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HK Investigates False Reporting By Employers

by Mary Swire, Lowtax.net, Hong Kong
24 February, 2014

Responding to a question from Hong Kong's Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, said that the Inland Revenue Department relies on penalties to discourage the incorrect reporting of employees' remuneration by employers, but maintains no data in this regard.

Employers are required to file with the IRD an annual Employer's Return of Remuneration and Pensions (Employer's Return) in respect of each employee, furnishing information such as the employee's personal particulars and remuneration paid to the employee in the relevant year of assessment. However, recently, some taxpayers discovered that the information provided by their employer about them, including their annual income, was false. These employees may not know that this incorrect or falsified information has been provided to the IRD because employers may not share with their employee details of what they have submitted.

In the "Notes and Instructions" enclosed with Employer's Returns, the IRD reminds employers to provide a copy of the completed return to the employee concerned so as to facilitate the latter's completion of tax returns, but this is not a statutory requirement.

Asked whether the IRD actively investigates non-compliance, the IRD responded that it has adopted an "Assess First, Audit Later" system for tax assessment, i.e. assessments are issued based on the information reported in tax returns first and, assessments will then be selected for audit using a customized computer-assisted case selection program and risk assessment tools. It is only during an assessment that the IRD may request employees to provide relevant information to verify the correctness of the remuneration reported in the Employer's Returns.

According to Hong Kong's tax code, any person who fails to comply with the requirements specified therein, or makes an incorrect return or false report with intent to evade tax or assist any other person to evade tax, will be subject to heavy penalties. The maximum penalty for tax evasion is a fine of HKD50,000 (USD6,450), plus a further fine of three times the amount of tax undercharged, and imprisonment for up to three years.

When asked, the IRD could not provide statistical data for the past five years on the incorrect reporting of employees' remuneration, as the IRD does not keep such statistics. The IRD said it follows up informer's cases concerning the incorrect filing of Employer's Returns, and pursues penalty actions if it is discovered that an employer, without reasonable excuse, makes an incorrect return.

The IRD also confirmed that it will "continue its effort to combat tax evasion and tax avoidance and to reinforce the use of information technology, staff training and investigation techniques so as to enhance the overall effectiveness of its work."

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