Advance Rulings in Hong Kong
Advance rulings on tax, a kind of tax insurance, help to reduce the tax risks companies may face. This, as for most investors and their management, potential tax liabilities and tax risks that may arise within the company remains a concern when conducting their businesses. As tax authorities and taxpayers generally tend to protect their own tax interests, tax disputes between the two sides have become quite common.
Why You May Want Advance Rulings on Tax?
One of the most controversial tax issues between the Inland Revenue Department (‘IRD’) and the taxpayers in Hong Kong relates to the source of income determination for Hong Kong profits tax purposes. Many taxpayers will spend a lot of manpower and time to handle the IRD’s source of income enquiries and some of these enquiries result even into tax audit investigations, a process which may last for several years.
However, taxpayers are able to obtain a certain degree of certainty from the IRD regarding their tax treatment of business arrangement/transaction, including certainty related to the source of income, resulting into a reduction of potential tax disputes with the IRD. For this to happen, taxpayers need to conclude an advance ruling in Hong Kong.
Advance Ruling Types
Nevertheless, the IRD is not willing to provide for advance rulings for all types of tax issues. Generally, taxpayers are only eligible to apply for such ruling in advance when it regards certainty in respect of determination on the source of income, whether or not a person (including a corporation) is carrying on business in Hong Kong, applications of the general anti-avoidance provisions in the relevant circumstances, the tax liability of a non-resident person and the treatment of tax losses.
Requirements for Obtaining an Advance Ruling
For the purpose of obtaining an advance ruling from the IRD, taxpayers are required to submit to the IRD a specific application form and all other related information and documents. In addition, the IRD levies a fee of at least HKD 15,000 – HKD 45,000. Usually, it will take about 6 weeks for the IRD to reply on the advance ruling application submitted. Please note that taxpayers should take care when supplying information and documents to the IRD in order to avoid any unfavourable effects on their tax position.
Knowing the IRD’s tax treatment/view on business arrangements/transactions in advance will assist the taxpayer to plan its business ahead and mitigate their concerns on the potential tax liabilities and tax risks arising from such business arrangements/transactions. If you have further questions on the advance ruling application or other tax issues, please feel free to contact HKWJ Tax Law & Partners Limited.