February 24, 2023
Author: GetFreeTax
Introduction:
Our client is an e-commerce business that is engaged in manufacturing activities in China and has customers in the US and Europe. To facilitate transactions, they have established a Hong Kong entity to handle all legal flows and receive money in a Hong Kong bank account. This is because Hong Kong has a rigorous financial system and no limits on capital flows.
Before we go into the details of the tax issues, let’s look briefly at the Hong Kong tax system. Hong Kong adopts a territorial tax system, which means that only income that has a Hong Kong source is taxable in Hong Kong. Offshore income, which is income derived from a source outside Hong Kong, is not taxable in Hong Kong. This means that if our clients can demonstrate that their income is generated outside of Hong Kong, they will not be subject to Hong Kong tax.
Background:
Our client has filed tax returns in the past five years with an offshore claim. They took the position that their income is generated outside of Hong Kong and is not taxable in Hong Kong. However, Hong Kong Inland Revenue Department (IRD) challenged this position and issued an inquiry letter asking the client to explain why the income should not be taxed in Hong Kong.
To respond to this, our client engaged a local tax consultant who prepared an initial response to the questions raised by the Hong Kong IRD. The questions raised by Hong Kong IRD were focused on understanding the overall operations of the company, as well as the reasons for setting up the structure and running the transactions through Hong Kong. In addition to this, the tax authorities also asked the client to substantiate their offshore claim.
The local accountant prepared a response to the questions raised by Hong Kong IRD. In response to the answer submitted by the client, Hong Kong IRD issued another inquiry letter, requesting even more details in transactions, breakdowns, as well as simple documents for a number of transactions. The client again engaged the local accountant to prepare a response, which was lodged with the tax authority.
Hong Kong IRD was not satisfied with the response and issued another inquiry letter. At this point, the client reached out to us to request our help. The client was frustrated that there were a number of inquiries issued by Hong Kong IRD. However, the client failed to convince Hong Kong IRD of their offshore claim position.
Our Approach:
We looked at all the previous responses prepared, as well as the latest set of questions issued by Hong Kong IRD. We discussed with the client the change in the approach to respond to Hong Kong IRD questions. Instead of responding only to the questions raised in the inquiry by Hong Kong IRD, we went further and explained the overall supply chain as well as the manner in which the transactions are conducted. We requested the client to provide as many supporting documents as possible, which would help Hong Kong IRD understand the overall supply chain.
The client was keen on closing the matter with the tax authorities as soon as possible with our response. We reassured them that we would be able to convince Hong Kong IRD on the offshore position adopted by the company.
Outcome:
After the response was lodged, within one month, tax authorities came back with their agreement to the offshore claim. The amount of tax in question was USD 1 million, however, with our support, we managed to help the client save 100% of this.
We take a unique approach where we look at the reason for the challenge raised by the tax authorities. We then design an approach that can minimize the round of questions and inquiries raised by the tax authorities. Our main focus is always to close the matter as soon as possible. And we went beyond the scope of the questions raised by the HKIRD and provided them with a comprehensive overview of the client’s supply chain, as well as the manner in which the transactions were conducted. We also requested that the client provide us with as many supporting documents as possible, which would help the HKIRD understand the overall supply chain.
Our approach paid off, and within just one month of lodging our response, the HKIRD agreed to the offshore claim. The amount of tax in question was USD 1 million, but with our support, we managed to help the client save 100% of this amount.
At our firm, we take a unique approach to dealing with tax challenges. We first seek to understand the reason for the challenge raised by the tax authorities, and then design an approach that can minimize the round of questions and inquiries raised by the tax authorities. Our main focus is always to close the matter as soon as possible. We are able to do this because of our long-standing experience in handling such matters, our expertise in dealing with different tax jurisdictions globally, and our deep understanding of tax legislation.
We are delighted to have closed this matter with the HKIRD in just one reply and saved our client USD 1 million in tax obligations. Our client was thrilled with the outcome and has since engaged our firm for all their tax-related matters. In conclusion, offshore tax planning can be a complex and challenging area to navigate, especially when dealing with multiple jurisdictions. At our firm, we have the experience, expertise, and deep understanding of tax legislation to provide our clients with the best possible outcomes. We are committed to ensuring that our clients remain compliant with tax regulations and take a proactive approach to manage their tax affairs.
If you require assistance with your offshore tax planning, we would be happy to assist you.
Contact Us:
Email: hello@getfreetax.com
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