Hong Kong passes exchange of tax information amendment
The Hong Kong Legislative Council passed, on 6 January 2010, the Inland Revenue (Amendment) (No. 3) Bill 2009. This amendment enables Hong Kong to adopt the latest international standard for exchange of tax information and removes a major obstacle to its ability to enter into tax treaties.
Prior to this amendment, the Inland Revenue Department (IRD) could only collect taxpayers" information for domestic tax purposes, a provision that conflicted with the exchange of information clause in the OECD’s 2004 Model Tax Convention. This provides that the lack of a domestic tax interest does not constitute a valid reason for refusing to collect and supply the information requested by the other contracting party.
The amendment to the Inland Revenue Ordinance introduces a new section 49.1(A), which allows the chief executive to authorise tax treaties or tax information exchange agreements (TIEAs) with other countries that include wording in conformity with the OECD standard. Tax authorities will have the authority to obtain information – using search warrants if necessary – that may affect any liability, responsibility or obligation of anyone under the laws of a treaty partner concerning taxes of that territory.
The government said it would adopt the "most prudent" version of the standard to protect the privacy of firms and individuals, and ensure confidentiality. Relevant tax jurisdictions would need to prove their request was necessary or relevant to avoid "fishing expeditions", and must treat the information as confidential under their domestic laws.
This amendment will facilitate Hong Kong’s ability to enter into more tax treaties in line with its main competitors. Hong Kong has so far concluded only five treaties – with Belgium, Thailand, mainland China, Luxembourg and Vietnam – since 2003. It is expected that Hong Kong will now sign a number of tax treaties and TIEAs, and it may be that the Special Administrative Region will be included in future agreements entered into by mainland China.
The Financial Services & Treasury Bureau has not said which nations are involved in current talks or the progress of negotiations, but it is understood that a number of significant trading partners, including the UK, the Netherlands, France and Ireland, have been waiting for this amendment before concluding treaty negotiations with Hong Kong.
The move comes as a Bill is progressing through the US Congress to extend a crackdown on US taxpayers evading tax overseas. In February, Swiss bank UBS agreed to a US$780 million settlement with the US government over charges it helped Americans evade US taxes. Several of the UBS clients hid money in corporations in Hong Kong.
After the G-20 meeting in London in April last year, China was included by the OECD on its "white list" of jurisdictions that had substantially implemented the internationally agreed tax standards. But in a footnote, the Special Administrative Regions – Hong Kong and Macau – were specifically excluded because they had only “committed†to implement the internationally agreed tax standard.
The IRD has also recently released DIPN 46 to illustrate how transfer-pricing principles will be applied in the territory. The document explains how OECD Transfer Pricing Guidelines will be practiced in Hong Kong and particularly how OECD transfer pricing methodologies will work with its own Inland Revenue Ordinance (IRO). It shows the provisions in the IRO and the relevant articles in tax treaties that should allow the IRD to reallocate profits or adjust deductions by substituting an arm’s length consideration.
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