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Penalty Policy

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A. Introduction

  1. The Inland Revenue Ordinance (IRO) imposes requirements in relation to filing timely and accurate returns (including financial account information returns and country-by-country (CbC) returns); keeping and retention of records; establishing, maintaining and applying due diligence procedures for financial account information. For an effective implementation of the requirements, a high degree of compliance by the relevant persons or entities is necessary.
  2. If the requirements under the 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.
  3. This penalty policy statement explains how the Commissioner administers the punitive provisions, in particular those relating to additional tax under section 82A of the IRO.

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B. Penalty Provisions

  1. In relation to return, notification and record obligations, information requirements, etc., punitive actions under Part 14 of the IRO include:
     
    (a) Prosecution under section 80(1) against any person as an employer who without reasonable excuse fails to comply with the requirements specified under section 52(2) and (4) to (7).
     
    The offence is subject to a fine of $10,000 and the court may order the person convicted to do within a specified time the act which he has failed to do.
     
    (b) Prosecution under section 80(1A) against any person who without reasonable excuse fails to comply with the record-keeping requirement of business records under section 51C.
     
    The offence is subject to a fine of $100,000 and the court may order the person convicted to do within a specified time the act which he has failed to do.
     
    (c) Prosecution under section 80(1) against any person who without reasonable excuse fails to comply with the record-keeping requirement of rent records under section 51D.
     
    The offence is subject to a fine of $10,000 and the court may order the person convicted to do within a specified time the act which he has failed to do.
     
    (d) Prosecution under section 80(2) against any person who without reasonable excuse:
    (i) makes an incorrect return;
    (ii) makes an incorrect statement in connection with a claim for any deduction or allowance;
    (iii) gives any incorrect information in relation to any matter or thing affecting the person's or any other person's liability to tax;
    (iv) fails to notify refund of premiums paid under a Voluntary Health Insurance Scheme policy or qualifying deferred annuity policy after claiming deduction of the premiums;
    (v) fails to furnish a return in time; or
    (vi) fails to inform chargeability to tax.
      The offence is subject to a fine of $10,000 and a further fine of treble the amount of the tax undercharged. In respect of the offence in (v), the court may order the person convicted to furnish the return within a specified time.
     
    (e) Prosecution under section 82(1) against 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 or allowance;
    (iv) signs any untrue statement or return furnished under the IRO;
    (v) gives any false answer to any question or request for information asked or made in accordance with the provisions of the IRO;
    (vi) prepares or maintains any false books of accounts or records; or
    (vii) makes use of any fraud, etc. to evade tax.
      The offence is subject to a fine of $50,000, a further fine of treble the amount of the tax undercharged and 3-year imprisonment.
     
    (f) Compounding in lieu of prosecution under section 80(5) or 82(2) in respect of any of the offences in (a) to (e).
     
    (g) Assessing additional tax in lieu of prosecution under section 82A in respect of any of the offences (d) and (e), if applicable.
     
    The maximum amount of additional tax is treble the amount of the tax undercharged.
     
    For details, please refer to Part D (Field Audit & Investigation Cases)Part E (Profits Tax Cases)Part F (Salaries Tax and Property Tax Cases)  and Part G (Personal Assessment Cases)  below.
     
  2. In relation to relief from double taxation, exchange of information, transfer pricing requirements, advance pricing arrangement (APA), mutual agreement procedure (MAP) and arbitration, etc., punitive actions under Part 14 of the IRO include:
     
    (a) Prosecution under section 80(2D) against any person who without reasonable excuse gives any incorrect information in relation to any matter or thing affecting the person's or any other person's liability to any tax of a territory outside Hong Kong covered by an arrangement having effect under section 49(1A) which requires disclosure of tax information.
     
    The offence is subject to a fine of $10,000.
     
    (b) Prosecution under section 80(2E) against a person who knowingly and recklessly makes a statement that is misleading, false or incorrect in a material particular in relation to a self-certification that is required to be collected by a reporting financial institution under Schedule 17D for the purposes of automatic exchange of financial account information.
     
    The offence is subject to a fine of $10,000.
     
    (c) Prosecution under section 80(2G) against any person who without reasonable excuse:
    (i) fails to notify any adjustment under section 50AA(5) on foreign tax in relation to relief from double taxation;
    (ii) fails to provide information under section 50AAB(2) for the purposes of MAP or arbitration; or
    (iii) makes an incorrect statement, provides incorrect information or omits anything from a statement made or information provided in connection with any MAP or arbitration case under section 50AAB and the incorrect statement or information or omitted thing is material to the case.

    The offence in (i) is subject to a fine of $10,000 and a further fine of the amount of the tax undercharged.
     
