A new era of profits tax filing

Jolene Otrema
Calvin Sit

A roundtable discussion highlights the impact of this month’s roll out of the first phase of the Inland Revenue Department’s e-Filing project, and how Hong Kong businesses can best prepare themselves for the change. Jolene Otrema reports

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Jolene Otrema
Calvin Sit

Speakers (from left): James Liu, Finance Director, IKEA at DFI Retail Group; Emily Chak, Tax Partner at PwC; Edmund Wong, Member of the Legislative Council of Hong Kong, Accountancy Functional Constituency; Leung Kin-wa, Deputy Commissioner (Operations) of the Inland Revenue Department; Charles Lee, South China (including Hong Kong SAR) Tax Leader at PwC; and Thomas Lee, Assistant Vice President for Group Taxation at PCCW

As the Inland Revenue Department (IRD) continues on its mission to go digital, businesses and the profession are watching the changes unfold. In 2021, the IRD embarked on a major digitalization process to digitalize the filing of profits tax returns in Hong Kong, titled the “e-Filing project.” This month, the IRD rolled out the first phase of the project, with a voluntary e-filing period commencing on 1 April 2023.

Amid this development, A Plus organized a roundtable discussion at the newly built Inland Revenue Centre in Kai Tak, to gather views from tax and accounting practitioners on the impact of the first phase, and how businesses can deal with those changes and transition successfully.

To kickstart the event, the IRD representatives briefly explained the reasons for the e-Filing project and its importance for Hong Kong. “We’ve come a long way in this digitalization journey, and this year we have launched the new e-filing system,” said Leung Kin-wa, Deputy Commissioner (Operations) of the IRD, and a member of the Hong Kong Institute of CPAs. “We are doing this to be in line with the government’s commitment to make Hong Kong a smart city and also to make sure we fall in line with international practices around tax filing.”

Aside from these overarching reasons, digitalizing Hong Kong’s tax filing also aims to enhance convenience, accuracy and make the overall tax administration become more environmentally-friendly. “From an environmental point of view, electronic tax filing saves paper and may help fulfil ESG requirements,” Leung explained. “And from a tax point of view, it is faster, more efficient and it’s actually better for companies because its brings everything together on to one platform which makes doing taxes easier. We’ve already come quite far on this journey.”

Leung pointed out that up until recently, only a small number of profits tax returns could be filed electronically through the IRD’s eTax Portal. Most returns were submitted in paper form because of limited data uploading capacity in the IRD’s information technology (IT) infrastructure. A peer review report on the exchange of information on request of Hong Kong, conducted by the Organization for Economic Co-operation and Development (OECD) in 2019, recommended that Hong Kong should take measures to ensure that accounting records for all businesses become available. Considering the issuance of a large number of profits tax returns and processing of voluminous accounting and financial data of companies in the city, there was a real need to collect and process accounting and financial data electronically.

Following a series of consultations with key stakeholders and recommendations from the OECD, the IRD began its tax digitalization journey in 2021 with a taxonomy package proposal and introduction of the Inland Revenue (Amendment) (Miscellaneous Provisions) Ordinance 2021, among others, to enhance the mechanism for furnishing tax returns.

“Practitioners will have to adopt basic knowledge of iXBRL and learn how to tag financial and tax documents in a different way.”

The taxonomy package is essentially a classification system that identifies and structures information in financial statements as well as tax computations and supporting schedules so that the information can be tagged and exchanged in an electronic format. This is an important first step to standardizing account reporting for e-filing.

Alongside the taxonomy package, the IRD also developed the IRD iXBRL Data Preparation Tools (the Tools), which allow taxpayers to convert financial statements and tax computations into inline eXtensible Business Reporting Language (iXBRL) data files, a standardized and specific international computer format for e-filing purposes.

Together, these trigger changes not only to the tax filing format but also behaviour in the preparation of audited financial statements in paper form. “Practitioners will have to adopt basic knowledge of iXBRL and learn how to tag financial and tax documents in a different way,” Leung explained.

The entire tax digitalization process will be rolled out in phases. The first phase, already launched this month, enhanced the existing eTax Portal to enable more businesses to voluntarily e-file their tax returns together with financial statements and tax computations in iXBRL format.

The second phase will be the implementation of mandatory e-filing of tax returns starting with large multinational enterprise (MNE) groups and then progressing on to small- and medium-sized enterprises (SMEs), with the ultimate goal of achieving full-scale mandatory e-filing by 2030.

“We hope that this year, taxpayers will begin to migrate and file voluntarily their profits tax returns online through the existing eTax platform, but if you don’t want to sign the tax return digitally right now, there is still an option to print a simplified tax form out and sign it physically after uploading the data files,” Leung explained.

“We call this a semi-electronic filing mode,” he added. “So while digital filing is optional, taxpayers can continue using paper mode, or a combination of both for now.”

