tax compliance and tax risk management

Tax Compliance and Tax Risk Management

An entity has corporate income tax reporting and/or payment obligations in general – in other words; tax compliance. Infringement of the tax obligations will potentially result into penal and/or even prosecution actions taken by tax authorities.

For a multi-national corporation, apart from the jurisdiction in which it is incorporated, it may have corporate income tax exposures (and accordingly income reporting and tax payment obligations) in other tax jurisdictions where it carries out business functions.

Tax compliance requirements

During the past years, for the purpose of combating tax evasion and aggressive tax avoidance, and enhancing transparency of tax information, most tax jurisdictions have introduced a number of new tax policies or actions, which are in accordance with the Base Erosion and Profit Shifting (BEPS) project and Common Reporting Standard (CRS) initiated by the Organisation for Economic Cooperation and Development (OECD).

In Hong Kong, apart from filing of profits tax returns and employer’s returns in which a number of the prescribed information is required to be disclosed, an entity is required to prepare transfer pricing documentations, such as master files, local files and country-by-country reports/notifications, if the exemption conditions cannot be met. Moreover, an entity is required to determine its tax residency based on the relevant tax rules for the purpose of the CRS.

An entity has to ensure that it has fulfilled all the tax compliance obligations, including provision of accurate and complete information and documents to the tax authorities.

Tax risk management and exposure

An entity’s management is advised to have a good understanding of and periodically review the entity’s tax position and risks in the relevant tax jurisdiction, in light of tax compliance. This is in order to mitigate the chance of sudden and unexpected tax investigations or tax payments conducted or demanded by tax authorities.

For example, Company A incorporated in Country A may have corporate income tax exposures or permanent establishment risks in Country B if it has certain management, control and/or business functions carried out in Country B.

The earlier such tax risks can be identified, the earlier Company A can take the appropriate actions to mitigate or eliminate those risks accordingly.

Transfer pricing is another aspect that tax authorities have great concerns thereon. An entity’s management is thus suggested to review whether the transactions with related parties are charged on an arm’s length basis and have a proper transfer pricing policy in place.  

Tax planning, tax avoidance and tax evasion

Some entities have tax planning conducted with a view to reduce their income tax liabilities and consequently avoid paying tax (tax avoidance).

It has to be noted that if the tax planning or tax avoidance consists out of trying to explore the loopholes of the tax laws and then arranging a series of transactions or schemes accordingly for the purpose of reducing or avoiding tax liabilities, these may be regarded by tax authorities as too aggressive.

While one may argue that the ‘aggressive’ tax planning is made within the limits of the laws, it is usually not accepted by the tax authorities. In particular, most tax jurisdictions, including Hong Kong, have specific and general anti-tax avoidance provisions in place to tackle too aggressive tax avoidance arrangements.

Different from tax planning and tax avoidance, tax evasion is an illegal act for the purpose of reducing or avoiding tax liabilities. Specifically, tax evasion may be achieved through various means, such as making false statements, non- or under-reporting of income, over-claiming of expenses as well as hiding facts and documents.

HKWJ Tax Law can help with tax compliance

Knowing the potential tax exposures and risks in advance and how to mitigate them are essential when running a business. A poor tax management and tax compliance may result into burdensome tax enquiries, tax audits and investigations by the tax authorities, which have to be handled with significant time and costs.

The worst scenario may be that the entity is ultimately required to pay a huge sum of unexpected tax plus interests and penalties due to non-compliance of certain tax obligations.

An entity may consider to engage a professional tax lawyer or advisor to closely monitor its tax compliance obligations and tax position.

In particular, when an entity has any potential new business activities, transactions, arrangements or restructuring, it is recommended to seek advice from tax professionals in regards of tax compliance to ascertain what are the resulting tax implications and consequences in the relevant tax jurisdictions.

Do not hesitate to get in touch with the HKWJ Tax Law professionals via the form below.

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