Hong Kong Tax Alert: 23 April 2013

The provisions of the Bill

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Background

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

Clause 4

Clause 4 amends section 49 of the IRO such that arrangements may be made with the government of a territory outside Hong Kong not only for affording relief from double taxation (i.e., a CDTA), but also for exchanging information in relation to any tax imposed by the laws of Hong Kong or the territory (i.e., a TIEA). This proposed amendment will enable the IRD to obtain information from taxpayers solely for the purposes of supplying the same to a requesting authority under a TIEA.

Clause 5 and 7

Clauses 5 and 7 amend sections 51 and 52 of the IRO respectively such that the IRD’s information gathering powers will not be restricted by the current provisions of these two sections namely, that the information required be in the possession of a taxpayer. Under the proposed amendment, the IRD’s information gathering powers will be extended to information that is in the control of a taxpayer.

This proposed amendment is to 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. The Bill however contains no definition of what constitutes information in the “control” of a taxpayer.

Clause 8

Clause 8 amends section 4 of the Inland Revenue (Disclosure of Information) Rules to enable the IRD to disclose information, regardless of the period to which it relates, that is relevant for carrying out of the relevant arrangements (i.e., a CDTA or a TIEA), or relevant for tax assessments in respect of any period that starts after the relevant arrangements have come into operation. This proposed amendment, justified on the grounds of a technical operational need, is a relaxation of the current provision that such information cannot be exchanged if it relates to a period before a CDTA comes into operation.