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Instruction on accounting and auditing in Hong Kong


In order to make the entrepreneur to have more understanding of Hong Kong’s condition of business, and methods of management in corporation , especially the difference in bookkeeping and taxation between corporation (liabilities limited company) and firm (liabilities unlimited company ). With according to actual needs and existent questions, Tannet Group carries on the analysis and the comparison and compiles the information and explanation.

1. The difference in submission of tax return between corporation and firm
(1) Auditing: the business activity corporation must prepare the certified copy of financial statements and auditor’s report where required by Hong Kong Inland Revenue Ordinance. The auditor’s report is not required for firm.
(2) Profits tax rate: with according to The Government of Hong Kong SAR 2008-2009 Budget, 16.5 % for corporation and 15 % for individual (firm).
(3) Annual Return and Business Registration Certificate: in each anniversary, both corporation and firm are required to renew The Business Registration certificate, the submission of The Annual Return to Companies Registry is required for corporation only.

2. Determining the submission of “NIL” profits tax return – commence business or not yet commence business.
In Hong Kong, submission of “nil” profits tax return without auditor’s report and financial statement would be accepted for not yet commence business corporation, otherwise, the auditor’s report and financial statements must be submitted together with profits tax return. Basic principle for determining the commencement of business:
(1) There are transactions in the bank,
(2) There are import and export records in the Customs and Excise Department or logistics company,
(3) The sales or purchases have bee made to a Hong Kong customer,
(4) Recruiting the staff,
(5) The royalties or intellectual property is used in Hong Kong,
(6) Rental receipts from real property,
(7) Act as agent in Hong Kong,
(8) The profits arise in or are derived from Hong Kong.

3.  Basic principles for submission of tax return
There are three ways for submission:
(1) ‘Nil’ profits tax return – for not yet commence business,
(2) Profits tax return only – for firm (liabilities unlimited company ) which commence business, completed bookkeeping is priority,
(3) Profits tax return together with auditor’s report and financial statements – for corporation (liabilities limited company) which commence business.

4. ‘NIL’ profits tax return
In case of the company not yet commence business within the fiscal year, which may apply the exemption for submission of auditor’s report and financial statements. The first profits tax return would be issued by Inland Revenue Department to new set up  company on 18th month from the date of company incorporated. The “NIL” profits tax return must be submitted to Department within one month from the issued date. Our standard fee for completed “NIL” profits tax return is RMB800.00, and the flowchart : received profits tax return > signed and confirmed by director > paid the fee > completed and submitted the profits tax return to Department > finished and reported to clients.

5. Fiscal year and time limitation of submission of profit tax return
The basis period of fiscal year is 12 months, the basis period of the first profits tax return for new set up corporation would be permitted to18 moths. The corporations are required to complete and submit it to Inland Revenue Department within one month from the date of issue. The corporation need apply to the Department for such extension time. In the case of first profits tax return for corporations and their first fiscal year exceeds 18 month, they may submit it within three months in block from the date of issued and the application is not required. The block extension scheme as follows-
Accounting Date                     Extended Due Date
1st January    to  31st March           15th November
1st April      to  30th November        30th April of next year
1st December  to  31st December        15th August of next year

6. The preparing works and supporting documents for bookkeeping
(1) The preparing work:
a. Although the profits tax return will be issued after the year ended, the corporations need to always keep the records promptly since commencement of business.
b. Supporting documents and vouchers: with according to the nature of supporting documents and vouchers are kept in separately, also, the date of them must be within the fiscal year.
c. Effective supporting documents and vouchers:
Hong Kong Inland revenue recognizes all lawful invoices, receipts and memo.
(2)  Information and details are required for bookkeeping:
a. Bank statements and bank advices
b. Sales invoices and contracts, 
c. Purchases invoices and contracts,
d. Expenses vouchers, e.g. payrolls, rental receipts (included rental agreement) and transport receipts, etc.,
e. Other concerning documents: 2 copies of memorandum and articles of association, annual return, all the change’s information of company (if any), identified documents of acquisition of fixed assets and investments, receipts and payments of 3-5 subsequent settlements for carried forward outstanding of sales and purchases.
(3)  The process to provide the information for bookkeeping:
With according to corporation own situation, they may provide the information monthly, quarterly or half yearly, but they must be sure of sufficient times to prepare the accounting and auditing work.

7. Procedure for bookkeeping, auditing and submission of profits tax return
Appraisal, quotation, signing of appointment agreements > pay deposit > bookkeeping > finished bookkeeping > settle balance > auditing > completed auditing > approved and signed by director(s) > submission of profits tax return together with auditor’s report and financial statements to Inland Revenue Department > report to client with concerning documents

8. Services fee and payment term
Services fee for bookkeeping and auditing: For the turnover less than Hong Kong Dollars 5 Millions, bookkeeping fee is RMB3,500 and auditing fee is RMB5,500, surcharge is 0.1% on exceeding amount of turnover. Pay 50% for deposit before bookkeeping and the pay balance before auditing. Application of offshore income: Minimum service fee is RMB20,000 and full payment in advance. Pay cash, Bank transfer, T/T, Cheque or Cashier order is available.

