Hong Kong Court docket of Closing Enchantment Confirms That Administrators Are Not Responsible for Penalty Tax for Signing Incorrect Firm Tax Return

August 17, 2022

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The Court docket of Closing Enchantment (the “CFA”) has lately confirmed {that a} director just isn’t liable to penalty, by means of further tax, arising from an incorrect tax return filed by the corporate which he/she has signed and declared to be appropriate, on the premise that he/she shouldn’t be regarded having made the corporate’s incorrect tax return.[1]

The CFA’s judgment offers readability on the which means and impact of s 82A(1)(a) of the Inland Income Ordinance (Cap. 112) (the “IRO”), which empowers the Commissioner of Inland Income (the “Commissioner”) to impose further tax, generally known as penalty tax, on any one who with out affordable excuse “makes” an incorrect tax return.

It ought to, nevertheless, be famous that the related provision has additionally lately been amended to cowl an individual who “causes or permits to be made on the particular person’s behalf, an incorrect return”, and it stays to be seen how this modification will have an effect on a director’s legal responsibility in relation to any firm’s incorrect returns signed and declared to be appropriate by him/her.

1. Background and Procedural Historical past

The CFA judgment was on the attraction by the Commissioner towards a call of the Court docket of Enchantment (“CA”) in October 2019, by which the CA dismissed the Commissioner’s attraction towards a call of the Court docket of First Occasion (the “CFI”) made in November 2018. The CFI dominated in favour of Mr Koo Ming Kown (“Mr Koo”) and Mr Murakami Tadao (“Mr Murakami”), who appealed towards two earlier selections of the Board of Evaluate (the “Board”) upholding sure penalty tax assessed towards them.[2]

Mr Koo and Mr Murakami had been administrators of Nam Tai Digital & Electrical Merchandise Restricted (the “Firm”) on the materials instances when the Firm’s returns for the years 1996/97, 1997/98 and 1999/2000 had been filed. Mr Koo and Mr Murakami respectively signed and declared to be appropriate the primary and third, and the second, of those returns. Mr Murakami and Mr Koo ceased to be administrators of the Firm in 2002 and 2006 respectively.

Following a tax audit in 2002, the Inland Income Division (the “IRD”) disallowed claims for deductions made within the returns, and assessed the Firm to undercharged tax underneath s 60 of the IRO, which the Firm challenged unsuccessfully. The Firm didn’t pay the quantities assessed and was ultimately wound up in June 2012 by the court docket on the petition of the Commissioner.

In 2013, Mr Koo and Mr Murakami had been assessed to further tax underneath s 82A(1)(a) of the IRO within the quantity of HK$12,600,000 and HK$5,400,000 respectively, on the premise that the Firm’s returns had been incorrect. They appealed to the Board, which discovered towards them. The Board discovered the returns to have been incorrect and elevated the general quantities payable by Mr Koo and Mr Murakami.

Mr Koo and Mr Murakami appealed to the CFI, which accepted their major argument that they didn’t fall inside s 82A(1)(a) of the IRO. The CFI ordered the annulment of the extra tax assessments towards Mr Koo and Mr Murakami. The Commissioner appealed to the CA, which upheld the CFI’s resolution that Mr Koo and Mr Murakami weren’t required by the IRO to make the returns on behalf of the Firm, and subsequently couldn’t be made liable to further tax underneath s 82A(1)(a).

The Commissioner appealed to the CFA however Mr Koo and Mr Murakami knowledgeable the CFA that they didn’t intend to oppose the Commissioner’s attraction and wouldn’t attend the listening to in particular person or instruct attorneys to take action. The CFA appointed Mr Eugene Fung SC and Mr John Leung as amici curiae, who filed submissions addressing the questions earlier than the CFA that supported the CA and CFI selections.

2. The CFA’s Resolution

Whether or not Mr Koo and Mr Murakami must be chargeable for the Firm’s incorrect returns signed by them will depend on whether or not they fall throughout the description, within the s 82A(1)(a) prevailing on the materials instances, of a “one who with out affordable excuse – (a) makes an incorrect return by omitting or understating something in respect of which he’s required by this Ordinance to make a return, both on his behalf or on behalf of one other particular person…”[3]

The Commissioner contended that the people specified underneath s 57(1),[4] which included Mr Koo and Mr Murakami as administrators of the Firm, had been “answerable” for doing all such acts as had been required to be executed by the Firm underneath the IRO, and accordingly they had been required to make the Firm’s returns; and additional that, by bodily signing and declaring to be appropriate the related Firm’s returns, they did make the Firm’s return on behalf of the Firm as a company taxpayer. On the case for the Commissioner, the people recognized underneath s 57(1) to be “answerable” (for doing all such acts as required to be executed by a company taxpayer) are required (secondarily) to do such acts which the company taxpayer is (primarily) required to do underneath the IRO.

