ACCOUNTING, ARRANGEMENT OF AUDITING AND TAXATION
Hong Kong Company's Accounting and Taxation Guide
In accordance with the Chapter 622 NEW COMPANIES ORDINANCE, Chapter 122 AUDIT ORDINANCE and Chapter 112 INLAND REVENUE ORDINANCE, all companies in Hong Kong must file the auditor's report and annual income tax return (for new companies, the auditor's report must be filled within 18 months after the incorporation, and file annual income tax return within 3 months after issuing). All Hong Kong companies must prepare and submit the tax return based on the auditor's report.
The general purpose of auditing is to grasp the management status and financial status of the company from an objective point of view, to avoid damages caused by unforeseen financial difficulties of stakeholders such as shareholders, creditors, and trading partners, and it is to increase the trust between investors and stakeholders.
In addition to declaring the income of the tax department, the auditor's report is required to be submitted to the immigration department when applying for a visa application of the company. It should also be submitted when applying for a loan to the bank. In addition, it is widely used for partnership commercial transactions, supply and purchase contracts, .
The accounting cost of a Hong Kong company is usually calculated by measuring the estimated time spent on average monthly transactions or the number of transactions per year. The concept of the number of transactions is usually based on every revenue or expenses incurred by the company.
For example, if you have 3 sales and 5 expenses, you have 8 transactions.
The following is a list of universal details included in the accounting process.
Statement of Financial Position (also known as Balance Sheet)
Income Statement (also known as Profit and Loss Account)
In case of conducting the auditing after the preparation of an accounting book, due to the business nature and corresponding audit risk, the final estimate of the auditing fee will be offered from the auditor after all the accounting books have been prepared. Generally, the arrangement of the auditing for small companies usually costs from HK$5,000 to HK$10,000 and depending on the time consuming on the process and the risk level of the auditing, it may incur additional cost in relation to the corresponding additional works.
It usually takes one to two months to prepare an auditor's report.
Preparatory documents for accounting and auditing arrangement
** Identify materials for accounting work:
1. Corporate account bank statement
2. All documents related to the transactions: invoice / receipt / waybill / contract / etc
3. Documents related to expenses incurred at the time of incorporation: invoice / receipt, etc.
4. Payment of shares: Payment of shares set up in the beginning of incorporation (if paid, with payment receipt)
5. Details of employees' wage statement
6. Receipts, lease agreements, and other expenditures related to office operations
7. Director(s)' lending or borrowing status: Check whether director(s) borrowed or lended money from/to the company
8. Check whether you have a Petty Cash Account, if applicable, provide an account ledger and expense receipts
** Confirmation of business nature for an arrangement of auditing:
9. Confirm business items and business status: Identify what goods or services are being traded and source of supplying
10. Confirm business flow:
How sales and profits are generated, how costs are handled, whether there was an outsourcing in the process of costing, how many percent of sales or profits are generated, whether outsourcing companies, suppliers and customers are related parties(relationship with the company's ownership or operating rights), whether the company has any subsidiary, etc.
** Confirm the contents for tax declaration:
11. Confirm whether your company had any trade with offshore company(s) such as BVI, Seychelles, Samoa, Cayman, etc.
12. Confirm whether your company had any offshore income: Whether business activities such as sales/purchasing of goods or services have not occurred in Hong Kong, and transactions with trading partners have occurred in areas not related to Hong Kong
Guidelines for Offshore Claims
(Offshore claim in Hong Kong may result in tax liability in another jurisdiction)
The focus of the offshore earnings is based on the fact that the transaction profits originate outside (offshore) rather than within Hong Kong.
The following are the items to be confirmed by the Hong Kong Inland Revenue Department when filing an offshore income tax return.
1. Supplier / Consumer's jurisdiction (Location of Supplier / Customer)
2. Location of the service rendered.
3. Business Cycle
4. Location of daily operation / management
5. Location of the contract made
Therefore, if the profits were generated from the transactions with the items mentioned above are all originated in areas other than Hong Kong, it will be possible to proceed with tax exemption.
If you would like to claim for the offshore income, you should refer following costs:
1. Accounting and auditing arrangement: 30% to 50% increase from the general costs of accounting and auditing arrangement
2. HK$25,000 ~ 30,000 will be incurred for preperation of the first letter from IRD and for the relevant investigation.
3. HK$15,000 will be incurred for preperation of the second letter from IRD and for the relevant investigation.(further handling of each letter will incur HK$15,000 after the second letter)
** Offshore income tax returns are treated as non-taxable, but there are costs associated with complicated documents, due diligence by tax authorities, and time-consuming investigations.
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