Global Tax Alert | 12 July 2013

Hong Kong enacts new law to enter into standalone tax information exchange agreements

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Background

On 10 July 2013, Hong Kong’s Legislative Council passed the Inland Revenue (Amendment) Bill 2013, the major provisions of which are to allow Hong Kong to enter into standalone TIEAs.

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 an income tax treaty (treaty) or a standalone tax information exchange agreement (TIEA). Furthermore, a jurisdiction’s preference for a treaty over a TIEA cannot constitute a reason for not entering into a TIEA if requested by the other jurisdiction.

Hong Kong, however, was unable to 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 regarding a taxpayer with the tax authority of a jurisdiction with which Hong Kong had concluded a treaty. Now Hong Kong may enter into standalone TIEAs.

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 so that the scope of information exchanged covers both information in the possession of a taxpayer and 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 treaty 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 treaty.

Impact

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, 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 treaty framework may also help Hong Kong persuade certain key jurisdictions to commence negotiations with Hong Kong toward a treaty, thus further expanding Hong Kong’s treaty network.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong
  • Tracy Ho
    +852 2846 9065
    tracy.ho@hk.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM3640