During the past decade, Mainland China had a pro-Hong Kong policy to open a gate for its national people to visit the city. This policy has certainly brought new momentum to many retailing businesses here. Businesses like jewellery dealers, money exchangers, pharmacy, cosmetics, clothing and accessory retailers have been the most benefited businesses.
Let’s introduce a recent investigation case. There is a ‘dried seafood’ street in the Western District with over 20 retailers and wholesalers there. Among them was a long established store which had experienced their best trading records over the past 5 years. They had received a large number of mainlanders who had high spending power from over $3,000. to $100,000 per person. The firm had a turnover growth up to HK$100M p.a. in recent years!
The store was operated under a partnership of two brothers. Just over a few years, the brothers had really made good fortune, having millions of dollars in their bank accounts. It was fairly straight forward for them to purchase luxurious apartments in the Western mid-level District as well as to invest jointly in some residential units to earn rental. Despite the brothers had sought bank mortgages, they still needed to put up substantial deposits for acquisitions of the properties.
The firm had over many years appointed an accounting service company to prepare annual financial statements and tax returns. The service provider only adjusted certain figures on the returns which borne nothing to the reality. The partners had individually applied for personal assessment, i.e. to combine their profit income from the partnership and other income (mainly rentals) to compute their respective personal tax liability.
A tax officer responsible for the case had noticed that the individual partner had reported minor profits of around HK$100K for a year but rental income was as high as many hundred thousand dollars. This seemed to be an inbalanced situation of income and assets. According to general practices, the tax officer then made inquiry into the tax payers’ property details like acquisition costs, dates, instalments, sources of income, etc. The two tax payers had endeavored to answer the authority’s questions. They claimed that they had won big sums in Macau casinos, friends lending money to them for paying property deposits, or even made up a story of a long outstanding loan repaid from overseas.
It was quite obvious that the Inland Revenue Department could hardly accept the tax payers’ excuses and determined to commence investigation into the firm’s books, records and bank transactions. Certain tax officers had even paid site visits to the shop to count and project the sales of the retailer. They estimated that the turnover of the store was practically 10 times or more than the data per actual tax returns submitted!
The case had lasted for quite long. The two brothers were chased for understated taxes and fined with heavy penalty of more than 100% of the understated sums. It was already their luck not being sent to prison for their wrong doings!