    The offence in (ii) is subject to a fine of $10,000 and the court may order the person convicted to do within a specified time the act which he has failed to do.
     
    The offence in (iii) is subject to a fine of $10,000 and a further fine of treble the amount of the tax undercharged.
     
    (d) Prosecution under section 80(2L) against any person who without reasonable excuse:
    (i) fails to take reasonable steps to ensure that the person has knowledge about any adjustment and notify the adjustment under section 50AAM(11), 50AAN(3) or 50AAO(3) in relation to a claim for corresponding relief;
    (ii) makes an incorrect statement, provides incorrect information or omits anything from a statement made or information provided in relation to a claim for corresponding relief or an application for APA under section 50AAM, 50AAN, 50AAO or 50AAP(1), and the incorrect statement or information or omitted thing is material to the claim or application;
    (iii) fails to notify under section 50AAS a breach of critical assumption specified in an APA within a reasonable time after the breach or fails to provide all reports and other information that may be required to provide under an APA;
    (iv) provides incorrect information or omits anything from information provided in relation to a breach of critical assumption under an APA or any report and other information under section 50AAS that may be required to provide under an APA, and the incorrect information or omitted thing is material to the arrangement;
    (v) fails to keep records and data under section 50AAT in relation to an APA; or
    (vi) fails to provide information under section 3 of Schedule 17H in relation to an application for APA.

    Any of the offences in (i) to (iv) is subject to a fine of $10,000 and a further fine of the amount of the tax undercharged.
     
    The offence in (v) is subject to a fine of $50,000 and the court may order the person convicted to do within a specified time the act that the person has failed to do.
     
    The offence in (vi) is subject to a fine of $10,000.
     
    (e) Prosecution under section 80(2Q) against any person who without reasonable excuse fails to prepare and retain a master file and a local file under section 58C.
     
    The offence is subject to a fine of $50,000 and the court may order the person to do within a specified time the act which he has failed to do.
     
    (f) Prosecution under section 82(1AA), (1AAB) or (1AAC) against any person who willfully, with intent to evade tax or to assist any other person to evade tax, makes an incorrect statement, provides incorrect information, or omits anything from a statement made or information provided in connection with:
    (i) any MAP or arbitration case under section 50AAB;
    (ii) a claim for corresponding relief under section 50AAM, 50AAN or 50AAO;
    (iii) an application for APA under section 50AAP(1); or
    (iv) a notification of breach of critical assumption under an APA or any report and other information that may be required to provide under the APA under section 50AAS.

    and the incorrect statement or information or omitted thing is material to the MAP or arbitration case, claim, application or APA.
     
    The offence is subject to a fine of $50,000, a further fine of treble the amount of the tax undercharged and 3-year imprisonment.
     
    (g) Compounding in lieu of prosecution under section 80(5) or 82(2) of any of the offences in (a) to (f).
     
    (h) Assessing additional tax in lieu of prosecution under section 82A(1A), (1B) or (1H) in respect of any of the offences in (c)(i), (c)(iii), (d)(i) to (iv) and (f).
     
    The maximum amount of additional tax in respect of any of the offences in (c)(i), (d)(i) to (iv) and (f)(ii) to (iv) is the amount of the tax undercharged.
     
    The maximum amount of additional tax in respect of any of the offences in (c)(iii) and (f)(i) is treble the amount of the tax undercharged.
     
    (i) Assessing additional tax under section 82A(1D) or (1F) on any person in respect of whom the assessor has made an assessment or issued a computation of loss under section 50AAF(5) or 50AAK(9), and the assessed income is larger than, or the computed loss is smaller than, the amount stated in the person's tax return (relevant difference).
     
    The maximum amount of additional tax is the amount of the tax assessed on the relevant difference. The person is not liable to additional tax under section 82A(1G) if the person has made reasonable efforts to determine the arm's length amount under section 50AAF(1) or 50AAK(2).
     
    For details, please refer to Part H (Transfer Pricing Cases) below.
     
    (j) Prosecution under section 80B, 80C, 80D or 80E against any reporting financial institution, service provider or others for any of the following acts or failures in relation to section 50B, 50C, 50D, 51B(1AAAD), 51BA(2) or 51BA(6): failing to comply with a due diligence requirement; failing to furnish a financial account information return or notice; furnishing an incorrect return; failing to notify discovery of misleading, false or inaccurate information in a return; defrauding with intent in relation to financial account information; obstructing, hindering or failing to allow an assessor to inspect the compliance system and process; failing to rectify the compliance system and process, etc.
     
    The offence is subject to a fine of $10,000 if the person has no reasonable excuse and the court may order the person convicted to do within a specified time the act that the person has failed to do, if applicable.
     
