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FAQs: Audit and Profits Tax Return Filing

By FastLane Team, April 25, 2019 (5 mins)

The process of completing a Hong Kong audit and filing a profits tax return is closely linked to each other. As Hong Kong companies are often managed from outside of the city, how these two processes relate to each other may not be entirely clear. In this article, we look to answer some commonly asked questions about the Hong Kong audit and profits tax return filing process. 

1. What is the auditing process?

The Hong Kong audit process is as follows:

  • The company prepares the financial accounts along with the supporting documents for the CPA’s further handling.
  • The auditor reviews and understands the activities of the company as well as the nature of the company, both of which could affect the audit.
  • The auditor identifies and evaluates significant transactions in the financial statement.
  • The auditor tests the financial statements and spots uncertainties and errors that could influence the financial accounts.
  • The auditor reviews the financial statements and its supporting documents to ensure that the report on transactions is accurate.
  • The auditor made an opinion report to reflect the accuracy and fair representation of the company’s financial statements.
  • The auditor makes a report from the audit and opinion on the financial statements.
  • The director of the company signs the audit report and the supporting documents.
  • The auditor receives the signed audit report and creates the tax computation form and sends it back to the IRD along with the Profits Tax Return.

The content and depth of the audit documents depend on the identified risks of material misstatement, the judgement required in performing the audit and the significance of the audit evidence obtained by the auditor.

2. How can I apply for reporting exemption?

According to the new Company Ordinance, private and guarantee companies are qualified to prepare simplified accounts and directors’ reports.

To qualify for the reporting exemption, you need to meet the requirements below:

For a small private company,  it is required to meet two of the following conditions:

  • Your total revenue does not exceed $100 million in a financial year;
  • Your total assets does not exceed $100 million in a fiscal year;
  • The number of employees does not exceed 100 in a financial year.

For a small guarantee company, it is required that:

  • Your total revenue does not exceed $25 million in a fiscal year.

Please note that for the subsidiaries of a listed company, you may qualify for reporting exemption, in the case that it is not a company specified in section 359(4) (for example, an insurance company or a bank) if you meet the requirements above.

3. How does reporting exemption help simplify the reports for qualified companies?

For companies that qualify for reporting exemption, the financial statements can be prepared following the Small and Medium-Sized Entity Financial Reporting Standard and Financial Reporting Framework.

Moreover, for the qualified companies, it is not required to prepare the following when creating the accounts and directors’ reports:

  • Disclosure of the auditor’s remuneration in financial statements;
  • A “true and fair view” for financial statements;
  • Disclosure in the material interests of directors in transactions or contracts within the notes to financial statements;
  • The inclusion of the following information in the director’s report:
    • Business review
    • Donations
    • Director’s reason for resignation
    • Material interests of directors in transactions, arrangements and contracts

Please note that for reporting exemption-qualified companies,  their financial statements are still required to be audited.

4. When is the Profits Tax Return Deadline?

The due date for Profits Tax Return depends on the financial year-end date. For Hong Kong limited companies or unincorporated businesses, any date can be chosen as the fiscal year-end date. Most companies in Hong Kong set their financial year-end date on December 31st or March 31st.

 

It is worth mentioning that for new companies in Hong Kong, the first Profits Tax Return will be sent to you by the Inland Revenue Department (“IRD”) approximately 18 months after the date of incorporation. Once receiving a Profits Tax Return, the company will have a 3-month period to return the form. However, starting from the second Profits Tax Return, a Hong Kong business will only have 1 month to submit their Profits Tax Return.

If a financial year-end date of December 31st was selected, a Profits Tax Return must be filed by mid-August. For companies that set the financial year-end date as March 31st, the deadline Profits Tax Return submission would be mid-November. If you choose a different date as your financial year-end date, the IRD will send you the Profits Tax Return on the first working day of April and will need to be filed by the end of April.

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If a financial year-end date of December 31st was selected, a Profits Tax Return must be filed by mid-August. For companies that set the financial year-end date as March 31st, the deadline Profits Tax Return submission would be mid-November. If you choose a different date as your financial year-end date, the IRD will send you the Profits Tax Return on the first working day of April and will need to be filed by the end of April.

5. What happens if I missed the deadline for Profits Tax Return submission?

Late submission in Profits tax return may be subject to a penalty payment of HK$10,000 and triple the amount of the tax. You are also subject to prosecution. To avoid delay in Profits Tax Return filing, it is recommended to have all the documents prepared for your CPA because the document preparation process is normally the longest step of the audit process.

6. Can I extend the deadline for Profits Tax Return submission?

Yes, a further 2-weeks extension will be granted to Small Corporations and Small Partnership Businesses on application, if they file the Profits Tax Return through online platform.

 

7. Can I change year-end date for my company?

Yes, you can change the year-end date. However, please note that the financial year cannot be longer than 18 months. It is not allowed to extend the financial year-end date again within a five-year period from your previous year-end extension.

 

8. Do I still need to audit my accounts and submit Profits Tax Return if I am not making profits or the business has not yet started?

In the case that your business has yet to commence, you are allowed to report that it has “not yet commenced” to IRD (Inland Revenue Department). The company director or company secretary must provide a declaration of a not yet commenced business. You can file a “NIL” Profits Tax Return to the IRD by absence of an audit report.

 

However, please note that you are still required to prepare an audited financial statement even when the business has not yet started. Once your business commences, you are required to submit your first and subsequent years’ financial statements.

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In the case that your business has yet to commence, you are allowed to report that it has “not yet commenced” to IRD (Inland Revenue Department). The company director or company secretary must provide a declaration of a not yet commenced business. You can file a “NIL” Profits Tax Return to the IRD by absence of an audit report.

 

However, please note that you are still required to prepare an audited financial statement even when the business has not yet started. Once your business commences, you are required to submit your first and subsequent years’ financial statements.

9. As an offshore company, do I need to submit a Profits Tax Return?

In the case that all income of the offshore company is generated outside Hong Kong, you can make an offshore claim and apply for profit tax exemption. Please note that any profit derived from Hong Kong from trades, profession or business is liable to profit tax.

 

The offshore company needs to submit the Profits Tax Return and financial statement, together with an offshore claim. The company needs to provide the IRD with passports of all company directors, company invoices, contracts and other relevant documents. The Inland Revenue Department will examine and confirm that the company does not have any income derived from Hong Kong and thus is not required to pay tax in Hong Kong. The offshore claim status will stay effective in the course of 5 years.

10. Why Should You Use FastLane CPA’s Services?

Completing tax returns can be an intimidating process for companies and individual taxpayers alike. Everyone is scared of making a mistake, especially when they can be so costly! 

 

The FastLane Group has extensive experience helping hundreds of companies operating in Hong Kong with their audit and taxation needs. With over 7 years of experience helping SMEs, FastLane has developed a unique understanding on the needs of companies operating in Hong Kong.

 

Furthermore, because FastLane is a licensed Hong Kong CPA firm we can act as a one-stop solution for all your business needs. As our accounting team can work closely with our company secretary department, you won’t need to worry about coordinating between different groups when it comes time to conducting your audit. Whether you need help preparing completing your profits tax returns or even communicating with the IRD, our team of qualified professionals would be delighted to assist. 

 

Please contact the FastLane Group for a quotation or if you have any enquiries regarding your Hong Kong Profits Tax returns!



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