What Is Tax Evasion in Hong Kong

February 28, 2024

Hong Kong’s low tax rates and tax structure policy have made it a successful place to attract businesses, foreign investment, and affluent people. While this certainly benefits the economy, it also presents a challenge: tax evasion.

The fact that there are serious penalties associated with tax evasion, thus it is crucial for businesses and individuals to be aware of tax evasion and to be tax compliance.

In the article, we focus on what tax evasion is, what the difference between the tax evasion and tax avoidance, what are the consequences of tax evasion, the best practices to stay away from tax evasion, and how FastLane Group could help you.

Content Outline

What Is Meant by Tax Evasion?

Tax evasion is an illegal act of taxpayers intentionally not making tax payments or reporting incorrect income. The offenders typically use many approaches like falsifying all the income, taking false deductions, hiding assets, money or transactions or using offshore banking.

Moreover, in Hong Kong, the definitions of tax evasion and tax fraud are mixed so some activities that constitutes tax evasion in Hong Kong may be looked at as tax fraud, whereas in other jurisdictions they are different. These illegal activities for companies include, but are not limited to:

The company provided a false amount of the income that would have appeared in the financial report of the year.
Using unreal expenses to reduce the gross profit reported.
Failing to notify the IRD of your company’s profits tax liabilities.
Avoiding disclosure of employee salary details.
Exaggerating your company’s expenses

You can protect your business and reputation in the competitive market in Hong Kong by staying away from any illegal activities listed above.

Tax Fraud vs Tax Avoidance

And while the most people use ‘tax avoidance’ and ‘tax evasion’ as synonyms, it is not correct.

Two ways in which tax can be avoided is through legal financial statements and procedures, while tax evasion is done illegally by evading tax payments.

Tax planning can help you save tax payable, but you must be restrained from crossing the boundary to excessive tax planning, as it is simple to overstep the limit. The Hong Kong tax bodies discourage the latter practice and consider it as a tax evasion.

Entrepreneurs frequently have to go through stricter tax reviews than wage-earners with the similar income, as business owners have more options for not paying taxes. To prevent fraudulent tax activities, keep an eye out for the following:

Hiding income
Taking part in irregularities in accounting
Participation in fraudulent activities, such as mislabeling transactions

To differentiate between tax avoidance and tax evasion, and comply with the legal tax planning methods, you will be in a position to operate your company in Hong Kong in an ethically right manner.

With us, you will have a chance to minimize your tax liability legally and according to the law. We shall lead you through the tax laws of Hong Kong and make sure that your company operates within the law, without violating the tax evasion laws.

The consequences of tax evasion in Hong Kong

The Inland Revenue Ordinance (IRO) stipulates the procedures that a company should follow to be in compliance with the tax laws. The requirements are tax purposes, tax documents and further submissions must be filed accurately and in a timely manner, financial records must be kept accurate, due diligence processes must be employed when financial information is needed and more.

If these conditions are not fulfilled, the Commissioner of the IRD may, at their own discretion, initiate a prosecution or sanction other tax payments.

Committing tax evasion in Hong Kong may lead to serious consequences. Individuals or businesses found in the act of tax evasion could be subject to heavy fine, penalty, and jail term.

The maximum penalty for fraud in Hong Kong is a fine of HKD 50,000, three years imprisonment and another fine of three times the tax evaded amount.

The severity of the penalty depends on a few factors, such as:

The extent of responsibility for the offence
The nature of the offence
The evidence provided
The amount of tax undercharged or underreported
The severity of the offence
The length of time the offence has been committed
The history, demeanor, and level of cooperation of the taxpayer

Further, apart from legal consequences, tax evaders may also suffer much harm for their reputation and relations with customers, suppliers, and other stakeholders.

Through comprehending the possible penalties for tax evasion and adhering to the requirements posed by the IRO, you will be able to shield your company and keep it clean of any scandals.

The best ways to prevent tax fraud

To avoid tax evasion and its impacts in Hong Kong, businesses and individuals are encouraged to embrace the best practices that will help implement transparency and compliance.

Here are some steps you can take to avoid penalties and maintain good standing with tax authorities:

Monitor your accountant and make sure that their works are accurate and in accordance with tax laws.
Always tell the truth of your employee’s remuneration information.
Ask employees to validate their tax information with the relevant government authorities if in doubt.
Alert the tax authorities if a refund is received after claiming taxes deductions.
Do not delay your tax filings and present them on time.
Keep detailed income and expense statements to avoid misunderstandings.
Maintaining accurate records and accounting documents for at least 7 years past the date of transactions.
Obtain professional guidance on correct income tax planning and payment to understand your tax responsibilities and legally reduce tax charges.
Keep an eye for the newest tax laws and changes to ensure compliance.
Have adequate internal control measures or policies in place that will prevent fraudulent activities or tax evasion by employees, or by third parties.
Establish a positive rapport with the tax authorities such that you can openly discuss concerns and you can address issues immediately.

Through the implementation of these good practices, businesses as well as individuals can avoid tax evasion and remain clean in relation to the tax laws of Hong Kong, which in turn ensures their reputation and financial well-being.

How FastLane Group can Help?

Managing tax laws in Hong Kong might be intricate, but with FastLane Group’s involvement, you will have the peace of mind that your taxes are in a good professional hand. The group of our professionals enjoys the broad expertise in the nuances of the Hong Kong tax laws and can provide you with a complete and detailed support in the areas like tax planning, bookkeeping, accounting, and reporting.

Our goal is to help you stay in complete compliance and ensure that your tax documents are organized and filed as needed. Moreover, in the case of tax audits or investigations, we can provide you with the required support to safeguard your rights and your interests.We value our commitment to your businesses’ financial standing and credibility. Please, contact us now, to know more about our services and how we can assist you in dealing with the intricacies of Hong Kong’s tax world. Contact us now.