What happens when you receive a tax assessment from Hong Kong’s Inland Revenue Department (IRD) that you believe is incorrect? With billions of dollars in tax disputes resolved annually, understanding Hong Kong’s structured tax dispute resolution process is essential for every taxpayer. This comprehensive guide walks you through every step—from initial audits to final court appeals—ensuring you know your rights, deadlines, and strategies for navigating tax disputes successfully.

Understanding Tax Audits in Hong Kong

Navigating Hong Kong’s tax landscape requires understanding potential interactions with the Inland Revenue Department (IRD) through audits. An IRD tax audit is a formal process designed to protect tax revenue by reviewing taxpayer information and verifying tax payable. These reviews apply to all taxpayers regardless of industry or background.

How Cases Are Selected for Audit

The IRD employs sophisticated methods to screen cases for review. The Department uses a computerized “Assess First Audit Later System” combined with risk-based case selection programs to identify high-risk cases for field audit and investigation. IRD officers use their experience and professional knowledge to select cases identified by these systems.

Common risk factors that may trigger an audit include:

• Significant changes in reported income or expenses compared to prior years
• Claims for offshore income exemption under FSIE regime
• Industry-specific red flags or unusual business patterns
• Discrepancies between tax returns and third-party information
• Late filing or failure to file tax returns
• Incomplete or insufficient supporting documentation

Types of Tax Audits

The IRD conducts two primary types of audits:

Investigation Unit

For cases involving suspected tax evasion, the IRD’s Investigation Unit conducts in-depth investigations and takes penal action, including prosecution proceedings. Tax evasion is a serious crime in Hong Kong. A person convicted of tax evasion could be sentenced to imprisonment for up to three years and fined.

Record-Keeping Requirements

Under Section 51C of the Inland Revenue Ordinance (IRO), every person carrying on a trade, profession or business in Hong Kong must keep sufficient records for at least 7 years after transaction completion. These records must enable assessable profits to be readily ascertained.

Types of Records to Maintain

• Income statements and cash flow statements
• Assets and liabilities (balance sheets)
• Service records and daily transaction records
• Sales receipts, invoices, and purchase records
• Expense vouchers and bank statements
• Payroll documents and employee records

Penalties for Non-Compliance

A person who fails to comply with record-keeping requirements without reasonable excuse commits an offence and is liable on conviction to a fine of up to HKD 100,000. The absence of sufficient records may prompt the IRD to assess tax based on alternatives such as changes in the taxpayer’s assets, bank deposits, or profiles of comparable businesses.

The Tax Objection Process

If you disagree with a tax assessment issued by the IRD, you have the right to lodge a formal objection. Understanding the objection process and strict timelines is critical to protecting your rights.

Step 1: Filing a Notice of Objection

The notice of objection must be received by the Inland Revenue Department within one month after the date of issue of the notice of assessment. This deadline is strictly enforced.

How to file an objection:

1. Complete Form IR831: Notice of Objection/Application for Revision of Assessment
2. State clear grounds: Clearly articulate the reasons for your objection in writing
3. Submit via eTax account: For individuals with ITP accounts for Salaries Tax, Property Tax for solely owned properties, or Profits Tax for sole proprietorships
4. Alternative submission: By post to P.O. Box 28777, Concorde Road Post Office, Hong Kong, or by fax to 2877 1232
5. For estimated assessments: If objecting to an estimated assessment issued under Section 59(3) of the IRO, you must submit a properly completed tax return together with your objection letter and supporting accounts

Step 2: IRD Review and Negotiation

After receiving your objection, the IRD assessor will review the additional information and supporting documents. In most cases, objections are handled through negotiations between the taxpayer and the IRD assessor. The assessor may issue a revised assessment or propose a basis for revision. This informal resolution stage allows many disputes to be settled without formal proceedings.

Step 3: Commissioner’s Determination

If no agreement is reached through negotiation, the objection will be referred to the Commissioner of Inland Revenue for determination. The Commissioner will consider the objection and, within a reasonable time, may confirm, reduce, increase, or annul the assessment. The Commissioner will transmit the determination together with reasons in writing to the taxpayer.

Appeals to the Board of Review

If you disagree with the Commissioner’s determination, you may appeal to the Board of Review, an independent statutory body established to determine tax appeals.

Filing an Appeal

A taxpayer who wishes to appeal the Commissioner’s decision must do so in writing to the Clerk to the Board of Review within one month after the transmission of the Commissioner’s written determination.

The written appeal must include:

• A copy of the Commissioner’s written determination (including reasons and statement of facts)
• A statement of the grounds of appeal
• The Commissioner must also be served with a copy of the notice of appeal and grounds

Board Composition and Independence

The Board of Review is a statutory body, independent of the IRD, often composed of members with legal qualifications and extensive experience in dealing with tax-related issues in Hong Kong. This independence ensures impartial adjudication of tax disputes.

