Penalty Policy

(i)

makes, or causes or allows to be made on the person's behalf, an incorrect return;

(ii)

makes an incorrect statement in connection with a claim for any deduction or allowance;

(iii)

gives any incorrect information in relation to any matter or thing affecting the person's or any other person's liability to tax;

(iv)

fails to notify refund of premiums paid under a Voluntary Health Insurance Scheme policy or qualifying deferred annuity policy after claiming deduction of the premiums;

(v)

fails to furnish a return in time; or

(vi)

fails to inform chargeability to tax.

(i)

omits from a return any sum which should be included;

(ii)

makes any false statement or entry in any return;

(iii)

makes any false statement in connection with a claim for any deduction or allowance;

(iv)

signs any untrue statement or return furnished under the IRO;

(v)

gives any false answer to any question or request for information asked or made in accordance with the provisions of the IRO;

(vi)

prepares or maintains any false books of accounts or records; or

(vii)

makes use of any fraud, etc. to evade tax.

The maximum amount of additional tax is treble the amount of the tax undercharged.

The offence is subject to a fine of $10,000 if the service provider has no reasonable excuse and the court may order the person convicted to do within a specified time the act that the person has failed to do, if applicable.

(i)

fails to notify any adjustment under section 50AA(5) on foreign tax in relation to relief from double taxation;

(ii)

fails to provide information under section 50AAB(2) for the purposes of MAP or arbitration; or

(iii)

makes an incorrect statement, provides incorrect information or omits anything from a statement made or information provided in connection with any MAP or arbitration case under section 50AAB and the incorrect statement or information or omitted thing is material to the case.

The offence in (i) is subject to a fine of $10,000 and a further fine of the amount of the tax undercharged.

The offence in (ii) is subject to a fine of $10,000 and the court may order the person convicted to do within a specified time the act which he has failed to do.

(i)

fails to take reasonable steps to ensure that the person has knowledge about any adjustment and notify the adjustment under section 50AAM(11), 50AAN(3) or 50AAO(3) in relation to a claim for corresponding relief;

(ii)

makes an incorrect statement, provides incorrect information or omits anything from a statement made or information provided in relation to a claim for corresponding relief or an application for APA under section 50AAM, 50AAN, 50AAO or 50AAP(1), and the incorrect statement or information or omitted thing is material to the claim or application;

(iii)

fails to notify under section 50AAS a breach of critical assumption specified in an APA within a reasonable time after the breach or fails to provide all reports and other information that may be required to provide under an APA;

(iv)

provides incorrect information or omits anything from information provided in relation to a breach of critical assumption under an APA or any report and other information under section 50AAS that may be required to provide under an APA, and the incorrect information or omitted thing is material to the arrangement;

(v)

fails to keep records and data under section 50AAT in relation to an APA; or

(vi)

fails to provide information under section 3 of Schedule 17H in relation to an application for APA.

Any of the offences in (i) to (iv) is subject to a fine of $10,000 and a further fine of the amount of the tax undercharged.

The offence in (v) is subject to a fine of $50,000 and the court may order the person convicted to do within a specified time the act that the person has failed to do.

(i)

any MAP or arbitration case under section 50AAB;

(ii)

a claim for corresponding relief under section 50AAM, 50AAN or 50AAO;

(iii)

an application for APA under section 50AAP(1); or

(iv)

a notification of breach of critical assumption under an APA or any report and other information that may be required to provide under the APA under section 50AAS.

and the incorrect statement or information or omitted thing is material to the MAP or arbitration case, claim, application or APA.

The maximum amount of additional tax in respect of any of the offences in (c)(i), (d)(i) to (iv) and (f)(ii) to (iv) is the amount of the tax undercharged.

The maximum amount of additional tax is the amount of the tax assessed on the relevant difference. The person is not liable to additional tax under section 82A(1G) if the person has made reasonable efforts to determine the arm's length amount under section 50AAF(1) or 50AAK(2).

The offence is subject to a fine of $10,000 if the person has no reasonable excuse and the court may order the person convicted to do within a specified time the act that the person has failed to do, if applicable.

The offence is subject to a fine of $50,000 and 3-year imprisonment if the person has intent to defraud.

If a reporting financial institution fails to furnish a return or rectify its compliance system and process under section 50C(1), 51B(1AAAD) or 51BA(6), the reporting financial institution will be subject to a further fine of $500 for every day during which the offence continues after conviction.

The offence is subject to a fine of $50,000 if the entity or person has no reasonable excuse and the court may order the entity or person convicted to do within a specified time the act that the entity or person has failed to do, if applicable.

The offence is subject to a fine of $50,000 and 3-year imprisonment if the person has intent to defraud.

If a reporting entity fails to furnish a CbC return or notice under section 58E(1), 58F or 58H, the reporting entity will be subject to a further fine of $500 for every day during which the offence continues after conviction.

