Call Us +852 3956 3112 WhatsApp Us (+852) 9654 5078

Checklist: What You Need to Consider to Prepare for Your Audit and Profits Tax Return Filing

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

Previously in our article of FAQs: Audit and Profits Tax Return, we touched upon frequently asked questions concerning the Hong Kong audit and Profit Tax Return filing process. Even though Hong Kong is named as one of the most tax-friendly systems in the world, let’s face it, as a business owner, it can still be pretty complicated. In cases where you accidentally engage in non-compliance, you may even be subjected to financial penalties! In this article, we will take a closer look at what business owners need to consider to prepare for their audit and Profits Tax Return filing process.

 

What you will learn from this article:

1. Hong Kong’s Two-tiered profits tax regime

2. Profits Tax Return Filing Timeline

3. What should be included in the Profits Tax Return?

3.1. Profits Tax Return
3.2. Audit Report
3.3. Checklist of Required Documents

4. Basic Period

5. Deductions

6. Penalties for Late Submission

 

1. Hong Kong’s Two-tiered profits tax regime

The Inland Revenue Department (IRD) has introduced a two-tiered profit tax rate regime on December 29, 2017.  With the aim to maintain a simple and low tax regime, as well as promoting economic development, the introduction of the two-tiered profit tax regime intends to reduce the tax burden on enterprises, with a particular focus on SMEs in Hong Kong.

For corporations, the tax rate for the first HK$2 million of assessable profits will be 8.25%, and the remaining profits will be taxed at the existing 16.5% tax rate.

Image Right
Image Top

For corporations, the tax rate for the first HK$2 million of assessable profits will be 8.25%, and the remaining profits will be taxed at the existing 16.5% tax rate.

2. Profits Tax Return Filing Timeline

Corporations, partnerships, trustees, and bodies of persons facilitating trade, profession or business in Hong Kong are legally required to be subjected to tax on all profits derived from Hong Kong.

If you have recently formed a company in Hong Kong, you will receive your first Profit Tax Return approximately 18 months after the date of incorporation.

You are required to submit your Tax Return (BIR51 or BIR52 or BIR54) along with an audit report to the IRD (The Inland Revenue Department) within 3 months from the day of the issue. 

Thereafter,  your Profit Tax Return will be issued by the IRD on the first working day of April every following year. You are required to complete and file an audit report every year, within 1 month of the date of issue.

Image Right
Image Top

Thereafter,  your Profit Tax Return will be issued by the IRD on the first working day of April every following year. You are required to complete and file an audit report every year, within 1 month of the date of issue.

3. What should be included in the Profits Tax Return?

3.1. Profits Tax Return

There are three different types of Profits Tax return forms:

  • Profits Tax Return – Corporations (BIR51)
  • Profits Tax Return – Persons Other Than Corporations (BIR52)
  • Profits Tax Return – In Respect Of Non-Resident Persons (BIR54)

3.2. Audit Report

  • A certified copy of the Statement of Financial Position / Balance Sheet
  • Profit & Loss Accounts
  • Tax computation

In Hong Kong, only a Certified Public Accountant (CPA) can perform the audit. In order for the CPA to perform a proper audit, correct management accounts are needed.

In order to prepare for your audit, it is best practice to have a list of required documents prepared.

3.3. Checklist of Required Documents

  • Audited financial statements of subsidiary companies
  • Copy of original Profit Tax Return from the IRD
  • All financial statements
  • All sales/service agreements, employment contract, tenancy agreement
  • All purchase invoice
  • Receipt for all expenses
  • Bank statements (The auditor might ask you to sign a confirmation form which will be sent to the bank to obtain the bank balance)
  • All sales invoices with the corresponding receipt
  • Copy of any special license like SFC License and Property Agent License (if any)
  • Copy of company registration documents:  
    • Updated business registration certificate
    • Incorporation certificate
    • Articles of association
    • Annual Return
Image Right
Image Top

