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onus of notifying disputed liability upon the offender; and to improve the measures already in existence for enforcing collection of fines. I asked the Commissioner of Police for his opinion on whether the amending legislation is having its intended effect, set against the arrears of $41 million (relating to 123 000 fixed penalty tickets) outstanding as a 1986 in respect of the two years from April 1984 to March 1986. The Commissioner has recently informed me at the objective of the amending legislation has been achieved.
8. Inland Revenue Department. Investigating cases involving tax evasion under the Inland Revenue Ordinance. Tax evasion is a problem confronting all tax administrations and in Hong Kong the Investigation Unit of the Inland Revenue Department, with a staff establishment of 115 out of a total establishment of 3 477 in the Inland Revenue Department, is responsible for combating tax evasion and thereby provides reassurance to the public that the tax burden is not being borne only by the honest members of the community. The objectives of the Investigation Unit are to:
-serve as a deterrent to potential tax evaders;
-uncover and quantify understatements of profits or income; and
-recover back-taxes and penalties.
The main objective is to deter evasion but for this to be effective the Commissioner of Inland Revenue considers it is essential that in appropriate cases offenders are prosecuted in the courts because the attendant publicity that they attract, with the possibility of imprisonment, has a strong deterrent effect on potential tax evaders. The work of the Investigation Unit can be classified into two main groups namely, the referred cases of suspected evasion and the special projects initiated by the Investigation Unit itself into areas where it strongly suspects tax evasion. I recently carried out a review of the Investigation Unit's work and concluded that whilst it had been efficient in achieving the two subsidiary objectives of uncovering understatements of profits or income and recovering back-taxes and penalties, there were some doubts as to whether it was entirely effective in achieving its main objective of providing a deterrent to potential tax evaders.
9. Prior to 1976, when the Investigation Unit was formed, the investigation work was carried out by a smaller Investigation Section within the Inland Revenue Department's Headquarters Unit but, whilst the Section had uncovered substantial understatements of profits or income and recovered back-taxes and penalties, it was thought by the Commissioner of Inland Revenue that the Section was not functioning as an effective deterrent to evasion. Whilst there was no way of knowing the extent of tax evasion, the Commissioner of Inland Revenue considered that the constantly high level of understatements of profits or income in the cases investigated by the Investigation Section indicated that the Inland Revenue Department was barely touching the surface of the evasion problem. Therefore, the Commissioner proposed to upgrade the Investigation Section into an Investigation Unit and with its increased staff it was hoped to give more time to two important functions for deterring tax evasion namely, prosecutions and special projects. The proposal was approved and the new Investigation Unit continued with the fruitful work of uncovering understatements of profits or income and recovering the back-taxes and penalties. In 1985-86 the work of the Investigation Unit yielded $140.4 million to the revenue and, as a measure of the Unit's efficiency, the investigation costs were one tenth of the sum recovered. However, the increasing number of cases referred to the Investigation Unit has meant that it has not been able to devote much time to either prosecutions or special projects. Court prosecution work is time-consuming and since 1975-76 the number of cases of wilful evasion of tax brought to court has averaged only about one a year. The special section dealing with prosecution cases was abolished at an early stage of the Investigation Unit's existence. The Commissioner of Inland Revenue preferred to impose administrative penalties on tax evaders instead of prosecuting them because of the difficulty and time taken to bring cases successfully through the courts. Special projects have been given a little more attention but in 1985-86 only 10% of the cases completed by the Investigation Unit related to special projects initiated by the Investigation Unit. Special projects have been deferred because they were not so fruitful in raising revenue as some other cases. Thus, the Investigation Unit in 1986 is in much the same position as the Investigation Section was in 1976 when the Commissioner of Inland Revenue reported that the Section was not functioning as an effective deterrent to evasion.
10. Faced with an increased workload and a shortage of staff to carry out the various functions for which it is responsible, the Investigation Unit has had to choose its priorities and in doing so it has concentrated its efforts on achieving the tangible subsidiary objectives of uncovering understatements of profits and income and recovering back-taxes and penalties. It has given a lower priority to the intangible main objective of deterring potential tax evaders. The former produces a relatively quick and measurable benefit to the revenue whilst the impact of the latter is long-term and immeasurable. This practice of seeking to maximize revenue at the possible expense of deterring tax evasion would seem to conflict, therefore, with the Investigation Unit's main objective.
11. In the light of these findings I have suggested to the Commissioner of Inland Revenue that his objectives could be better achieved if he planned and specified clearly the workload for each of the functions for which the Investigation Unit is responsible and decided on a reasonable number of staff for each function. This would provide a better balance of priority and would make it possible to identify more quickly the areas where staff shortages occur and to put up a stronger case for increasing the staff. In particular, I have recommended to the Commissioner that he should:
-increase the number of prosecutions;
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-give higher priority to special projects; and
increase the number of staff in the Investigation Unit.
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