Hong Kong Tax Alert: 23 April 2013
The provisions of the Bill
Under the current provisions of the Inland Revenue Ordinance (IRO), the Inland Revenue Department (IRD) of Hong Kong is only permitted to exchange information in respect of a taxpayer with a tax authority in a jurisdiction which has concluded a CDTA with Hong Kong.
However, 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 CDTA or a standalone 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, currently cannot enter into TIEAs with other jurisdictions. This is primarily because under the current provisions of the IRO, the IRD cannot obtain information from taxpayers for that purpose.
Against this background, Inland Revenue (Amendment) Bill 2013 (the Bill) was recently published in a gazette. The Bill aims to enable Hong Kong to enter into TIEAs with other jurisdictions and to enlarge the scope for the Eol under a CDTA. The Bill will commence its second reading debate in the Legislative Council on 24 April 2013.
It should be noted that the scope and purpose of CDTAs and TIEAs are different.
The main purpose of a CDTA, aside from the exchange of information in respect of taxpayers for the purpose of preventing tax evasion, is to facilitate the flow of trade, investment and talent between two jurisdictions. This is achieved by way of the terms of a CDTA preventing double taxation of cross-border transactions, and reducing or eliminating the taxation of passive income streams in the form of dividends, interest, royalties and capital gains.
The only purpose of a TIEA however, is to exchange information in respect of taxpayers for the prevention of tax evasion.
The effects of the major clauses of the Bill