There was a prominent and successful restaurant chain in Hong Kong having outlets all around the territory. The chain had also opened up a few large shops in the Guangdong Province. Annual turnover had been millions of dollars but the reported income was merely a few millions a year. To protect its long term operational stability, the group had begun acquisitions of landed properties about a decade ago, investing many millions in this sector.
The Inland Revenue Department always pays close attention on cash retailing businesses because profits would be most easily “run” away by tax payers. It was not surprising that the group one day received a field audit notice from the Inland Revenue that the Department would commence site audit on the group’s affairs. Without any hesitation, the board of directors promptly engaged an experienced tax professional accountant to handle enquiries from the government authority.
After reviewing the books and records of the group, the new professional accountant soon found out that there were a few Hong Kong subsidiaries which had large cash deposits (a few hundred thousand or even millions of dollars) in and out of their bank accounts, seemingly not relating to the catering business. The directors had no choice but to frankly confess to the professional accountant that these were underground RMB/HK$ exchange transactions conducted by them.
The above-said underground activities had an average net margin of 1.0-1.5%, thus the aggregate profits were really very substantial. The directors were advised to honestly disclose the affairs to the Inland Revenue Department in order to avoid more serious consequences. It was logical that the directors agreed to the professional advice and then they informed the Department about these commercial activities. The Department was promised to receive full details of such exchange transactions and the resulting profits earned. The professional accountant had conducted intensive work to sort out the net income and then reported them to the Inland Revenue Department. As the group only took the initiative to report additional income a few months after the Department had commenced the field audit, the group was finally fined up to 80% of the under-reported taxes. This was already considered not that severe.
We sincerely urge any business people to run their activities in a legal manner. If income is earned, pay tax!