The last two years can be defined as an era of digital transformation, driven by the pandemic, where companies and businesses around the world have been in a race to supercharge and digitalize their services and operations.
Hong Kong’s Inland Revenue Department (IRD) is no exception and has embarked on a major digitalization process to implement electronic filing of profits tax returns, which it calls “the e-Filing Project.” To expand on details, the Hong Kong Institute of CPAs hosted a live webinar this month titled “The IRD’s eTAX Journey,” where William Chan CPA, Tax Partner at Grant Thornton and Chairman of the Institute’s Taxation Faculty Executive Committee, welcomed Benjamin Chan CPA, Acting Deputy Commissioner (Technical) of the IRD, who explained the purposes, objectives and key benefits for going digital as well as the IRD’s proposals for taking forward the e-Filing Project.
Currently, due to limitations of the IRD’s existing information technology (IT) infrastructure, only a small number of profits tax returns can be furnished electronically through the existing eTAX Portal, and most profits tax returns are submitted in paper form.
According to the IRD, one of the main reasons for implementing the e-Filing Project is to strengthen its IT infrastructure and to keep pace with global trends. “It’s really about modernizing and digitalizing our tax administration,” says Benjamin Chan. “This is an important initiative for our city, and this will benefit everyone including practitioners and businesses.”
Experts in the field agree and say it would be a welcome move, seeing that many businesses are still filing profits tax returns in paper format and have to visit the IRD’s office to submit their returns in person. “The world is online, so we need to go online,” says William Chan. “We have been asking for this and a timeline for quite some time.”
Timothy Chuk, Director of Asia Pacific Tax at Trinseo and Hong Kong Vice President of the Tax Executives Institute, agrees, saying that the move would save time and that COVID-19 has highlighted the inefficiencies of submitting tax returns in person to the IRD’s office. “These visits were made a lot harder during COVID-19,” he says. “There’s only one location for taxpayers to speak to someone or to submit their documents. It just doesn’t make sense.”
Why should the IRD digitalize?
Aside from these conveniences, there are also a host of reasons why the IRD has been actively pursuing the e-Filing Project.
Firstly, there is a need to comply with international standards. The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published its second Peer Review Report on the Exchange of Information on Request of Hong Kong (China) in March 2019. The Global Forum recommended that Hong Kong should take measures to ensure that all accounting records of all relevant businesses are made available.
“The peer review report highlighted a problem that we need to address. Quite a number of companies in Hong Kong don’t need to file their profits tax returns annually for a number of reasons, for example, newly incorporated companies, and companies that have sustained losses continuously or have been dormant for the past few years,” Benjamin Chan says. Given that there are around 1.4 million locally incorporated companies registered with the Company Registry in Hong Kong, he says that submitting all profits tax returns along with audited financial statements and tax computations in paper forms – the way it is done now – would make universal filing of tax returns a cumbersome task to manage. “Tremendous manpower resources would be required for processing paper profits tax returns, and on top of that we need to think about the storage, so in this area, we really need to think of a way that we can manage the processing of returns effectively and efficiently without paper,” he says.
“The IRD can increase their operational efficiency and have better usage and management of data collected during the tax filing process. This will also benefit taxpayers, who can do e-filing from anywhere.”
To cope with this, a full adoption of electronic filing of profits tax returns for businesses has to be implemented. “Given what is needed, we really need to improve our uploading capacity for audited financial statements and tax computations and the inline eXtensible Business Reporting Language (iXBRL) format is, in our view, a viable option,” Benjamin Chan reiterates.
Another reason to go digital, according to the IRD, is to improve operational efficiency and service performance. The implementation of digital services could help the IRD streamline the administrative processes.
Digitalization will also seek to upgrade the IRD’s current infrastructure and ability to provide more e-services to help facilitate the tax filing process, which may translate into a higher adoption rate of e-filing by taxpayers.
“For multinational corporations, the entire profits tax compliance process from preparing the working files for the tax return to internal reviews are all done online already, yet the Hong Kong government still requests a paper copy of tax return, audited financial statement and tax computation when everything is already digital,” says Chuk. “We must utilize technology in our businesses, and the IRD needs to do the same.”
“The IRD can increase their operational efficiency and have better usage and management of data collected during the tax filing process. This will also benefit taxpayers, who can do e-filing from anywhere; they don’t have to bother with opening hours of the IRD’s office or get to a post office,” says Anita Tsang CPA, Director of Tax Policy and Knowledge Management at KPMG Tax Services Limited.
Local initiatives are also adding pressure on the IRD to go digital. The Hong Kong government has been investing heavily in its Smart City Initiative with the launch of the Smart City Blueprint. With a mission to make Hong Kong a world class smart city, the Office of the Government Chief Information Officer already has the “iAM Smart” platform, which brings together personalized digital government services that allow users to conduct online government and commercial transactions, and manage their tax filing using a single digital identity and authentication.
“We must utilize technology in our businesses, and the IRD needs to do the same.”
Implementation of the project
The e-Filing Project will take place in two phases. The first phase, which is to be completed by 2023, will involve enhancing the existing eTAX Portal to enable more businesses to voluntarily and digitally file their profits tax returns together with financial statements and tax computations in iXBRL format. The next phase is to develop a new business tax portal, which is expected to be completed by 2025. Taking into consideration and observing how other jurisdictions have made the transition, the IRD has set out a timeline that aims at full implementation of electronic filing of profits tax returns, tentatively by 2030.
“This is seen as a positive move as it means that the government is taking a careful and calculated approach, rather than a rushed implementation,” says Tsang. “These are all moves in the right direction as this is a long-term plan,” added Chuk.
According to the industry, in order for the project to be successful, changes have to be made in a number of areas. These include technological, legal and procedural changes, and a mindset change.
