Hong Kong Tax Alert: 12 July 2013
New law enacted to enable Hong Kong to enter into standalone TIEA
Under the latest international standard on tax transparency, a jurisdiction should be prepared to exchange information in respect of taxpayers on a reciprocal basis pursuant to a comprehensive avoidance of double taxation agreement (CDTA) or a standalone tax information exchange agreement (TIEA).
Furthermore, a jurisdiction’s preference for a CDTA over a TIEA cannot constitute a reason for not entering into a TIEA if the other jurisdiction requests a TIEA.
Hong Kong however, cannot enter into TIEAs without amending its tax law. This is because under the previous provisions of the Inland Revenue Ordinance (IRO), the Inland Revenue Department (IRD) of Hong Kong was only permitted to exchange information in respect of a taxpayer with a tax authority in a jurisdiction which had concluded a CDTA with Hong Kong.
Against this background, the Inland Revenue (Amendment) Bill 2013, the major provisions of which are to allow Hong Kong to enter into standalone TIEAs, was passed by the Legislative Council on 10 July 2013.
The provisions of the new law
The new law amends certain provisions in the IRO and the Inland Revenue (Disclosure of Information) Rules to:
- Allow the Hong Kong government to enter into an arrangement with the government of a territory outside Hong Kong for exchanging of information in relation to any tax imposed by the laws of Hong Kong or the territory (i.e., a TIEA). As a result, if a TIEA is entered into between Hong Kong and another jurisdiction, the IRD can now obtain information from taxpayers for the purposes of supplying the same to the requesting authority of the relevant TIEA jurisdiction.
- Extend the IRD’s information gathering powers to include information not only in the possession of a taxpayer, but also information in the control of a taxpayer. This amendment will enable Hong Kong to comply with the standard term of a TIEA that the scope of information exchanged covers both information in the possession of a taxpayer or in their control. However, what constitutes information in the “control” of a taxpayer is not defined in the new law.
- Relax certain restrictions on information that can be exchanged. Under the new law, information that relates to a period before a relevant arrangement (i.e., a CDTA or TIEA) has come into operation can nonetheless be exchanged under certain conditions. The applicable conditions are that the information is relevant for the carrying out of the relevant arrangement, or relevant for tax assessments in respect of any period that starts after the relevant arrangement has come into operation.
Safeguarding the privacy and confidentiality of information of taxpayers under a TIEA
The government has committed that the safeguards in respect of the privacy and confidentiality of information of taxpayers under a TIEA would be the same as those afforded under a CDTA.
The passage of the new law will enable Hong Kong to comply with the latest international standard on tax transparency and maintain its reputation as an international business and financial center. In particular, the new law will enhance the likelihood that Hong Kong will pass the Phase 2 peer review currently being conducted by the Global Forum 1, the report in respect of which is due to be released in September 2013.
Upon passing the Phase 2 peer review, the risk of Hong Kong being labeled as an uncooperative jurisdiction should decrease.
In addition, the relaxation of the restrictions on information that can be exchanged under the CDTA framework may also help Hong Kong persuade certain key jurisdictions to commence negotiations with Hong Kong toward a CDTA, thus further expanding Hong Kong’s CDTA network.
1 Hong Kong is one of the 120 members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). The Global Forum is an international body for ensuring the implementation of the internationally agreed standards of transparency and exchange of information on request in the tax area. It 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 foreseeably 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 the relevant information. The Global Forum’s peer review process examines both the legal and regulatory aspects of exchange (Phase 1 reviews) and the exchange of information in practice (Phase 2 reviews).