What happens when your Hong Kong tax assessment arrives with numbers that just don’t add up? Every year, business owners face the dilemma of whether to accept an assessment that seems incorrect or to challenge the Inland Revenue Department. With HK$ millions potentially at stake and strict deadlines looming, knowing when and how to object can mean the difference between paying unnecessary tax and protecting your company’s bottom line. This comprehensive guide walks you through the critical indicators that signal you should challenge your assessment, the valid grounds for objection, and the strategic decisions that could save your business significant money.

The One-Month Countdown: Your Non-Negotiable Deadline

Time is your most critical resource when considering a tax objection. According to Hong Kong’s Inland Revenue Ordinance, your notice of objection must be received by the IRD within one month after the date of issue of the assessment notice. This deadline is absolute, and missing it can severely limit your options.

What to Do Immediately Upon Receiving a Questionable Assessment

1. Day 1: Review the assessment notice thoroughly, noting the issue date and payment deadlines
2. Day 2-3: Compare the assessment figures against your financial records and tax return
3. Day 4-7: Gather supporting documentation for any discrepancies you identify
4. Day 8-14: Consult with a tax professional if the amount is significant or issues are complex
5. Day 15-25: Prepare and file your objection with detailed grounds and evidence
6. Day 26-30: Submit your objection and request a holdover if needed

Valid Grounds for Challenging Your Assessment

Simply disagreeing with the amount assessed won’t get you far. You must demonstrate specific, valid grounds according to Hong Kong tax law. Here are the five most common and legitimate reasons to challenge an assessment:

1. Factual Errors in Calculations or Income Figures

The IRD can make mistakes too. Common factual errors include:

• Incorrect income figures that don’t match your audited financial statements
• Double-counting revenue from the same transaction
• Inclusion of transactions that never occurred or were cancelled
• Mathematical errors in computing assessable profits or deductions
• Estimated assessments issued when you actually filed a proper return

2. Incorrect Application of Tax Law

Assessors sometimes misinterpret provisions of the Inland Revenue Ordinance. Common legal issues include:

• Wrongful application of allowances or deductions
• Misclassification of revenue versus capital receipts
• Improper calculation of depreciation allowances
• Errors in determining the applicable tax rate (e.g., applying 16.5% instead of 8.25% on first HK$2 million)
• Misunderstanding industry-specific tax provisions

3. Offshore Income Wrongly Assessed

Hong Kong’s territorial tax system means only profits earned from activities within Hong Kong are subject to profits tax. This remains one of the most common grounds for objection, but with important updates:

4. Deductions Incorrectly Disallowed

The IRD’s most common reason for disallowing deductions is insufficient evidence. You should object if legitimate business expenses were rejected, particularly when:

• You have proper documentation (receipts, invoices, contracts) supporting the expense
• The expense was wholly and exclusively incurred for producing assessable profits
• The assessor misclassified a revenue expense as capital in nature
• Industry-specific deductions were incorrectly denied
• The assessor applied inconsistent treatment compared to prior years

5. Estimated Assessments Without Proper Basis

Under Section 59 of the Inland Revenue Ordinance, the IRD can issue an estimated assessment if you fail to provide proper documentation or submit a tax return. However, if you did file a proper return or can now provide the required documentation, you should object. When objecting to an estimated assessment, you must submit a properly completed tax return together with the accounts.

Red Flags: When the Numbers Say “Challenge”

The Cost-Benefit Analysis: Should You Challenge?

Even with valid grounds, business owners must weigh practical factors before proceeding. Here’s how to make an informed decision:

Financial Considerations

• Tax amount in dispute: Is the potential saving sufficient to justify professional fees and management time?
• Professional costs: Engaging tax advisors and potentially legal counsel can be expensive
• Interest on held-over tax: Currently 8.25% per annum (effective from July 2025), accruing from the original due date
• Cashflow impact: Unless the Commissioner grants a holdover, you must pay the full amount while objecting

The Objection Process: Step-by-Step Guide

1. Step 1: Filing Your Objection (Within 1 Month)
   • Complete Form IR831 (Notice of Objection / Application for Revision of Assessment)
   • Submit via your eTax account online, or mail/fax to the IRD
   • State your grounds precisely and in detail – vague objections are more likely to be rejected
2. Step 2: Initial Review by Original Assessor
   • The objection is first considered by the original assessor
   • If they agree with changes, the assessment is revised and the case concludes
   • If not, the file transfers to the IRD’s Appeals Section
3. Step 3: Review by Appeals Section
   • A separate unit reviews the matter from the beginning
   • They may request additional documentation or clarification
   • The IRD aims to issue decisions within 4 months from receipt
4. Step 4: Commissioner’s Determination
   • The Commissioner may confirm, reduce, increase, or annul the assessment
   • You receive a written determination explaining the decision and reasoning
5. Step 5: Appeal to Board of Review (If Necessary)
   • If you disagree with the determination, appeal within one month
   • The Board of Review is independent of the IRD
   • Requires written notice with statement of grounds supported by reasons

The “Pay First, Argue Later” Reality

Hong Kong operates a “pay first, argue later” regime. Lodging an objection does not automatically suspend your obligation to pay the assessed tax. The tax remains payable on the date(s) specified in the assessment notice unless the Commissioner orders a holdover.

Types of Holdover Available

1. No holdover: Tax is payable immediately despite the objection
2. Unconditional holdover: Payment is suspended pending the objection outcome
3. Conditional holdover: Payment is suspended subject to providing security (bank guarantee, cash deposit, etc.)

Burden of Proof: Your Responsibility to Prove Your Case

A fundamental principle in Hong Kong tax disputes is that the taxpayer bears the burden of proving that the tax assessment is incorrect or excessive. There is no burden on the IRD to prove the assessment is correct. This means you must:

• Provide concrete evidence supporting your position
• Demonstrate specific errors or misapplications of law
• Maintain comprehensive documentation substantiating your claims
• Present clear, logical arguments supported by facts and law

When to Seek Professional Help

While business owners can file objections themselves, professional assistance is strongly recommended when:

• The tax amount in dispute exceeds HK$100,000
• The issues involve complex legal interpretations
• You’re claiming offshore status for the first time
• The IRD has raised multiple adjustment issues
• Previous objections have been unsuccessful
• The case may proceed to the Board of Review
• You lack experience with IRD objection procedures

Challenging a Hong Kong tax assessment is not about confrontation but about ensuring accuracy and fairness in your tax obligations. With proper preparation, clear evidence, and strategic decision-making, you can protect your company’s financial interests while maintaining a constructive relationship with the Inland Revenue Department. Remember: when in doubt about significant amounts or complex issues, professional tax advice is not an expense—it’s an investment in getting your tax position right.