Tax Return and Other Reports
Bookkeeping and audit requirements are the first things to learn before registering a company in Hong Kong. Incorrectly prepared tax returns or delays in filing them will lead to fines and other issues.
Hong Kong Accounting and Audit Standards
The low level of corruption and the free flow of information make Hong Kong different from most other Asian countries. Since the 1970s, many anti-corruption measures have been taken. An Independent Commission Against Corruption has been established with a mandate to deal with the issue in both the private and the public sector.
Companies follow the Hong Kong Financial Reporting Standards (HKFRS), developed by the Hong Kong Institute of Certified Public Accountants (HKICPA), in keeping their accounting records. All companies are required to keep accounting records, regardless of where they operate. If there is no business activity, a zero tax return is filed.
Companies must keep all documents explaining their transactions for seven years. Documents must be organized by type and date. They will be required by the tax office if they decide to audit the company.
Preparation and Filing of Your First Tax Return in Hong Kong
The official fiscal year in Hong Kong begins on April, 1, and ends on March, 31. But companies are allowed to choose the end date of their accounting period. Offshore companies prefer an accounting period from January 1 to December 31. This is convenient if you have other foreign companies, where the reporting period corresponds to the calendar year.
The first tax return form is usually sent to the company 18 months after opening. It must be completed and sent back within three months from the date of issue. The tax office sends the next tax return a year later. This means that the services of an accountant and auditor will be required annually.
In practice, Hong Kong companies are faced with many subtleties that you need to know when preparing your accounts, especially in the first accounting period. An experienced accountant will tell you which transactions are to be taken into account in the first accounting period and which are not. With a large number of transactions, it makes sense to contact your accountant at least quarterly, not only before the preparation of accounting reports. This way you will be sure that you will not be late with filing the tax returns.
The cost of accounting services in Hong Kong depends on the number of company’s transactions, company’s turnover and the time spent on verification and reporting.
How Does Audit Work in Hong Kong?
The accounting and audit system of Hong Kong consists of the following three stages:
- Preparation of supporting documents
- Preparation of reports
Preparation of financial reports includes the following documents:
- The general ledger that has information on all the transactions;
- Profit and Loss Statement, Balance Sheet;
- Reports on the Accounts Payable and Receivable.
The auditor is required to review the financial statements to determine whether the company is in compliance with the tax laws and accounting standards issued by the HKICPA. He or she compares sales and purchases for each service and commodity, and assesses the reasonableness of expenses. He or she checks the supporting documents of the transactions for accuracy.
The auditor then shares their view of the fairness of the financial statements and issues an audit opinion. If the auditor leaves a negative opinion on the company, the auditor is required to indicate deficiencies identified during the audit.
The auditor’s report is signed by the firm’s directors. It is then sent to the tax authorities together with the tax return.
The auditor determines the territorial nature of the business. If the company did not conduct business in Hong Kong, he or she can prepare an appropriate justification and submit an application to the tax authorities for offshore status, exemption from income tax.
The tax office, receiving the statements with the audit report, takes into account the opinion of the auditors, but reserves the right to check the territorial character of the company. Such verification may be carried out immediately after the reporting period or in 2 to 3 years.
Audit of Hong Kong Companies: A Friend or a Foe?
Audit in Hong Kong might seem a tiresome procedure. But your attitude to it should rather be positive.
Auditors in Hong Kong take their work seriously. They report to the Government Authorities whether the company is working according to the rules. This means that if an auditor points out that the company complies with the requirements of Hong Kong laws, which are in line with international laws, then:
- this company acquires a good reputation in the eyes of the Government Authorities;
- the trust of customers and partners to the company increases;
- the chances of obtaining a loan from the bank also increase;
- your application for the offshore status will be approved.
In order to successfully pass the annual audit in Hong Kong, make sure you find an experienced auditor who understands the details of running your business. It is good if you use an accountant and an auditor from the same service provider in Hong Kong who has been working for your company throughout the year. The auditor will need less time to review the company’s documents if he or she is already familiar with them. This means the audit will cost less. But more importantly, you will avoid misunderstandings that could make the auditor give a negative opinion.
Should you need assistance with bookkeeping and audit in Hong Kong, do not hesitate to contact us by email or via online chat. Your company will be addressed by an experienced certified accountant directly from Hong Kong, but in English.