Board’s Decision Powers

After hearing an appeal, the Board will deliver its decision, normally in written form. The Board may:

• Confirm the assessment
• Reduce the assessment
• Increase the assessment
• Annul the assessment
• Remit the case to the Commissioner for re-assessment

Costs of Board Appeals

Where the Board does not reduce or annul the assessment, the Board may order the appellant to pay as costs of the Board a sum not exceeding HKD 25,000, which shall be added to the tax charged. This order is at the discretion of the Board. It is a material consideration in the exercise of such discretion to determine whether the appeal has been conducted frivolously, vexatiously, or as an abuse of process.

Court Appeals

If either the taxpayer or the Commissioner is dissatisfied with a decision of the Board of Review, further appeals to the courts are available, but only on questions of law.

Court of First Instance

An application for leave to appeal to the Court of First Instance of the High Court against the Board’s decision on a ground involving only a question of law must be made within one month after the date on which the Board’s decision is made.

Court of Appeal and Court of Final Appeal

With the leave of the Court of Appeal, the appellant or the Commissioner may appeal against the decision of the Board directly to the Court of Appeal. A party can ultimately appeal to the Court of Final Appeal, being the highest judicial authority in Hong Kong. Unless the intended appeal involves a question of great general or public importance, it is often not easy to obtain permission to appeal to the Court of Final Appeal.

Tax Dispute Resolution Timeline

Important Principles During Dispute Resolution

Pay First, Argue Later

Hong Kong operates a “pay first, argue later” system for tax disputes. Notwithstanding any notice of objection or appeal lodged, you must pay the tax on or before the date(s) specified in the notice of assessment, unless the Commissioner orders that the payment of tax or any part of it be held over pending the result of such objection or appeal.

Failure to pay by the due date will result in late payment surcharges:

• 5% surcharge imposed immediately after the due date
• Additional 10% surcharge if tax remains unpaid six months later

Holdover of Tax Payments

Taxpayers may apply for a holdover (postponement) of tax payment pending the outcome of an objection or appeal. The holdover may be granted unconditionally or conditionally upon the provision of security (such as a banker’s undertaking).

Burden of Proof

In appeals to the Board of Review and courts, the burden of proof rests entirely on the taxpayer to demonstrate that the assessment is excessive or incorrect. This requires gathering comprehensive evidence, documentation, and potentially expert testimony to support your position.

Time Limits Are Strictly Enforced

Missing the one-month deadline for objections or appeals can be fatal to your case. The Commissioner or Board may extend deadlines only if satisfied there was reasonable cause, such as serious illness or absence from Hong Kong. Always calendar critical deadlines and seek professional assistance immediately upon receiving an assessment you wish to dispute.

Penalties and Enforcement

Administrative Penalties

Offences which do not involve any wilful intent to evade tax are generally dealt with administratively by the imposition of monetary penalties in the form of additional tax under Section 82A of the IRO. The IRD may impose surcharges ranging from 5% to 15%, issue estimated assessments without deductions, and in serious cases, prosecute taxpayers.

Late Filing Penalties

Criminal Penalties

Under the Inland Revenue Ordinance, if convicted for tax offenses involving wilful evasion or fraud, penalties can include:

• Fines up to HKD 10,000
• Additional tax of up to 3 times the amount of tax underpaid
• Imprisonment for up to 3 years

Advance Ruling System

In Hong Kong, an advance ruling is a written confirmation issued by the Inland Revenue Department on how a specific provision of the Inland Revenue Ordinance applies to a taxpayer or a specific arrangement they are contemplating. This system provides taxpayers with certainty regarding the tax treatment of their proposed transactions.

Application Procedures

To apply for an advance ruling:

1. Complete Form IR1297: Available on the IRD website
2. Provide full particulars: Details of the proposed transaction or arrangement
3. Include relevant documents: All agreements and supporting documents
4. Explain your position: How you believe the relevant IRO provisions apply
5. Submit early: Early in the year of assessment to which the ruling relates
6. Pay application fee: HKD 45,000 for territorial source rulings (non-refundable)

FSIE Regime Advance Rulings

Under the Foreign-Sourced Income Exemption (FSIE) regime effective January 2024, taxpayers can apply for advance rulings on whether their covered income is exempt from tax and whether they comply with the Economic Substance Requirement. The application may cover a maximum of 5 years of assessment. To obtain tax certainty and reduce compliance burden, taxpayers are encouraged to apply for these rulings.

Professional Representation

Given the complexity of tax law, strict procedural requirements, and the burden of proof on taxpayers, professional representation is highly recommended throughout the dispute resolution process.