FAQs About Auditing & Profits Tax Return

fter reading our previous article in relation to auditing and profits tax return in Hong Kong, we believe that you now have a basic understanding of the related matters. Today, let’s take a look at some of the most frequently asked questions we receive at FastLane.

The content and depth of the audit documents depend on the identified risks of material misstatement, the judgement required in performing the audit and the significance of the audit evidence obtained by the auditor.

2. How can I apply for reporting exemption?
According to the new Company Ordinance, private and guarantee companies are qualified to prepare simplified accounts and directors’ reports.
To qualify for the reporting exemption, you need to meet the requirements below:
For a small private company, it is required to meet two of the following conditions:

For a small guarantee company, it is required that:

Please note that for the subsidiaries of a listed company, you may qualify for reporting exemption, in the case that it is not a company specified in section 359(4) (for example, an insurance company or a bank) if you meet the requirements above.

3. How does reporting exemption help simplify the reports for qualified companies?
For companies that qualify for reporting exemption, the financial statements can be prepared following the Small and Medium-Sized Entity Financial Reporting Standard and Financial Reporting Framework.
Moreover, for the qualified companies, it is not required to prepare the following when creating the accounts and directors’ reports:

Please note that for reporting exemption-qualified companies, their financial statements are still required to be audited.

4. When is the Profits Tax Return deadline in 2020?
The due date for Profits Tax Return depends on how you set your financial year-end date. For limited companies or unincorporated businesses in Hong Kong, you can select any date as your fiscal year-end date. Most companies in Hong Kong set their financial year-end date on December 31st or March 31st.

It is worth mentioning that for new companies in Hong Kong, the first Profits Tax Return will be sent to you by the IRD (Inland Revenue Department) 18 months after the date of incorporation, and you will have a 3-month period to return the form. However, starting from the second Profits Tax Return, you will only have 1 month to submit the Profits Tax Return.

If you chose December 31st as your financial year-end date, it is required to file your Profits Tax Return by mid-August. For companies that set the fiscal year-end date as March 31st, the deadline tax return submission would be mid-November. If you choose a different date as your accounting year-end date, IRD will send you the Profits Tax Return on the first working day of April, and you need to file the tax return by end of April.

5. What happens if I missed the deadline for Profits Tax Return submission?
Late submission in Profits tax return may subject to a penalty payment of HK$10,000 and triple amount of the tax. You are also subject to prosecution. To avoid delay in Profits Tax Return filing, it is recommended to have all the documents prepared for your CPA, as the document preparation process is normally the longest process to an audit.

6. Can I extend the deadline for Profits Tax Return submission?
Yes, a further 2-weeks extension will be granted to Small Corporations and Small Partnership Businesses on application, if they file the Profits Tax Return through online platform.

7. Can I change year-end date for my company?
Yes, you can change the year-end date. However, please note that the financial year cannot be longer than 18 months. It is not allowed to extend the financial year-end date again within a five-year period from your previous year-end extension.

8. Do I still need to audit my accounts and submit Profits Tax Return if I am not making profits or the business has not yet started?

In the case that your business has yet to commence, you are allowed to report that it has “not yet commenced” to IRD (Inland Revenue Department). The company director or company secretary must provide a declaration of a not yet commenced business. You can file a “NIL” Profits Tax Return to the IRD by absence of an audit report.

However, please note that you are still required to prepare an audited financial statement even when the business has not yet started. Once your business commences, you are required to submit your first and subsequent years’ financial statements.

9. As an offshore company, do I need to submit a Profits Tax Return?
In the case that all income of the offshore company is generated outside Hong Kong, you can make an offshore claim and apply for profit tax exemption. Please note that any profit derived from Hong Kong from trades, profession or business is liable to profit tax.

The offshore company needs to submit the Profits Tax Return and financial statement, together with an offshore claim. The company needs to provide the IRD with passports of all company directors, company invoices, contracts and other relevant documents. The Inland Revenue Department will examine and confirm that the company does not have any income derived from Hong Kong and thus is not required to pay tax in Hong Kong. The offshore claim status will stay effective in the course of 5 years.

10. What is Hong Kong’s profits tax deduction policy in 2020?
Per the Hong Kong 2020-21 Budget, a Hong Kong incorporated company may have their 2019-20 Hong Kong profits tax liabilities waived, up to a ceiling of HKD20,000.

Conclusion
We hope the frequently asked questions above are able to help you with your auditing problems.

Need help in performing an audit or handling your Profits Tax Return? Fastlane is a CPA firm that can help you handle all matters in accounting so you can focus on other areas of your business. Reach out to us today to learn more!