    The offence is subject to a fine of $50,000 and 3-year imprisonment if the person has intent to defraud.
     
    If a reporting financial institution fails to furnish a return or rectify its compliance system and process under section 50C(1), 51B(1AAAD) or 51BA(6), the reporting financial institution will be subject to a further fine of $500 for every day during which the offence continues after conviction.
     
    The offence may be compounded in lieu of prosecution under section 80F(2).
     
    (k) Prosecution under section 80G, 80H or 80I against any reporting entity, service provider or others for any of the following acts or failures in relation to section 58E, 58F, 58H or 58L: failing to furnish a CbC return or notice; furnishing an incorrect return or notice; failing to notify discovery of misleading, false or inaccurate information in a return or notice; defrauding with intent in relation to CbC reporting; failing to keep and retain records in relation to a return, etc.
     
    The offence is subject to a fine of $50,000 if the entity or person has no reasonable excuse and the court may order the entity or person convicted to do within a specified time the act that the entity or person has failed to do, if applicable.
     
    The offence is subject to a fine of $50,000 and 3-year imprisonment if the person has intent to defraud.
     
    If a reporting entity fails to furnish a CbC return or notice under section 58E(1), 58F or 58H, the reporting entity will be subject to a further fine of $500 for every day during which the offence continues after conviction.
     
    The offence may be compounded in lieu of prosecution under section 80J(2).
     
  3. Before invoking section 82A, the Commissioner or his deputy will issue a written notice to the person indicating his intention to assess additional tax and setting out the particulars of the alleged offence. The person will be invited to submit written representations, and evidence, if required, with regard to the proposed additional tax assessment. The person will be given a period of not less than 21 days from the date of service of the notice to make his representations.
  4. A person who has been assessed to additional tax has the right to appeal to the Board of Review 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, and improper transfer pricing and profit attribution, 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 or transfer pricing examination might have been conducted in relation to cases falling within the above categories.  Such an audit / investigation or examination 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:
     
    This table shows the penalty loading table. This table basically consists of 9 columns. The header of the table consists of 3 logical levels. The first level having one column only is 'Category of Disclosure and Work Involved'. The first column is 'Nature of Evasion(see Note 2 below)'. The second and third columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Full Voluntary Disclosure'. The forth and fifth columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Disclosure with FULL Information Promptly on Challenge'. The sixth and seventh columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Incomplete or Belated Disclosures'. The eighth and ninth columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Disclosure Denied'. End of Summary.
    Category of Disclosure and Work Involved
    Nature of Omission / Understatement
    (see Note 1 below)
    Full Voluntary DisclosureDisclosure with FULL Information Promptly on Challenge Incomplete or Belated DisclosureDisclosure
    Denied
    Normal LoadingMax. incl. C.R.Normal LoadingMax. incl. C.R.Normal LoadingMax. incl. C.R.Normal LoadingMax. 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:
     
    This table shows the mitigating and aggravating factors in determining the level of penalty. This table basically consists of 3 columns. The header of the table consists of 1 logical level only. The first column is 'Factors for Consideration'. The second column is 'Mitigating'. The third column is 'Aggravating'. End of Summary.
    Factors for ConsiderationMitigatingAggravating

    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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H. Section 82A Penalty Policy for Transfer Pricing Cases

  1. This part only applies to profits tax cases which involves adjustments under section 50AAF(5) or 50AAK(9) of the IRO arising from a transfer pricing examination without any omission or understatement of income or profit.
  2. A person is liable to be assessed to additional tax under section 82A(1D) of the IRO of an amount not exceeding the difference between:
     
    (a) the amount of tax assessed on the basis of the amount of the person's assessed income under section 50AAF(5) or 50AAK(9); and
    (b) the amount of tax that would have been assessed if the amount of the person's income as stated in the person's tax return had been accepted for the purpose of assessment.
  3. A person is liable to be assessed to additional tax under section 82A(1F) of the IRO for a year of assessment (subject year) of an amount not exceeding the difference between:
     
    (a) the amount of tax assessed for the subject year taking into account the amount of the person's computed loss for an earlier year of assessment (year of loss) under section 50AAF(5) or 50AAK(9); and
    (b) the amount of tax that would have been assessed for the subject year if the amount of the person's loss as stated in the person's tax return for the year of loss had been accepted for the purpose of assessment.
  4. Section 82A(1G) of the IRO provides that a person is not liable to be assessed to additional tax under section 82A(1D) or (1F) if the person proves that the person has made reasonable efforts to determine the arm's length amount under section 50AAF(1) or 50AAK(2).
  5. The scale of penalty to be imposed on a person is basically a function of the nature of transfer pricing treatment and the efforts spent to determine the arm's length amount. In the present context, transfer pricing treatment refers to the determination of income or loss in respect of transactions between associated persons under section 50AAF(1), or the attribution of income or loss to a permanent establishment under section 50AAK(2). For the purposes of maintaining consistency in penalty calculation and in the generality of cases, the following penalty loading table is used:
     
