Hong Kong Tax Alert: 23 April 2013

Enlarging the scope of exchange of information arrangements

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Enlarging the scope of exchange of information (Eol) arrangements

In addition to the Bill enabling the exchange of information in relation to a period before a relevant arrangement comes into operation (the circumstances above refers), the Legislative Council Brief1 on the Bill also indicates that the government may in future enlarge the scope of information relating to the types of taxes to be exchanged under a CDTA.

This enlargement would presumably be reflected in the terms of a future CDTA that Hong Kong would conclude with another jurisdiction, the passing into law of the CDTA being subject to a negative vetting procedure2 of the Legislative Council. 

Previously, the government had undertaken that the EoI clause of a CDTA that Hong Kong would conclude with another jurisdiction would restrict the information to be exchanged to that relating to direct income taxes similar to our profits, salaries and property taxes, but not other types of indirect taxes such as VAT that may be levied by other jurisdictions.

The government is now of the view that this restriction may hamper our ability to enter into CDTAs with other jurisdictions and explains that Hong Kong stands a better change of persuading key jurisdictions to commence CDTA negotiations if flexibility exists as regards the types of taxes in respect of which information can be exchanged.

The proposed enlargement would also remove the frustration felt by Hong Kong’s existing CDTA partners when conducting their investigation of tax evasion cases concerning tax types other than direct income taxes. Presumably, this enlargement of the scope of information relating to the types of taxes to be exchanged would apply equally to any future TIEA.

In the Legislative Council Brief, the government also indicates that the latest 2012 version of the Model Tax Convention, and the related Commentary of the Organization for Economic Co-operation and Development (OECD), features a new requirement to allow for information exchanged to be used for non-tax related purposes. This is subject to the condition that such use is allowed under the laws of both contracting parties and the competent authority of the supplying party authorizes such use.

The government states that it is prepared to abide by the OECD’s new requirement by allowing our future CDTA or TIEA partners to use the information exchanged for other purposes when such information may be used for such other purposes as specified under the laws of both sides and the competent authority of the supplying party (i.e., the IRD) authorizes such use.

The government’s approach in this regard has taken into account the fact that our domestic legislation (i.e., the Drug Trafficking (Recovery of Proceeds) Ordinance, the Organized and Serious Crime Ordinance and the United Nations (Anti-Terrorism Measures) Ordinance) already require any persons with knowledge or suspicion, including IRD officers, to disclose confidential information to authorized officers of law enforcement agencies designated under the relevant legislation to enable them to perform their duties thereunder.

Once again, the authorization of such other use of information exchanged under a CDTA or a TIEA would presumably be reflected in the terms of the arrangement to be concluded, the passing into law of which being subject to a negative vetting procedure of the Legislative Council. 

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 following are the salient points of the relevant safeguards:

Built-in safeguards under the terms of a CDTA, or any future TIEA

Restriction in terms of scope:

  • Information will only be exchanged upon receipt of requests and no information will be exchanged on an automatic or spontaneous basis
  • The information sought should be foreseeably relevant, i.e., no fishing expeditions
  • There is no obligation to supply information under certain circumstances, for example, where the information would disclose any trade, business, industrial, commercial or professional secret or trade process, or which would be covered by legal professional privilege, etc
  • Tthe IRD will not accede to any requests from our treaty partners for tax examinations abroad and assistance in collection of taxes

Restriction in terms of usage:

  • Information received by the treaty partners should be treated as confidential
  • Information would only be disclosed to the tax authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of and the determination of appeals in relation to taxes falling within the scope of the EoI, but not for release to their oversight bodies unless there are legitimate reasons given by the relevant CDTA or TIEA partners (subject to the authorization for certain non-tax related use of the information as may be specified in the terms of a CDTA or TIEA as explained above)
  • Information requested should not be disclosed to a third jurisdiction

Domestic safeguards provided for under the Inland Revenue (Disclosure of Information) Rules

  • The decision on whether to accede to an EoI request has to be made by a directorate officer of the IRD, who has to be satisfied that the request is made in accordance with the law and the CDTA or TIEA concerned
  • Save in exceptional circumstances where notification would prevent or unduly delay the effective exchange of information, or where prior notification would otherwise undermine the chance of success of the investigation conducted by the requesting party, the IRD has to notify and provide the taxpayer with the information that the IRD is going to transmit to the requesting party
  • The taxpayer can verify the factual accuracy of the information with the IRD. If the Commissioner of Inland Revenue (CIR) refuses to accept the taxpayer’s proposed factual correction to the information, the taxpayer may seek a review by the Financial Secretary (FS), whose decision on the matter shall be final

Commentary

It appears that Hong Kong is now under intense international pressure to put in place a legislative framework enabling Hong Kong to enter into TIEAs with other jurisdictions, and to enlarge the scope of information to be exchanged under both CDTAs and any future TIEAs.

The government has indicated that failure to enter into TIEAs and enlarge the scope for the exchange of information may cause Hong Kong to be labeled as an uncooperative jurisdiction thus undermining our position and competitiveness as an international business and financial centre. Furthermore, other jurisdictions may impose unilateral sanctions on Hong Kong.

The government has also stressed the urgency of putting the legal framework for TIEAs in place by mid-2013. This is because failure to do so would likely cause Hong Kong to fail the Phase 2 peer review report conducted by the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD3 on Hong Kong’s compliance with the international EoI standard. This report is due to be released in September 2013.  Failing the peer review would presumably heighten the risk of Hong Kong being labeled as an uncooperative jurisdiction.

Although Hong Kong may be unable to withstand the international trend toward a greater exchange of information in respect of taxpayers, clients who have comments or concerns in respect of the provisions of the legislative bill (including the adequacy of the safeguards therein as regards the privacy and confidentiality of information exchanged) are nonetheless welcome to share them with their tax executives. The relevant comments and concerns can then be transmitted by EY to the relevant authorities in an appropriate manner. 


1 The Legislative Council Brief can be accessed here.

2 Under the negative vetting procedure, a piece of legislation is gazetted first and immediately becomes operational unless and until it is amended by way of a resolution of the Legislative Council during a vetting period.

3 Hong Kong is one of the members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). 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 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 that 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).