiveness and co-operation
  • undue delay or obstruction to the progress of audit and investigation
  • sincerity and willingness to compromise
  • passiveness and unwillingness to compromise
  • readiness to accept the discrepancy when quantified
  • evasiveness and belated acceptance of the discrepancy quantified

3. Time Span

  • casual or one-off understatement
  • multiple or repeated evasion acts over a consecutive number of years (e.g. persistent default in rendering returns and making of incorrect returns when pressed with estimated assessments)

4. Scale of Business and Quantum of the Understatements

  • relatively small cases
  • cases with substantial quantum of understatements having regard to the operating scale of the business
  • accepted discrepancy includes substantial contentious items
  • discrepancy consisting of specific fictitious items with cover-up tactics
  Depending on the facts peculiar to each case, the penalty may be scaled upwards or downwards to a maximum of 25% in the generality of cases.  Further adjustment would be made only when exceptional warranted circumstances exist.
   
5. Taxpayers are encouraged to make full voluntary disclosure of their offences and work out reasonable proposals for the Department's consideration.  Failing that and for the sake of expediency, field audit cases (including anti-avoidance cases) closed within 3 months from the date of initial interview as well as investigation cases closed within 6 months from the date of initial interview, can be classified as falling into the category of "Disclosure with Full Information Promptly on Challenge".
   
6. Cases often fall within the categories of "Disclosure with Full Information Promptly on Challenge" Group (a) and "Incomplete or Belated Disclosure" Group (b).  In the generality of cases, subject to various aggravating or mitigating factors, a penalty of about 100% of the amount of tax undercharged is considered appropriate in the following circumstances:
 
(a) where there has been no criminal intent and the taxpayer has totally failed in his or its obligations under the Ordinance; and
   
(b) where the Commissioner has had to resort to investigations or the preparation of assets betterment statements or has otherwise had difficulty in assessing the tax; and
   
(c) where the failure by the taxpayer to fulfill his or its obligations under the Ordinance has persisted for a number of years.
   
7. Strictly speaking, each offence should be considered separately. However, if multiple offences (not limited to those stipulated in paragraph 1 above) were committed by the taxpayer in respect of the same year of assessment, the Commissioner would normally penalize the taxpayer for the offence of the most serious nature only.
   
8. As section 82A makes no distinction between, among other things, transgression for understatement of income and late filing of return, the exposure to treble the amount of tax undercharged is applicable to both.  Furthermore, the rule mentioned in paragraph D6 above is equally applicable.  However, as most of the late return cases do not involve these factors, the level of penalty is much lower (see Parts E and F below).
   
9. For cases involving late filing of returns with no omission or understatement of income/profit detected after field audit or investigation, the penalty policy under Parts E to G is to be applied. However, a higher penalty loading will be applied if the taxpayer intentionally delays the submission of the returns pending the result of the field audit or investigation.
   
10. The penalty for a second or subsequent offence uncovered during an audit / investigation would be more severe.

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E. Section 82A Penalty Policy for Profits Tax Cases

1. This part applies to profits tax cases which do not involve any field audit or investigation.
   
2. For failure to notify chargeability to tax or failure to submit tax return in time, the Department will make reference to the following penalty loading scale:
   
 
(a) First offence
 
Group (i) 10% of the amount of tax undercharged.
   
Group (ii) 20% of the amount of tax undercharged, if the return is filed after two or more estimated assessments are issued.
   
(b) Second offence within 5 years
 
Group (i) 20% of the amount of tax undercharged.
   
Group (ii) 30% of the amount of tax undercharged , if the return is filed after two or more estimated assessments are issued.
 
(c) Third or subsequent offences within 5 years
   
 
Group (i) 35% of the amount of tax undercharged.
   
Group (ii) 50% of the amount of tax undercharged , if the return is filed after two or more estimated assessments are issued.
   
3. The above percentages are for general guidance only.  They may be adjusted upwards or downwards depending on the circumstances of each case.  The general relevant factors to be considered include the length of delay, the amount of tax involved, the reasons given for committing the offence,  the attitude of and the remedial steps taken by the taxpayer.
   
4. For the purpose of counting the number of offences within 5 years, "offence" means one in respect of which a warning letter, a compound, a court fine or a section 82A penalty assessment has been issued.
   
5. For omission or understatement of profits, the penalty policy under Part D will apply.    However, the fact that no field audit or investigation has been conducted will be considered as a mitigating factor.

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F. Section 82A Penalty Policy for Salaries Tax and Property Tax Cases

1. This part applies to salaries tax and property tax cases which do not involve any field audit or investigation.
   
2. For failure to notify chargeability to salaries tax or property tax or failure to submit such returns in time, the Department's policy is normally to compound such offences under section 80(5).  Save in exceptional cases, no penalty action under section 82A will be taken having regard to the large number of such cases and the relatively small amount of tax involved in each case. Nevertheless, in cases of repeated offences of the same nature or the degree of culpability of the offence in any particular case is considered serious, the Department may institute prosecution actions under section 80(2).
   
3. For simple and inadvertent omission or understatement of income or making an incorrect statement in respect of a claim for an allowance or deduction, the Department will make reference to the following penalty loading scale:
   
 
(a) First offence
   
  10% of the amount of tax undercharged.
   
(b) Second offence within 5 years
   
  20% of the amount of tax undercharged.
   
(c) Third or subsequent offences within 5 years
   
  35% of the amount of tax undercharged.
   
4. For blatant cases, e.g. a claim for dependent parent allowance in respect of a deceased parent, a higher percentage, currently at 100%, will normally be imposed.
   
5. The above percentages are for general guidance only.  They may be adjusted upwards or downwards depending on the circumstances of each case.  The general relevant factors to be considered include the time span over which the offence is committed, the amount of tax involved, the reasons given for committing the offence, the attitude of and the remedial steps taken by the taxpayer.
   
6. For the purpose of counting the number of offences within 5 years, "offence" means one in respect of which a warning letter, a compound, a court fine or a section 82A penalty assessment has been issued.

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G. Section 82A Penalty Policy for Personal Assessment Cases

  1. This part applies to personal assessment cases which do not involve any field audit or investigation.
  2. For making incorrect statements in respect of a claim for an allowance or deduction under personal assessment, the Department will make reference to the penalty loading scale in paragraphs F3 and F4.
  3. The fact that the taxpayer elects for personal assessment would not affect the applicability of the penalty policy under Parts D to F to appropriate cases. However, the amount of tax undercharged in such cases will be computed by reference to that charged under personal assessment.

 

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