The investigation team of the Inland Revenue Department (“IRD”) has always been highly concerned with taxpayers in retail businesses because these businesses have the most incentives to evade taxes and are not easy to detect.

Hong Kong does not have a sales tax, while there is such a tax item in Mainland China. How to “effectively” reduce the sales tax on retail income in Mainland China? The method is actually very simple! Just an the accounting software engineer to make some simple modifications in the POS (point of sale system), one can save as much as he wants. (Note: this is illegal).

But the problem comes back. Unless a certain retail business doesn’t make money or makes very little money, the sales revenue saved from the POS manipulation must be divided among shareholders. How is this done?

To answer the above “problem”, the simplest method is to bring the remaining cash back to Hong Kong, whether by personally carrying it or through underground money changers to transfer it to a Hong Kong account (disclaimer: both methods are against the rules). However, in the case of accumulating over time, a certain Hong Kong taxpayer over time would have accumulated a huge “unexplained” income.

We had recruited a new customer last year, who was operating a restaurant chain in Shenzhen. From the first restaurant five years ago to the seventh one now, he and used the above “bringing” money back to Hong Kong method to avoid the investigation of the Chinese tax authority. Unfortunately, this customer attracted the attention of the Hong Kong tax authority because he had earned too much in Shenzhen and purchased a large mansion on the Hong Kong Island for personal use last year, which was completely disproportionate to his income and property acquisition outlay.

After receiving an investigation letter from the Hong Kong IRD, this customer searched for “tax investigation” online because he had not hired an accountant before, and our firm was chosen because we had good experience in this area.

After 6 months of communication with the IRD, we finally resolved the case for the client, and they only had to pay a small amount of Hong Kong taxes and fines. However, the client should not be too happy and think that everything is over. According to the cross-border tax communication mechanism between Hong Kong and Mainland China, the Hong Kong IRD will inform the Shenzhen tax authority about this case, and the client will soon be in big trouble! From this case, we can see that dishonesty, greed, and self-righteousness may lead to a big fall on the tax road. Let us review ourselves whether there are any mistakes we have made.