9. Working date
Working date will be depended on the intricacies of information and documents supplied; it would be within 10 days to 3 months for completion.
 
10. Exceeding time limitation of submission of profit tax return and penalty
If do not to have submitted the tax return by the due date, it is an offence, in the absence of reasonable excuse, may be fined up to HK$10,000 and 3 times the amount of tax for year of assessment.

11. Glossary
(1)   Hong Kong auditor’s duty is as China Mainland auditor, under section 51(1) of the Inland Revenue Ordinance (Cap.112) , all corporations are required to appoint a Certified Public Accountant as company’s auditor, the auditor’s report would be presented in annual general meeting of shareholders, and the Inland Revenue Department require to submit auditor’s report for profits assessment.

(2)  Auditor’s report
Auditor’s report is prepared by Certified Public Accountant, provide the professional analysis of financial statements, auditor’s report is not only for profits assessment, but also being supporting documents of application of credit facilities, bank loan. It is as well as direction of improvement on company’s management and protects the shareholder’s interest in corporation.

(3)  Offshore income
Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. In simple terms this means that a person who carried on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits.

The following conditions and information must be considered and supplied:
a. An organization chart and details of the company’s establishments in Hong Kong
    and oversea. This should include the location and size of the office, the number of employees and their respective name, post title, duties and remuneration package.
b. The type of goods being purchased and sold.
c. How, where and by whom the suppliers were found and how the purchase price
    of the goods was determined. If by negotiation, explain how, where and by whom the negotiations were carried out.
d. Where formal purchase contract was made for every order/repeated order, How,
  where and by whom the contract was prepared and signed.
e. How, where and by whom the purchase order was initiated, processed and placed
 with the supplier.
f. How and where the shipment of goods from supplier was arranged and who
inspected the goods before shipment was made.
g. Wheher the goods from suppliers passed though Hong Kong and whether
  inventory has been maintained in Hong Kong to fulfill orders from customers.
h. The method of financing the purchase of goods and how payment was made to
 the supplier.
i. A list of the ten largest suppliers, giving the respective name, address, amount of
 yearly purchase and relationship with the company, its directors or shareholders,
if any.
j. How, where and by whom the customers were solicited and how the sales price
 of the goods was determined. If by negotiation, explain how, where and by whom the negotiation was carried out.
k. Where formal sales contract was made for every order/repeated order, How,
where and by whom the contract was prepared and signed.
l. How and where the purchase order from customer was received and processed,
 who had the ultimate authority to accept the order.
m. How the shipment of goods to customers was arranged.
n. How the customer settled its accounts (e.g. by letter of credit, bill of exchange
  etc).
o. Giving the customers, name, address, amount of yearly sales and relationship
 with the Company, its directors or shareholders. If any.
p. For the two largest amount of sales transaction, describe thoroughly how, where
  and by whom such activities were performed, from negotiations with buyers and suppliers, conclusion of contracts, issue and receipt of sales and purchase orders, confirmation and acceptance of the orders, delivery of goods to final settlement of accounts.

12. Tax information
Hong Kong‘s tax base is narrow, which divided into two main sectors, 1) Hong Kong direct (corporate) taxation, 2) Hong Kong personal (unincorporated/firm) taxation.

(1) Profits tax – being Hong Kong direct corporate taxation
Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. There is therefore no distinction made between residents and non-residents. A resident may therefore derive profits from abroad without suffering tax; conversely, a non-resident may suffer tax on profits arising in Hong Kong. The question of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong is largely one of fact; No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.
If a person sells his flat or any property as part of a scheme of profit-making, it will be regarded as a business and he is required to pay tax on any profit he may make.
(2)  Import tax – being Hong Kong direct taxation
Hong Kong is a duty-free port and there is no tax or duty for importing household goods; the dutiable items: alcoholic drinks, cigarettes, tobacco and perfumes.
(3) Salary Tax – being Hong Kong personal taxation
Persons are chargeable to Salaries Tax on their income arising in or derived from Hong Kong from an office or employment or any pension. Salaries Tax is chargeable on the smaller of their net chargeable income at progressive rates and their net income at standard rate for each year of assessment.
Net Chargeable Income = Total Income – Deductions - Allowance
Net Income = Total Income – Deductions

13. Records keeping
(1)  Section 51C of the Inland Revenue Ordinance requires every person carrying on a trade, profession or business in Hong Kong to keep sufficient records in the English or Chinese language of his income and expenditure to enable the assessable profits to be readily ascertained.
(2)  Such records shall be retained for a period of not less than 7 years.
(3)  Failure to comply with the requirements of the Ordinance without reasonable
excuse may be liable to a maximum fine of $100,000

14. Reduce tax legally
Reduction of tax must be carried out legally, first of all, the arrangement be done from internal financial control. The professional advices and analysis will be provided with according to the character of business and the tax policies.

15. Contact us
Tannet Group – Financial planning department
Contact persons: MR. CHAN
Tel: (+852) 2783 7818  Fax: (+852) 2783 7978

 

 
Source: Author: Time:2009-2-1
 
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