Consequences of Late Tax Return Submission for Hong Kong Companies

JULY 2, 2023

Submission of Profits Tax Return

According to Hong Kong tax law, all companies are required to submit a profits tax return. This form is typically issued by the Inland Revenue Department (IRD) on the first business day of April each year. Companies should return the completed form to the IRD within a month of its issuance.

Late Submission and Penalties

When the tax return is not submitted before the deadline, the IRD will issue a notice of additional charges. The initial additional charge is 5% of the unpaid tax and is calculated 30 days after the due date. If the tax is not paid within six months after the due date, an additional 10% charge may be imposed.

The IRD may also initiate legal proceedings against the taxpayer under Section 80(2) of the Tax Ordinance. Once convicted, the taxpayer may face a maximum fine of HKD 10,000, plus a possible additional fine of three times the amount of tax unpaid.

Profit Estimation by IRD

If a Hong Kong company fails to submit the profits tax return on time, the IRD may independently estimate the company's taxable profit, which is known as a "provisional estimation".

Under these circumstances, the IRD will make an estimate based on the company's previous tax records and business model, as well as the general state of the industry. Then, based on this estimated amount, the IRD will tax the company.

Estimated Profit and Actual Tax Burden

It is worth noting that if the IRD makes an estimation of the company's profits and levies tax based on this amount, the company must pay this tax, even if it is later proven that the estimation was higher than the actual profits. However, when the company finally submits the correct tax return and proves that its actual profits are lower, the IRD will refund the overpaid tax.

Appeals and Tax Payments

Furthermore, if the company disagrees with the IRD's profit estimation, it can choose to appeal. However, during the entire appeal process, the company still needs to pay the tax levied by the IRD.

Conclusion: Importance of Submitting Accurate Tax Returns

Therefore, it is crucial for Hong Kong companies to submit accurate tax returns on time to avoid the potential financial pressure that may be caused by the IRD's profit estimation.