萬國法律事務所

Four Hong Kong retail clothing chains were heavily fined for tax evasion. The four Hong Kong retail clothing chains in question operated their business either by setting up a counter or shop inside department stores or by renting retail shops on the high street. In terms of VAT for the first business model, the department stores issue government uniform invoices (GUIs) to the customers for the sale of goods. The clothing chains in turn issue GUIs to the department stores for the balance of revenues after deducting the rent charged by the department stores.

Said clothing chains adopted the same arrangement while they rented retail shops on the high street to sell their goods. The tax authority adopted the position that the above two business models are distinguished from each other and are subject to different rules with respect to the issuance of GUIs and payment of the VAT.

In the high street retailer sale, the clothing chains hire their own personnel and provide the facilities to run the business. Despite the fact that the clothing chains distributed 10 to 20 % of the revenues to the retail shop owner, the tax authority was of the opinion that such revenue distribution constitutes a consideration for the rent and that the business was operated by the clothing chains and, as such, the clothing chains must issue GUIs to the customers for sale of the goods and pay the VAT based on the total revenues generated by such sales.

The said 4 clothing chains were fined for VAT tax evasion and the failure to request GUIs from the retail shop owners for the rent paid. Said clothing chains challenged the tax authority’s fine order and filed an administrative lawsuit against the relevant tax authority all the way to the Supreme Court. This case is currently pending before the Supreme Court.