3.3. Checklist of Required Documents

  • Audited financial statements of subsidiary companies
  • Copy of original Profit Tax Return from the IRD
  • All financial statements
  • All sales/service agreements, employment contract, tenancy agreement
  • All purchase invoice
  • Receipt for all expenses
  • Bank statements (The auditor might ask you to sign a confirmation form which will be sent to the bank to obtain the bank balance)
  • All sales invoices with the corresponding receipt
  • Copy of any special license like SFC License and Property Agent License (if any)
  • Copy of company registration documents:  
    • Updated business registration certificate
    • Incorporation certificate
    • Articles of association
    • Annual Return

An audit report is required even if the company has not generated any income. If the company has not yet commenced, you are allowed to report to the IRD as “not yet commenced” by the absence of an audit report. Once the business has been launched, you will be required to submit back the first and subsequent years’ financial statements to the IRD.

4. Basic Period

The financial cut-off date for most Hong Kong companies is either December 31st or March 31st.

 

5. Deductions

Profit tax is levied based on the assessable profit, excluding deductible expenses and tax-exempt incomes.

While dividends (profits arising from the sale of capital assets and interest on deposits placed in authorised financial institutions) can be exempted from tax, there are other expenses that can be deducted from the assessable profit.

Expenses that are incurred by the taxpayer in the production of chargeable profits are allowed as deductions (Reference to section 16 of the I.R.O.).

Generally speaking, business expenses relating to your day to day business operations are deductible as your operating expenses, for example:

  • Rent paid on business premises for business premises
  • Light, water and telephone charges for business premises
  • Employer’s mandatory and voluntary contributions to MPF schemes (Deduction limited to 15% of the total emoluments)
  • MPF mandatory contributions if self-employed (applicable to the sole proprietor or partner)
  • Severance or long service payments at the termination of employment
  • Bad or doubtful debts
  • Repairing costs for premises, machinery and plants used in producing profits
  • Replacement costs of implements and utensils used in producing profits
  • Donations to approved charities valuing no less than $100 but not exceeding 35% of the adjusted assessable profits.

 

6. Penalties for Late Submission

The Inland Revenue Department (“IRD”) may take punitive actions for failure to file the profits tax return by the due date:

  • Prosecution
  • Compound Offer
  • Additional Tax (which is a form of penalty) in respect of the offence
  • Estimated Assessment

Conclusion

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 your Profits Tax Returns or even communicating with the IRD, our team of qualified professionals would be delighted to assist.



Related Articles


Two team member are working on Xero accounting on smartphone
Accounting & Taxation

Integrating Xero With Your HubSpot CRM To Improve Your Business Processes

The HubSpot Customer relationship management (CRM) and Xero integration simplify how companies manage and track their invoices, payment and billing processes. Choosing a CRM that works with your accounting software allows you to capture leads and create deals effectively to provide an accurate overview of your sales and sales process in your CRM dashboard. This article looks at the benefits of integrating Xero with your HubSpot CRM and how your company can benefit.
By FastLane & Oxygen team, September 17, 2021 (10 mins)
Hong Kong Audits
Accounting & Taxation

Hong Kong Audit Report – Audit Process & How To Be Prepared (Checklist Included)

As many Hong Kong businesses are operated by individuals who do not ordinarily reside in the city, it’s very common that business owners will often not be entirely familiar with what this process entails and why it’s so important for their business. In this article, we look to provide further guidance on this topic, specifically for new businesses who are keen to understand what the audit process entails and what they can expect from their auditor.
By FastLane Team, September 1, 2021 (5 mins)
Hong Kong Xero Advisor
Accounting & Taxation, Xero Story

What To Expect When You Partner With a Hong Kong Xero Advisor?

As a business owner, there are few aspects more complex and integral to success than financial accounting. It's essential to understand what financial accounting entails and how this knowledge can be applied to facilitate a successful business operation.
By FastLane Team, August 23, 2021 (5 mins)