Hong Kong’s objection and appeal procedures against tax assessments raised by the Inland Revenue Department (“the Department”) can be costly should a taxpayer wish to pursue his right of objection.
Firstly, if a taxpayer wishes to appeal against an assessment, he may be required to purchase a tax reserve certificate (“TRC’s”). Notwithstanding that it is estimated and may only have been raised to enable the Department to continue to investigate the affairs of the taxpayer beyond the statutory period of 6 years. Currently TRC’s carry interest at the rate of 0.2667% p.a. compared to the interest rate applicable to unpaid tax of 8.192% p.a.. The taxpayer may not be able to redeem the TRC’s until the objection has been determined which may be many years depending on how efficiently the Department deals with the case.
If the objection cannot be settled with the tax assessor, a process which may require the taxpayer to pay substantial professional fees, the case will be referred to the Commissioner of Inland Revenue for a determination, which inevitably will be in favour of the Department. From there the taxpayer has the option to appeal the Commissioner’s Determination to either the Board of Review or a higher court. In the vast majority of cases if is advisable to appeal first to the Board of Review, as it is at the Board of Review that the facts of the case are determined and on which any subsequent legal argument will be based. However, even if the taxpayer should win at the Board of Review there is no assurance that the case will not be appealed to a higher court. Furthermore, even if the taxpayer wins at the Board of Review he needs to bear his own legal and professional costs, in contrast to cases heard by the higher courts where the taxpayer may ask for costs to be awarded to him.
At current rates of legal and professional fees a taxpayer may find himself with a bill for professional services in the region of HK$1 million plus for the preparation of the case and representation at the Board of Review with respect to a complex profits tax case. At current rates of tax this represents profits tax on assessable profits of approximately HK$6 million. Hence many taxpayers will be dissuaded from pursuing an objection by this cost or may either attempt to represent themselves, in which case they may find themselves opposite an experienced advocate appointed by the Department.
In my view one would be foolish to assume that the Department are not aware of the taxpayer’s predicament and, at times, it appears that the Department deliberately push cases to the Board of Review, particularly as there is little loss of revenue to the Department. This needs to be reviewed as do the following issues;
a) Greater control is exercised over the issue of protective estimated assessments,
b) Assessors should attempt to resolve cases or bring them to a determination a quicker,
c) The rate of interest payable on TRC’s should equal that payable on unpaid tax, and
d) a taxpayer should be able to claim costs at the Board of Review, the same option being available to the Department.