Upon inspecting the legislative historical past and context, the CFA disagreed with the Commissioner’s building of the related provisions within the IRO. The CFA confirmed the choices of the CFI and the CA and concluded that the Firm (being the entity to which the discover for making a return was issued underneath s 51(1)), quite than the person who signed the return, was the “particular person” legally required to make, and did make, the return. There’s a distinction between answerability underneath s 57(1), which signifies that the people specified underneath s 57(1) are liable for seeing or guaranteeing the company taxpayer does the act in query, and an obligation or requirement to do such act on behalf of the corporate.

Accordingly, the CFA dismissed the Commissioner’s attraction.

3. Conclusion

The CFA judgment helpfully clarifies {that a} director of an organization (or some other related particular person specified underneath s 57(1)) just isn’t required to “make” the tax return of the corporate, and doesn’t make such tax return by motive that he/she has signed, and declared his/her perception within the correctness of the data in, the returns filed by the corporate. Subsequently, such director or particular person specified underneath s 57(1) doesn’t incur legal responsibility underneath s 82A(1)(a) of the IRO.

Nonetheless, as from 11 June 2021, s 82A(1)(a) has been amended to offer that “[a]ny one who with out affordable excuse—(a) makes, or causes or permits to be made on the particular person’s behalf, an incorrect return by omitting or understating something in respect of which he’s required by this Ordinance to make a return, both on his behalf or on behalf of one other particular person…” (emphasis added to point out the amendments).[5]

It stays to be seen whether or not, however that an organization’s director signing (or approving the submitting of) the corporate’s tax return just isn’t one who “makes” the tax return, he/she could be caught by the present s 82A(1)(a) as an individual who has “prompted” or “allowed” the tax return to be made on the corporate’s behalf, and therefore could also be uncovered to legal responsibility ought to the corporate’s tax return be discovered to be incorrect.

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[1] Koo Ming Kown & Murakami Tadao v Commissioner of Inland Income [2022] HKCFA 18. A duplicate of the judgment of the Court docket of Closing Enchantment is obtainable here. The judgment within the Court docket of Enchantment ([2021] HKCA 1037) is obtainable here. The judgment within the Court docket of First Occasion ([2018] HKCFI 2593) is obtainable here.

[2] Board of Evaluate, Circumstances D32/16 (accessible here) and D33/16 (accessible here).

[3] The present s 82A(1)(a) offers that “[a]ny one who with out affordable excuse—(a) makes, or causes or permits to be made on the particular person’s behalf, an incorrect return by omitting or understating something in respect of which he’s required by this Ordinance to make a return, both on his behalf or on behalf of one other particular person…” (emphasis added to point out the amendments).

[4] The then-prevailing s 57(1) offered that “[t]he secretary, supervisor, any director or the liquidator of an organization and the principal officer of a physique of individuals shall be answerable for doing all such acts, issues or issues as are required to be executed underneath the provisions of this Ordinance by such company or physique of individuals”; while the present s 57(1) offers that “[t]he following particular person is answerable for doing all of the acts, issues or issues which can be required to be executed underneath the provisions of this Ordinance by an organization or physique of individuals—(b) for some other company [that is not an open-ended fund company], the secretary, supervisor, any director or the provisional liquidator or liquidator of the company…”

[5] See the Inland Income (Modification) (Miscellaneous Provisions) Ordinance 2021, Ord. No. 18 of 2021, Gazette printed on 11 June 2021, No. 23 Vol. 25 – Authorized Complement No. 1, accessible here.

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Gibson Dunn’s attorneys can be found to help in addressing any questions you might have relating to these developments. Please contact the Gibson Dunn lawyer with whom you often work, or the authors and the next attorneys within the Litigation Apply Group of the agency in Hong Kong:

Brian Gilchrist (+852 2214 3820, bgilchrist@gibsondunn.com)
Elaine Chen (+852 2214 3821, echen@gibsondunn.com)
Alex Wong (+852 2214 3822, awong@gibsondunn.com)
Celine Leung (+852 2214 3823, cleung@gibsondunn.com)

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