C. Penalty Policy for Assessing Additional Tax under Section 82A

Offences which do not involve any wilful intent to evade tax, and improper transfer pricing and profit attribution, are generally dealt with administratively by the imposition of monetary penalties in the form of additional tax under section 82A of the IRO.
In general, section 82A penalties are imposed by the Department on the following three categories of cases:

(a)

Profits Tax cases;

(b)

Salaries Tax and Property Tax cases;

(c)

Personal Assessment cases.

D. Section 82A Penalty Policy for cases involving Field Audit & Investigation

(a)

Omission or understatement of income or profits;

(b)

Making incorrect statement in connection with a claim for any deduction or allowance;

(c)

Failure to notify chargeability to tax.

This table shows the penalty loading table. This table basically consists of 9 columns. The header of the table consists of 3 logical levels. The first level having one column only is 'Category of Disclosure and Work Involved'. The first column is 'Nature of Evasion(see Note 2 below)'. The second and third columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Full Voluntary Disclosure'. The forth and fifth columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Disclosure with FULL Information Promptly on Challenge'. The sixth and seventh columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Incomplete or Belated Disclosures'. The eighth and ninth columns are 'Normal Loading' and 'Max. incl. C.R.', respectively, under the heading 'Disclosure Denied'. End of Summary.

Category of Disclosure and Work Involved

Nature of Omission / Understatement
(see Note 1 below)

Full Voluntary Disclosure

Disclosure with FULL Information Promptly on Challenge

Incomplete or Belated Disclosure

Disclosure
Denied

Normal Loading

Max. incl. C.R.

Normal Loading

Max. incl. C.R.

Normal Loading

Max. incl. C.R.

Normal Loading

Max. incl. C.R.

Group (a)

100

140

180

210

260

Group (b)

110

150

200

Group (c)

100

150

(see Notes 2 and 3 below)

Note 1 :

Group (a) - cases where the taxpayers show intentional disregard to the law and adopt deliberate cover-up tactics involving the preparation of a false set of books, padded wage rolls and fictitious entries or multiple omissions over a long period of time.

Group (b) - cases with slightly less serious acts of omission resulting from recklessness including the "hand in the till" type of evasion, failure to bring to account sales of scrap, and sheer gross negligence.

Group (c) - cases where the taxpayers fail to exercise reasonable care and omit profits/ income such as lease premium, one-off commission, etc.

Note 2 :

The penalty loading is expressed as a percentage of the tax undercharged.

Note 3 :

For cases completed after 30 November 2003, the CR (commercial restitution) is at 7% per annum monthly compounded for periods up to and including 30 November 2003 and at the best lending rate monthly compounded for periods after 30 November 2003.

2. Attitude of the Taxpayer

genuine concern, seriousness, responsiveness and co-operation

undue delay or obstruction to the progress of audit and investigation

sincerity and willingness to compromise

passiveness and unwillingness to compromise

readiness to accept the discrepancy when quantified

evasiveness and belated acceptance of the discrepancy quantified

casual or one-off understatement

multiple or repeated evasion acts over a consecutive number of years (e.g. persistent default in rendering returns and making of incorrect returns when pressed with estimated assessments)

4. Scale of Business and Quantum of the Understatements

relatively small cases

cases with substantial quantum of understatements having regard to the operating scale of the business

accepted discrepancy includes substantial contentious items

discrepancy consisting of specific fictitious items with cover-up tactics

Depending on the facts peculiar to each case, the penalty may be scaled upwards or downwards to a maximum of 25% in the generality of cases. Further adjustment would be made only when exceptional warranted circumstances exist.

(a)

where there has been no criminal intent and the taxpayer has totally failed in his or its obligations under the Ordinance; and

(b)

where the Commissioner has had to resort to investigations or the preparation of assets betterment statements or has otherwise had difficulty in assessing the tax; and

(c)

where the failure by the taxpayer to fulfill his or its obligations under the Ordinance has persisted for a number of years.

(a)

Second offence within 5 years

Determined according to paragraphs 2 to 9 above with an upward adjustment of 10%.

(b)

Third or subsequent offences within 5 years

Determined according to paragraphs 2 to 9 above with an upward adjustment of 25%.

E. Section 82A Penalty Policy for Profits Tax Cases

This part applies to profits tax cases which do not involve any field audit or investigation.
For failure to notify chargeability to tax or failure to submit tax return in time, the Department will make reference to the following penalty loading scale:

(a)

First offence

Group (i)

10% of the amount of tax undercharged.

Group (ii)

20% of the amount of tax undercharged, if the return is filed after two or more estimated assessments are issued.

(b)

Second offence within 5 years

Group (i)

20% of the amount of tax undercharged.

Group (ii)

30% of the amount of tax undercharged , if the return is filed after two or more estimated assessments are issued.

