Received an IRD Query Letter? How to Defend Your E-commerce Offshore Claim

Opening your mailbox to find an official letter from the Hong Kong Inland Revenue Department (IRD) can be a stressful experience for any international business owner. If you have recently applied for an Offshore Profit Tax Exemption for your e-commerce or dropshipping company, receiving a Query Letter is highly likely.

Do not panic. A Query Letter does not mean your application has been rejected or that you have done something wrong. It simply means the tax assessor requires more concrete evidence before they legally grant you a 0% tax rate.

This guide explains exactly what the IRD is looking for and how you can defend your offshore tax position effectively.

What is an IRD Query Letter and Why Did You Receive One?

Under Hong Kong's territorial source principle of taxation, the burden of proof rests entirely on the taxpayer. When your CPA or CTA submits your audited financial statements claiming that 100% of your profits were generated outside Hong Kong, the IRD cannot simply take your word for it.

To protect tax revenue, the IRD issues a Query Letter to investigate the physical reality of your business operations. They are looking to verify that your company does not have a hidden physical presence in Hong Kong and that your core profit-generating activities genuinely occur overseas.

Top 3 Questions the IRD Asks E-commerce Sellers

Query Letters are often extensive, sometimes containing dozens of detailed questions spanning multiple pages. For Amazon, Shopify, and global dropshipping sellers, the IRD assessors generally focus on three critical areas:

1. How and where are your business contracts concluded?

The IRD wants to know exactly where the business decisions are made. They will ask for the physical location of the directors when they negotiate with suppliers and manage the online store. Since e-commerce relies on digital contracts, you must be prepared to provide email correspondence logs, supplier agreements, and passport travel records proving you were not in Hong Kong when operating the business.

2. How are your goods shipped and stored?

To qualify for the offshore exemption, your physical inventory must never enter Hong Kong. The IRD will ask for a complete logistics trail for a sample of your largest transactions. You must provide third-party shipping documents, such as Bills of Lading or Air Waybills, clearly showing the port of loading (e.g., Shanghai) and the port of discharge (e.g., Los Angeles), proving the goods bypassed Hong Kong entirely.

3. Who operates your bank and merchant accounts?

Because many overseas sellers use Hong Kong corporate bank accounts and payment gateways like Stripe or PayPal, the IRD will investigate who manages these funds. They will ask for the names, physical addresses, and IP locations of the individuals authorized to process payouts and pay suppliers, ensuring no local Hong Kong staff are involved in financial management.

Why You Need a Chartered Tax Adviser (CTA) to Respond

Many business owners make the critical mistake of attempting to reply to the IRD Query Letter themselves, treating it like a standard customer service email. This is incredibly dangerous.

Providing too little information will result in immediate rejection. Providing too much irrelevant information can accidentally trigger new suspicions and broaden the scope of the tax audit. If your offshore claim is rejected, the IRD will issue a tax assessment demanding 16.5% of your total profits, often accompanied by strict payment deadlines.

A Chartered Tax Adviser (CTA) approaches the Query Letter from a legal and technical perspective. A professional tax representative will:

• Filter your documents to ensure you only submit exactly what is legally required.

• Draft the response utilizing established tax case law and IRD Departmental Interpretation and Practice Notes (DIPN) to frame your e-commerce model correctly.

• Act as a buffer between you and the tax authority, handling all technical follow-up questions.

Immediate Action Required

If you have received an IRD Query Letter, time is of the essence. The IRD typically enforces a strict 30-day deadline for your response. Failing to reply within this window will almost certainly result in the forfeiture of your offshore claim.

Protect your business margins and ensure your tax compliance today.

About CK Tax

The founder was from one of the International Big 4 accounting firms (Corporate Tax) with extensive tax experience serving clients in different industries and participated in various tax projects including: tax investigation, offshore profits claim, reply of IRD enquiry letters, application of Tax Resident Certificate, tax automation projects for MNCs, optimization of overseas indirect tax, optimization of tax infrastructure to achieve tax reporting efficiency.

The founder is Fellow Member and former Council Member of The Taxation Institute of Hong Kong (Chartered Tax Adviser) and Fellow of Hong Kong Institute of Certified Public Accountants (Fellow Certified Public Accountant).  The founder is the first batch to be qualified to practice in China(Guangdong) Pilot Free Trade Zone, Qianhai & Shekou Area of Shenzhen, issued by Shenzhen Tax Service, State Taxation Administration.