Embracing the changes

“The implementation of voluntary e-filing this year has brought about some changes that practitioners need to be aware of,” Bo Bo Hui, Chief Assessor of the IRD, and an Institute member, who is the officer-in-charge of the e-Filing project, said. “Firstly, companies will now have to file tax returns and profits tax returns together with supporting documents. This includes small corporations and businesses with gross incomes not exceeding HK$2 million. In the past, they would have been exempt from furnishing supporting documents when filing their profits tax returns.

“Secondly, the IRD has upgraded its existing IT infrastructure to enhance processing capacity and strengthen the provision of digital services. Taxpayers are encouraged to upgrade or develop their own computer programs which are capable of converting their existing financial statements into the required iXBRL data files for e-filing purposes.” The IRD says it is fully equipped and stands ready to provide assistance as taxpayers make the transition.

“The IRD knows this is something new, especially for smaller companies. This is why we have developed the Tools online to assist taxpayers to convert their financial statements and tax computations into iXBRL data files. We have also uploaded detailed guidance, frequently asked questions (FAQs) and even provide an e-appointment service, online demonstration and training sessions so that taxpayers don’t have to struggle,” Hui assured.

“This is a good thing because we have fallen behind. Singapore and other countries are more advanced and we need to change the way we do things.”

Referring to the Tools, which consists of a tagging tool and template tool, Hui noted that these were designed with taxpayers in mind, with the template tool specifically built to help smooth the adoption and accounting process for smaller companies. “Big companies won’t be able to use the template tool. We recommend that they use the tagging tool,” she explained. With this tool, corporations or businesses can import their financial statements in Microsoft Word format and tax computations in Microsoft Excel format directly into the tool and then tag the accounting and tax data for generating the iXBRL data files. An auto-tagging function is included in the tagging tool to assist the users.

To get a broader view of how taxpayers are responding to these developments, Emily Chak, Tax Partner of PwC, and moderator of the roundtable, asked the participants to share their observations on the industry’s response so far. According to Edmund Wong, Member of the Legislative Council of Hong Kong, Accountancy Functional Constituency, and an Institute member, the e-Filing project was a long time coming. “From the government’s point of view, this is a good thing because we have fallen behind. Singapore and other countries are more advanced and we need to change the way we do things,” he said.

Based on a wide range of feedback, Wong concluded that general opinion is supportive of this initiative for the long run. “They understand the pressure to comply with international standards and that we need to be on par with our competitors and other countries, and frankly, it will be easier for IRD to do their job,” he said.

James Liu, Finance Director of IKEA at the DFI Retail Group and an Institute member, offered a retailer’s point of view, and agreed that this is a step in the right direction especially in boosting Hong Kong’s international image. “They have been doing this overseas for a long time now, and in Hong Kong, we want to attract talents. But when they come here and look at us, they might wonder why we haven’t got this? This needs to be addressed. How can we digitalize and promote our international image?” he said.

Thomas Lee, Assistant Vice President for Group Taxation at PCCW and an Institute member, who was involved in the pilot run of the e-filing system, also voiced his support for the IRD’s initiative. “There are more digital natives in the workplace today, and for this reason, companies are increasingly likely to embrace new technology changes,” he noted. “In the past, some people might remain sceptical, but nowadays, there isn’t a lot of pushback against new technology. Instead, they are keen to know how to use it, how it can benefit their companies, how it can be integrated with existing operations and platforms, and how it can add value to their businesses,” he said.

Expected initial issues

Of course, transitions aren’t always smooth. However, Leung assured taxpayers and practitioners that the IRD understands that change takes time, so it has introduced further extensions for adoption of voluntary e-filing and will allow room for errors to address technical issues that may arise, and will take a lenient approach in assessing the accuracy of tagging.

“The IRD understands that tagging is new to all taxpayers,” Hui added. “But during the transition period, the IRD will be more lenient. For example if you incorrectly tagged an item as electricity instead of entertainment, but it doesn’t affect your overall profits, it won’t trigger an error and there will be no penalty actions. It will get looked at on a case-by-case basis.”

Leung further assures taxpayers, pointing out that the IRD is now working hard to come up with potential scenarios and common errors and the relevant penal action. “We understand that this is all new and taxpayers are bound to make some mistakes,” Leung said. “Penalties will be considered on a case-by-case basis. We will look at why there was an error in the first place and whether there should be a penalty. We are also addressing these in our FAQs, which were published on 3 April on the IRD website.”

The IRD believes a long transitional period is the best way to allow people to get used to the new e-filing system. At the same time, it hopes that these leniencies will encourage an early uptake.

