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Hong Kong faces peer pressure to sign standalone agreements on exchange of information
To avoid the problem of double taxation, jurisdictions sign comprehensive double taxation agreements (CDTAs) to clarify the taxing rights of each party. In addition, as a means of promoting trade and investment, a CDTA will normally result in reduced withholding tax rates on passive income such as dividends, royalties and interest.
A CDTA will normally also include an article that provides for the exchange of taxpayers’ information on a reciprocal basis as necessary in order to carry out the agreement and to prevent tax evasion.
However, since Hong Kong is a low tax jurisdiction with no capital gains tax and no withholding taxes on the outflow of dividends and interest, some countries may have little or no incentive to enter into CDTAs with Hong Kong, viewing the exercise as being one whose primary beneficiary is Hong Kong. Such a jurisdiction may however, be interested in entering into a standalone tax information exchange agreement (TIEA) with Hong Kong in order to better prevent tax evasion by taxpayers liable to tax in its jurisdiction.
Thus far, it is understood to be the policy of the Hong Kong government that Hong Kong will only engage in an exchange of information in respect of taxpayers under the framework of a CDTA, but not of a TIEA.
That may however change as a result of the release of a peer review report (Phase 1) on Hong Kong by the Global Forum on Transparency and Exchange of Information for Tax Purposes on 26 October 2011.
The Global Forum conducts peer reviews of the ability of its member jurisdictions to co-operate with other tax administrations in accordance with the internationally agreed standard. The standard provides for exchange of information on request where it is forseeably relevant to the administration and enforcement of the domestic laws of the requesting jurisdiction.
Effective exchange of information under the standard requires that jurisdictions ensure information is available, that it can be obtained by the tax authorities, and that there are mechanisms in place allowing for the exchange of that information. The Global Forum’s peer review process examines both the legal and regulatory aspects of exchange (Phase I reviews) and the exchange of information in practice (Phase 2 reviews).
In the peer review report on Hong Kong, the Global Forum noted that at least one jurisdiction has approached Hong Kong with a view to negotiating a TIEA but Hong Kong apparently turned down the approach. Furthermore, the Global Forum also noted that the recent amendments by Hong Kong to its domestic law to allow for the exchange of information under the framework of a CDTA do not extend to TIEAs or other information exchange arrangements1.
As recommendations to rectify the above identified deficiencies, the Global Forum suggested that “Hong Kong should enter agreements for exchange of information (regardless of their form) with all relevant partners, meaning those partners who are interested in entering into an information exchange arrangement with it.”
Given this peer pressure, the Hong Kong government may perceive a need to conduct another public consultation2 on whether Hong Kong should enter into standalone TIEAs with other jurisdictions, explaining in the consultation paper the pros and cons and the relevant legislative requirements for such a move.
- Please go to the webpage: http://eoi-tax.org/jurisdictions/HK for full details of the report, including the Global Forum's findings and recommendations on some information gaps in the availability of ownership and accounting information in Hong Kong.
- The Hong Kong government undertook a public consultation exercise before it amended the relevant legislation to allow Hong Kong to widen the scope of its exchange of information with other jurisdictions under a CDTA. The result of the consultation process indicated public support for the proposed change which took place in March 2010.
Before the change of the laws, the Hong Kong Inland Revenue Department (IRD) could only obtain information from taxpayers for exchange of information purposes under a CDTA if the information sought was also relevant for Hong Kong tax purposes. Subsequent to the relevant legislative amendments, the IRD can now obtain information from taxpayers for exchange of information purposes - even though the information requested by the other contracting party is not relevant for Hong Kong tax purposes.
The change of the laws has facilitated Hong Kong's negotiations with other jurisdictions for CDTAs. Since March 2010, Hong Kong has entered into 18 new CDTAs, raising the total number of CDTAs Hong Kong has with other jurisdictions to 23 as at 28 February 2012.
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