Introduction:
The Exchange of information (EoI) article currently adopted in Hong Kong’s Comprehensive Double taxation Arrangements (CDTA)s is based on the 1995 version of the Organization for Economic Cooperation and Development (OECD) Model Tax Convention, which is more restrictive than the 2004 version now commonly adopted by most economies.
The 1995 version of EoI article restricts the exchange of information to that required in order to carry out the provisions of a CDTA. Furthermore, Hong Kong would not be obliged to supply any information to the other contracting state if the information sought is not obtainable under the tax law of Hong Kong or by way of the normal administrative practice in Hong Kong.
By comparison, the 2004 version of EoI article is more expansive and requires a contracting state, on request, to obtain and provide for the other contracting state any tax information, even though the same is not relevant for the tax administration of the former or not relating to any of the taxes covered by the CDTA.
As a result, Hong Kong’s effort to expand its CDTA’s network is greatly hindered. Moreover, it also has caused negative perceptions on the transparency of its tax regime.
At the London summit held in April this year, G20 leaders called on countries to adopt the common international standard for exchange of information, the failure of which could possibly lead to some forms of economic or fiscal sanctions. Reportedly, it was only through the insistence and personal intervention of President Hu Jintao at the summit that Hong Kong was in the last minute removed from the grey list of tax havens to be released by the OECD immediately following the G20 London summit.
Hong Kong’s coming so close to being labeled as a tax haven stemmed mostly from its inability to adopt the more expansive 2004 EoI version in its CDTAs.
The step forward:
Currently,Hong Kong cannot adopt the 2004 version of the EoI article because under the law the Inland Revenue Department (IRD) of Hong Kong can only collect taxpayers’ information for the ascertainment of liability, responsibility and obligation under its domestic tax law. In other words, the IRD cannot collect any tax information unless it is for domestic tax purposes.
In order to facilitate the Hong Kong’s government’s plan to increase the number of tax agreements on the avoidance of double taxation, in the 2009-10 Budget in February this year, the Financial Secretary announced that Hong Kong would put forward legislative proposal by the middle of the year to align its EoI arrangements with the international standard.
The legislative proposal is now made in the form of the Inland Revenue (Amendment) (No. 3) Bill 2009 (the Bill) publicized in the gazette on 26 June 2009.
The Bill:
The Bill proposes to amend the relevant provisions of Inland Revenue Ordinance (IRO) to:
- enable the IRD to collect information concerning tax of a foreign territory for the purpose of EoI under a CDTA;
- enable a magistrate to issue search warrants for information concerning tax of a foreign territory for the purpose of EoI under a CDTA;
- provide that a person commits an offence if he or she, without reasonable excuse, gives any incorrect information in relation to any matter that affects his or her or another person’s liability to a foreign tax covered by an EoI article under a CDTA.
Furthermore, the Bill also contains a related proposed amendment to the Personal Data (Privacy) Ordinance providing that the exemption from the principles of data protection and access in relation to tax information as specified in that Ordinance also applies to a foreign tax covered by an EoI article under a CDTA.
As regards the concerns over the privacy and confidentiality of tax information exchanged under an EoI article, the government has now pledged that additional safeguards will be made both under the framework of CDTAs and the domestic legislation and administrative practice.
Under the framework of CDTAs:
Under the framework of CDTAs, the government has now pledged that in adopting the OECD 2004 version of EoI article in our CDTAs, Hong Kong will seek to include the most prudent safeguards acceptable under the version to protect a person’s right to privacy and confidentiality of the information exchanged.
- Restrictions in terms of scope
1.Information exchange will only be conducted on a case-specific basis in response to legitimate requests. There will not be any automatic or wholesale exchange of information;
2.Only information on taxes covered by the CDTA (mainly income taxes including profits tax, salaries tax and property tax) will be exchanged;
3.The relevant authority of the requesting party must satisfy IRD that the information it requests is “necessary” or “foreseeably relevant” for the carrying out of the CDTA or the administration or enforcement of its local tax laws.
- Restrictions in terms of usage
1.The requesting party must treat the information provided as secret information under its domestic laws;
2.The requesting party must not share the information provided with any third party (including a third jurisdiction or another government department of its own jurisdiction). The requesting party must only use the information provided for purposes specified in the request.
- Restrictions imposed by domestic laws of the requesting party
1.The requested party is not obliged to supply information that the requesting party itself could not obtain under its own laws.
Under the domestic legislation:
To provide further safeguards of the privacy and confidentiality issues, the government has also undertaken to make additional rules for carrying out the provisions of CDTAs through subsidiary legislation. These further safeguards under the proposed subsidiary legislation will work as follows:
- The decision on whether to accede to an EoI request has to be made by a directorate officer of IRD, who has to be satisfied that the request is made in accordance with the law and the CDTA concerned;
- IRD has to notify and provide the person the information that the Department is going to transmit to the requesting party;
- The person can verify the accuracy of the information with IRD. If IRD refuses to accept the proposed correction to the information, the person may seek a review by a higher authority.
Under the IRD’s administrative practice:
Furthermore, the IRD will issue a Departmental Interpretation and Practice Note setting out the procedural safeguards IRD must adopt in processing EoI requests, including the requirements that the requesting party should:
- confirm that it has pursued all means available in its own territory to obtain the information except those that would give rise to disproportionate difficulties;
- confirm that the request is in conformity with the laws and administrative practices of the requesting party;
- state grounds for believing that the information requested is held in Hong Kong or is in the possession or control of a person in Hong Kong.
Commentary:
A tax jurisdiction having comparatively low income tax rate is a necessary but not sufficient factor to render a territory to be classified as an uncooperative tax haven. In strengthening its attractiveness as an international investment centre, Hong Kong Government may still maintain its low and simple tax system, but it needs to take positive step towards improving transparency and establishing effective exchange of tax information with other tax jurisdictions.
This move is important for the continued development of the Hong Kong economy, but what is even more crucial is to avoid damaging Hong Kong’s international reputation as a result of being labelled as offshore secrecy jurisdiction or restrictive in exchange of tax information.
Updating the relevant provisions in this area in the Ordinance will help mitigate this risk and also help Hong Kong expand its tax treaty network. Such a measure should therefore be welcomed by the international business community.
The Bill to amend the IRO was introduced in Legislative Council on 8 July 2009. Progress in implementing the Government’s proposals in this area will hopefully occur on a timely basis.
While the act is generally supported by most law-abiding taxpayers, it also poses challenges for multi-national businesses. It is imperative for multi-nationals to get well prepared in reviewing their tax positions in cross-border business transactions, including ensuring they have legitimate ownership structures and operating business models, supported by contemporaneous documentation.
