So you want to pursue your offshore claim before your profit tax return is issued? There may be a few reasons for this:
Your business model is new and you want to ensure that it will be approved as an offshore business model.
You are making a lot of money already in your first year, and don’t want to risk continuing to operate the business and have this overhanging potential tax liability in your mind.
What most Hong Kong CPAs will advise you to do is to simply wait the 18 months after your company has been formed and then submit the profit tax return with your audit, including the offshore claim. The government will review the case and and financial statements to accept or decline the offshore election. If rejected, we will work with you to dispute this and re-iterate the offshore status.
So some clients don’t want to wait the 18 months + 3 to 6 months after the profit tax return is submitted to be 100% sure of their fate. We do our best to determine if your case will be approved or not, but we can never guarantee what the Hong Kong IRD (Internal Revenue Department) can do.
If you must have the answer before the tax filing timeframe, we will do an advance ruling.
An advance ruling is where you ask the tax department to classify a certain transaction. This can be for offshore ruling, but it can also be for other types of transactions as well.
Today we will focus on it as an offshore advance ruling case.
Government Charges an Upfront Application Fee
To apply for an advance ruling, you need to pay the tax authorities to review your case. There are 2 fee choices:
10,000 HKD – for small cases on how to classify a transaction
30,000 HKD for territory tax classification requests
It is also important to note, this is not a flat rate. This is for up to 23 hours of the IRD staff’s time on the case (for the territory tax request). If the 23 hours are used up on your case, then they will go to hourly billing. For that, it is 1500hkd an hour.
So please keep this in mind when you are pursuing an advance ruling case. The CPA will not earn money on this fee, this is a direct fee going to the Hong Kong government.
Collect All Necessary Documents for The Case
Once you have approved to go ahead with the government fee, we need to collect a long list of items to go through on the case.
Items will be from the staffing agreements you have in place to organizational charts.
You May Need To Create New Documents To Fulfill The Case
The list is quite extensive, and your company may have never had a need for some of these before. If this is the case, someone, either in your company or our firm, will need to prepare those documents.
We have templates and systems in place to help you with the process, let us know who will be the point of contact. Also let us know if you want us to create the forms and other documents, or you will fulfill those on your side.
Once All Documents Gathered + Created – Time To Submit
Once the case has been prepared and all items on the extensive checklist have been gathered, we now need to complete the forms and submit all to the IRD.
They will review these documents and also first take the check for the application. If there are any issues with the application, they will let you know, but bear in mind their application fee is not refundable once submitted.
Pursuing the Case + Following Up
Once the documents and complete application is in the hands of the IRD, we will work to the best of our ability to expedite it. This is best done by visiting the IRD in person in Wan Chai district of Hong Kong. We can make appointments with them and answer any questions or concerns that they have.
This really depends on the complexity of your case. If this is truly a new style of transactions and a new business model for the Hong Kong tax department, it may take time to explain and ensure that they are classifying these items correctly.
By doing this in advance, you can get the confidence you will be able to conduct business in the same manner going forward for years to come.
Answering Questions and Difference of Opinions The IRD Has
So once they review the case, and we have followed up – they will most likely have questions. It is our responsibility to fully understand your business model and quickly follow up with the tax authorities when they ask.
We also will keep you informed in a timely manner of what they are asking and if you also want to include other documents or business proof to help the case it will be appreciated.
Once Advance Ruling Is Approved It’s The Same As Offshore Claim
So once this process is over, you don’t need to wait until your profit tax return is issued in order to apply for an offshore claim. This is an advanced ruling offshore claim. We will prepare the audit, and the note on the filing that this advanced ruling has been passed.
It will last for 2-3 years until then the IRD may ask to confirm if the business model is the same or not. It will not require too much upkeep, but may take approximately 10 billable hours of our time at that 2-3 year milestone checkpoint.
We will be as transparent as possible with you for the entire process. Yet the ultimate ruling will come from the government, not us. We will use all the information you provide us, and to the best of our ability we will lobby for you.