Charles Lee, PwC’s South China (including Hong Kong SAR) Tax Leader and an Institute member, pointed out that MNCs aren’t surprised by the changes, and because some have already been using e-filing for their tax management and compliance in other countries including in Mainland China, they generally welcome e-filing which aligns with international practice. For local companies, however, there could be practical challenges for them upon first-time adoption. “Local companies would consider the need to upskill staff and upgrade technology for a smooth transition, so it is likely that they will adopt a phased approach, which would allow them to have sufficient time getting prepared,” he said.

IKEA’s Liu agreed, adding that implementation, though voluntary for now, implies the need for speed and cost. “That is key. The faster the IRD rolls it out, the more it will cost as you have to figure out how to support the talent in-house or get external advisory,” he explained. Calling it an egg and chicken situation, he recommended that the government could also offer more financial assistance to encourage faster adoption. “That would be best,” he said.

“Local companies would consider the need to upskill staff and upgrade technology for a smooth transition, so it is likely that they will adopt a phased approach.”

Wong anticipated that small companies that don’t outsource the e-filing to service providers or use audit firms will face a skills problem. However, he encouraged SMEs to keep an open mind regarding this new way of filing profits tax returns and not to see it as an inconvenience, as well as make use of all the help that the IRD is offering.

Leung agreed, adding that: “e-filing is an essential step in our digital journey. I believe this shouldn’t be a problem for many MNCs, while for SMEs – I do believe they should try to get familiar with this system as early as possible. They shouldn’t be mistaken that only large corporations should use this system.”

According to Wong, e-filing would also significantly help businesses experiencing manpower problems or talent shortages, as it would make it easier to sign than paperwork and streamline the whole process. “In the long run, this will significantly reduce the back and forth between staff and this is a good thing,” he said. “But it takes time to adjust and we know this. By 2030, I am sure we will all be ready to move away from paper.”

Corporate taxpayers are not alone. Liu surmized that experienced tax experts will also face a skills challenge. “To have experience means that they are older, and will have to learn to use the technology, unlike the newcomers who are digital natives but lack the industry experience, so it’s a question of how do we upskill?”

“Ultimately, the skill issue goes beyond e-filing,” commented Charles Lee. “Digitalization is the global trend and when technology comes into the tax practice, it’s a journey where both tax experts and taxpayers should stay ahead with the trend. There are new technologies and software that could greatly add value to the industry, but collectively we have been stuck in our old habits. That’s why we’ve also begun hiring students with a background in STEM subjects in addition to accounting.”

Considering the experience overseas

Chak then asked the participants’ thoughts on the key success factors for a smooth transition. Collectively, the participants agreed that a successful transition to e-filing will require two things on the part of companies: retraining staff to use the technology and software around e-filing, including converting files to the iXBRL reporting standard, and having a positive mindset change.

In the United Kingdom, iXBRL filing was first introduced in 2010 by Her Majesty’s Revenue and Customs and Companies House. Liu, who was working in England at the time, said that responding to the new regulation was all about effective change management. “The beauty is that Hong Kong is offering a long transitional period. There are less penalties for making mistakes and companies are more likely to go ahead and try and do it, and deal with the mistakes when they creep up later,” he said, noting that other countries have implemented it in a more rigid manner. “So once you’ve done it, the second time is about fine tuning, and by the third time it will be smooth. That’s the way these things go, but it’s all about taking that first step,” he added.

Drawing on his own international experiences, Wong said he expects bigger companies to have less difficulties as this is nothing new for them. He also applauded the current measures put in place by the IRD to help SMEs and said that that should be a motivating factor for smaller companies to get going.

Charles Lee echoed this sentiment. “E-filing was always inevitable and to some extent. Hong Kong is a little late relative to the rest of the world. It is a great opportunity to promote this in the post-COVID-19 era as I’m confident that having been through the pandemic, all organizations will maintain a more positive attitude to this development. Taking the first step to embrace the change and familiarize with the policy is key.”

Thomas Lee then voiced his hopes that the platforms and tools in place now would continue to evolve based on feedback. “This shouldn’t be the only version, this is just version one. I hope there will be a channel for businesses and professional firms to give feedback to the authorities so that the technology infrastructure can continue to improve and create more value for all parties, and that would create a win-win situation for all,” he said.

At the end of the day, the e-Filing project will be more than just a standardization exercise, but also about solidifying Hong Kong’s position as an international financial centre. “I think digitalization is a key milestone for Hong Kong in paving its way forward to become a future smart city,” said Liu. “It is also a way to achieve sustainability which is a key foundation to building a future for generations to thrive.”

The e-Filing project is being implemented in two phases. The first phase, launched this month, enhanced the existing eTax Portal to enable more businesses to voluntarily e-file their tax returns together with financial statements and tax computations in iXBRL format. The second phase will be the implementation of mandatory e-filing of tax returns starting with large multinational enterprise groups and then progressing on to small- and medium-sized enterprises.

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