    Nature of Transfer Pricing Treatment
    and Efforts Spent by Taxpayer
    Normal Loading Maximum including
    Commercial Restitution
    No documented transfer pricing treatment 50 75
    Documented transfer pricing treatment without reasonable efforts to determine the arm's length amount 25 50
    Documented transfer pricing treatment with reasonable efforts to determine the arm's length amount Nil Nil
  6. Where a person does not have a documented transfer pricing treatment, it may not be necessary to consider the reasonable efforts test in most cases as the person would find it difficult, if not impossible, to prove that reasonable efforts have been made to determine the arm's length amount. This results in the person being liable to a higher additional tax under section 82A(1D) or (1F).
  7. Where a person has a documented transfer pricing treatment but does not satisfy the reasonable efforts test, the person will be liable to a lower additional tax under section 82A(1D) or (1F).
  8. Where a person has a documented transfer pricing treatment and satisfies the reasonable efforts test, the person will not be liable to additional tax under section 82A(1D) or (1F).
  9. In order to have a documented transfer pricing treatment, a person must have records that:
     
    (a) are prepared before the time the person submits its tax return for the relevant year of assessment or where the documentation requirements under section 58C of the IRO apply, no later than 9 months after the end of the relevant accounting period of the person;
    (b) are in English or Chinese, or readily accessible and convertible into English or Chinese;
    (c) explain the particular way in which section 50AAF or 50AAK applies, or the reason why the provision does not apply, to the relevant matter; and
    (d) explain why the application of section 50AAF or 50AAK to the relevant matter in that particular way best achieves the consistency with the OECD rules (as defined under section 50AAC of the IRO).
  10. Further, to have a documented transfer pricing treatment, the records must allow each of the following to be ascertained:
     
    (a) the arm's length provisions in respect of the relevant matter;
    (b) the particulars of the method used for and the comparable circumstances relevant to identifying those arm's length provisions;
    (c) where records explain the application (as opposed to the non-application) of section 50AAF or 50AAK, the records must also explain the result that the application in that particular way has as compared to the non-application;
    (d) for section 50AAF or 50AAK – the actual provisions in respect of the relevant matter; and
    (e) for section 50AAF or 50AAK – the actual profits and the arm's length profits as well as the particulars of the activities and circumstances to the extent they relate to the relevant matter.

    Any mechanical process or method without supporting documentation and/ or calculation resulting in unintended or unjustified outcome in the particular circumstances would not be accepted as a documented transfer pricing treatment.
  11. In deciding whether additional tax should be imposed under section 82A(1D) or (1F), the general consideration is whether the person has made reasonable efforts to have a documented transfer pricing treatment for determining the arm's length amount.
  12. A person has made reasonable efforts to have a documented transfer pricing treatment if, objectively considering the person's risk of not complying with the arm's length principle, and taking account of the person's relative resources, the person has taken all reasonable steps, in the particular facts and circumstances.  For more guidance on the reasonable efforts test, please refer to the Departmental Interpretation and Practice Notes No. 59 – Transfer Pricing Between Associated Persons.
  13. Having regard to any aggravating or mitigating factors, the penalty determined in accordance with the penalty loading table in paragraph 5 may be adjusted upwards or downwards to a maximum of 25% in the generality of cases.
  14. Taxpayers are encouraged to make full voluntary disclosure of transfer pricing shortfalls and work out reasonable proposals for the Department's consideration. In general, the amount of additional tax as determined above may be increased where a person:
     
    (a) delays or obstructs the progress of a transfer pricing examination;
    (b) becomes aware of the transfer pricing shortfall amount after the return is submitted and does not inform the Department within a reasonable time; or
    (c) has been assessed to additional tax under section 82A(1D) or (1F) or has been assessed under section 50AAF(5) or 50AAK(9) previously;

    and the amount of additional tax may be reduced where a person:

    (d) informs the Department voluntarily the transfer pricing shortfall amount after the return is submitted and before a transfer pricing examination is carried out;
    (e) resolves all the transfer pricing issues within 6 months after being informed that a transfer pricing examination has commenced; or
    (f) co-operates fully with the Department during the transfer pricing examination process by providing all the necessary documents and information, and shows readiness to accept the amount of adjustment.