Experts agree that the e-Filing Project will present challenges, noting that having the technology in place and getting it right will be the IRD’s greatest challenge. But Tsang thinks the IRD has an advantage as other countries have successfully implemented similar digital solutions. “Hopefully, migration won’t be that painful, as other parts of the world have already been using it for some time. The IRD can learn from other countries’ experience,” she says.
Now is also a good time for organizations to implement technology and adopt new infrastructure for tax, according to Albert Lee, Global Co-Leader and Asia Pacific Leader –Tax Technology & Transformation at EY, because the IRD will be relocating its offices to the Kai Tak Development Area. The move will take place in phases starting in late 2022. “This change will attract new skills and talent in a new environment, but it can also help change their departments’ teams frame of mind and be more inspired to transform,” Lee says.
The IRD has been working on the development of a taxonomy package that will help facilitate Hong Kong businesses to tag their financial statements and tax computations in order to generate iXBRL data files. The IRD has sought the views and feedback through a consultation process and has included them in its IT development and proposals.
“This is necessary for us to adopt, and aside from tax reporting, it has a lot of good uses especially in data analysis,” Benjamin Chan explains. “Sixty jurisdictions around the world have already adopted the iXBRL reporting requirements for regulatory and supervisory purposes.”
The XBRL is the worldwide standard for tagging business data for computers to process intelligently, making it easier to do business reporting and evaluation. Benjamin Chan explains that the iXBRL data would be human-readable and structured, as well as machine-readable data. This helps enterprises improve their accountability and transparency of business performance, and ensures that investors can easily understand their financial data. According to Tsang, the key benefits are a faster review process and a much better handling of data and analysis.
Despite the potential for change, there continues to be concerns among some businesses and user groups, such as the elderly, regarding the shift to e-filing. But William Chan says that this has all been taken into account, and that vendors will develop something that’s easy to use, even for small and medium enterprises and other users. “Not everyone has the latest version of software like the big companies, so hopefully it’s compatible even with older computers,” he says.
“Sixty jurisdictions around the world have already adopted the iXBRL reporting requirements for regulatory and supervisory purposes.”
Taxation Faculty Executive Committee.
“The world is online, so we need to go online. We have been asking for this and a timeline for quite some time.”
“The Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021 was enacted this year to enhance the statutory framework for furnishing tax returns in Hong Kong. It included provisions to allow service providers to furnish returns for or on the behalf of taxpayers, as well as setting out the legal obligations and liabilities of taxpayers and service providers,” says Benjamin Chan. “The ultimate goal is to help the government to reduce its cost in revenue collection, and with this digitization, if something is unreported, it can be detected very easily,” Chuk says. “This will consequently improve taxpayers’ systems and processes for external reporting,” Lee adds.
Benjamin Chan says: “It’s important that everyone understands their legal obligations, especially practitioners who are appointed by taxpayers to furnish tax returns for them or on their behalf.”
The IRD recognizes that getting all businesses on board could be tricky, especially when faced with too many technological barriers, or if it impacts the design of a company’s accounting software. As such, the IRD has been proactively encouraging businesses to upgrade or develop their own computer programmes that are capable of converting audited financial statements into iXBRL format for tax filing purposes. Tsang calls this an “all-important change” that requires the government’s full support.
“We understand that this could be an area of concern for some people, but we have put in place various kinds of IT support to help taxpayers and practitioners adjust. These include offering an IT support service hotline to help taxpayers or interested parties to upgrade their computer systems, a provision of free conversion tools, a provision of an e-concierge service, and an invitation for a trial run,” says Benjamin Chan.
Tsang applauds the IRD’s phased efforts, and says that the provision of free conversion tools to help businesses convert their files into iXBRL format, and the provision of an e-concierge are all the right approaches. “This way, smaller businesses that have limited resources have more time to prepare for change, and this will offer some flexibility to do e-filing and plan ahead,” she says.
While technology might feel like a hurdle to some businesses, Lee argues that, in some ways, it is the easiest part of this change, noting that the biggest impact is actually in relation to change management. “People are used to paper-based files. Even though most Hong Kong people are tech-savvy, corporations and individual taxpayers are still used to the old way of doing things when it comes to tax,” Lee explained.
“People are used to paper-based files. Even though most Hong Kong people are tech-savvy, corporations and individual taxpayers are still used to the old way of doing things when it comes to tax.”
What are the major benefits?
The e-Filing Project aims to enhance the efficiency, reliability and accuracy of collecting accounting and financial data from businesses.
“Through this, the IRD hopes to achieve a better user experience, greater compliance with international standards and better alignment with government initiatives,” says Benjamin Chan. “The wider use of automatic processing of tax assessments means that the IRD can streamline its administrative process, save or redeploy resources, and reduce paper usage. This will help the overall tax administration become more environmentally-friendly,” he adds.
The experts agree, with Lee adding that the completion of the project would modernize Hong Kong’s tax authority. Tsang adds that if the IRD can achieve this, the data gathered through the tax return filing process would provide insight on the tax incentives introduced, allowing the government to deliver better promotions, education of those incentives, and to find new ways to assist taxpayers to make use of them. “Really, this is a win-win situation for all.”
Moving forward, William Chan advises taxpayers to be open-minded and accept that this is the way going forward. “Everyone has to accept that there will be a period of adjustment,” he added, reiterating Benjamin Chan’s points that the government has put in place the necessary legislative framework and IT support to help businesses make the transition. “Everyone has to bite the bullet. Once everyone gets the hang of it, it will make life easier.”
The Inland Revenue Department commissioned a consultancy study on the Departmental Information Technology Plan in August 2018 which was completed in June 2019. The study recommended the department to develop a Business Tax Portal to facilitate e-filing of tax returns by businesses with accounting and financial data.