(c)

Third or subsequent offences within 5 years

Group (i)

35% of the amount of tax undercharged.

Group (ii)

50% of the amount of tax undercharged , if the return is filed after two or more estimated assessments are issued.

F. Section 82A Penalty Policy for Salaries Tax and Property Tax Cases

This part applies to salaries tax and property tax cases which do not involve any field audit or investigation.
For failure to notify chargeability to salaries tax or property tax or failure to submit such returns in time, the Department's policy is normally to compound such offences under section 80(5). Save in exceptional cases, no penalty action under section 82A will be taken having regard to the large number of such cases and the relatively small amount of tax involved in each case. Nevertheless, in cases of repeated offences of the same nature or the degree of culpability of the offence in any particular case is considered serious, the Department may institute prosecution actions under section 80(2).
For simple and inadvertent omission or understatement of income or making an incorrect statement in respect of a claim for an allowance or deduction, the Department will make reference to the following penalty loading scale:

(a)

First offence
10% of the amount of tax undercharged.

(b)

Second offence within 5 years
20% of the amount of tax undercharged.

(c)

Third or subsequent offences within 5 years
35% of the amount of tax undercharged.

G. Section 82A Penalty Policy for Personal Assessment Cases

This part applies to personal assessment cases which do not involve any field audit or investigation.
For making incorrect statements in respect of a claim for an allowance or deduction under personal assessment, the Department will make reference to the penalty loading scale in paragraphs F3 and F4.
The fact that the taxpayer elects for personal assessment would not affect the applicability of the penalty policy under Parts D to F to appropriate cases. However, the amount of tax undercharged in such cases will be computed by reference to that charged under personal assessment.

H. Section 82A Penalty Policy for Transfer Pricing Cases

This part only applies to profits tax cases which involves adjustments under section 50AAF(5) or 50AAK(9) of the IRO arising from a transfer pricing examination without any omission or understatement of income or profit.
A person is liable to be assessed to additional tax under section 82A(1D) of the IRO of an amount not exceeding the difference between:

(a)

the amount of tax assessed on the basis of the amount of the person's assessed income under section 50AAF(5) or 50AAK(9); and

(b)

the amount of tax that would have been assessed if the amount of the person's income as stated in the person's tax return had been accepted for the purpose of assessment.

(a)

the amount of tax assessed for the subject year taking into account the amount of the person's computed loss for an earlier year of assessment (year of loss) under section 50AAF(5) or 50AAK(9); and

(b)

the amount of tax that would have been assessed for the subject year if the amount of the person's loss as stated in the person's tax return for the year of loss had been accepted for the purpose of assessment.

Nature of Transfer Pricing Treatment and Efforts Spent by Taxpayer	Normal Loading	Maximum including Commercial Restitution
No documented transfer pricing treatment	50	75
Documented transfer pricing treatment without reasonable efforts to determine the arm's length amount	25	50
Documented transfer pricing treatment with reasonable efforts to determine the arm's length amount	Nil	Nil

(a)

are prepared before the time the person submits its tax return for the relevant year of assessment or where the documentation requirements under section 58C of the IRO apply, no later than 9 months after the end of the relevant accounting period of the person;

(b)

are in English or Chinese, or readily accessible and convertible into English or Chinese;

(c)

explain the particular way in which section 50AAF or 50AAK applies, or the reason why the provision does not apply, to the relevant matter; and

(d)

explain why the application of section 50AAF or 50AAK to the relevant matter in that particular way best achieves the consistency with the OECD rules (as defined under section 50AAC of the IRO).

(a)

the arm's length provisions in respect of the relevant matter;

(b)

the particulars of the method used for and the comparable circumstances relevant to identifying those arm's length provisions;

(c)

where records explain the application (as opposed to the non-application) of section 50AAF or 50AAK, the records must also explain the result that the application in that particular way has as compared to the non-application;

(d)

for section 50AAF or 50AAK – the actual provisions in respect of the relevant matter; and

(e)

for section 50AAF or 50AAK – the actual profits and the arm's length profits as well as the particulars of the activities and circumstances to the extent they relate to the relevant matter.

(a)

delays or obstructs the progress of a transfer pricing examination;

(b)

becomes aware of the transfer pricing shortfall amount after the return is submitted and does not inform the Department within a reasonable time; or

(c)

has been assessed to additional tax under section 82A(1D) or (1F) or has been assessed under section 50AAF(5) or 50AAK(9) previously;

and the amount of additional tax may be reduced where a person:

(d)

informs the Department voluntarily the transfer pricing shortfall amount after the return is submitted and before a transfer pricing examination is carried out;

(e)

resolves all the transfer pricing issues within 6 months after being informed that a transfer pricing examination has commenced; or

(f)

co-operates fully with the Department during the transfer pricing examination process by providing all the necessary documents and information, and shows readiness to accept the amount of adjustment.