Michael Olesnicky welcomes the new initiatives for the trust sector but argues that the jurisdiction still needs to move forward in the area of transparency.
Hong Kong is maturing. Previously content to be a backwater riding on the coat-tails of its neighbour to the north, mainland China, the Hong Kong Government has become aware that it needs to integrate more with international norms if it wishes to retain its competitive position.
This has manifested itself in a number of new developments.
During the last year the Government indicated its willingness to review the trust legislation in Hong Kong, with a view to modernising it to help the trust industry become more competitive with other jurisdictions. Industry groups have been principally involved in making submissions on this to the Government, and we are waiting to see how it will respond.
Consistent with the theme of global integration, Hong Kong is currently revamping its companies ordinance, again with an aim of streamlining the corporate rules and modernising its company law system.
At the moment, Hong Kong companies are unpopular because of the restrictions that the old-style company law imposes, and this makes using companies incorporated in more modern jurisdictions (e.g. British Virgin Islands) more popular.
Currently, high net wealth individuals rarely establish trusts and companies that are subject to Hong Kong law, but this will change as a result of these new initiatives.
Needless to say, if Hong Kong trusts and companies can be operated more simply and made more attractive, this will boost trusts and private banking industries in Hong Kong. Hong Kong has also embraced international norms in other significant ways.
On the theme of global integration, of most significance is the Government's new evangelical approach towards exchange of information with other countries. Global transparency is rapidly becoming the norm, and secrecy is increasingly being regarded as a relic of a bygone era. Mindful of the dangers of being placed on lists of uncooperative regimes maintained by the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF), Hong Kong has tried to stay one step ahead of the international regulators. However, it has now reached an impasse as it decides what its next step will be.
The issue has come to a head as a result of Hong Kong's tax treaty negotiating position. Hong Kong has entered into a very limited number of tax treaties with other jurisdictions and wants to enter into more. This would enhance Hong Kong's status as a premier venue for the location of regional headquarters companies. However, the Government has been hampered by the fact that, so far, it has not been prepared to negotiate liberal exchange of information provisions in its tax treaties. The existing treaties incorporate the restrictive 1995 OECD model exchange of information clause. The reality is that Hong Kong has little to offer other countries to induce them to enter into tax treaties other than exchange of information. Other countries have indicated that they would be keen to enter into tax treaties with Hong Kong if it relaxed its stance on information exchange. To take this step, however, the Government believes it needs a consensus from the business community, as well as support from the legislature to enact the necessary amendments to Hong Kong's tax laws.
To this end, the Government issued a consultation paper in July 2008 to seek support from the business community for wider exchange of information provisions. In a previous consultation exercise, opinions solicited from the International Chamber of Commerce in Hong Kong on this issue were evenly divided, and so there was no clear consensus to liberalise the exchange of information provision.
It will be interesting to see the results of the most recent consultation exercise, which should indicate how far, if at all, Hong Kong is prepared to progress on this issue. On the money laundering front, Hong Kong has what is probably the widest set of disclosure requirements of any jurisdiction in the world. Their application to new industries is becoming progressively more regulated. Solicitors’ firms in particular have been subjected to rigorous ‘know your customer’ rules prescribed by the Law Society of Hong Kong, from July 2008.
The FATF recently reviewed the money laundering position in Hong Kong. It noted that a good legal structure is in place to combat it, although it also observed that very few suspicious transactions reports are filed by so-called ‘professional gatekeepers’. Indeed, it is surprising that the accounting profession, for example, files a very limited number of reports, according to statistics that have been passed to us by the anti-money laundering authorities in Hong Kong. We suspect that, in an attempt to meet this apparent criticism, there is a real risk that the Hong Kong Government might seek to identify high-profile cases for prosecution in order to publicise its commitment to comply with the international laws with respect to money laundering.
Adding to the theme of global cooperation and compliance, the EU has made no secret of the fact that it would like Hong Kong (as well as Singapore), to apply the EU Savings Directive. If implemented, this would require Hong Kong banks to disclose to tax authorities in EU countries details of all bank interest paid on accounts held by residents of those countries, or alternatively to withhold tax from such interest and to pay the amounts withheld to those authorities. So far, Hong Kong has resisted the EU’s demands in this regard.
In a global environment of transparency, it is inevitable that Hong Kong must eventually succumb to the new international norms and make information more freely available. Hopefully, Hong Kong will be able to secure a quid pro quo for taking such steps, such as a comprehensive network of new tax treaties.
Senior Consultant in Tax, Baker & McKenzie in Hong Kong, formerly Senior Advisor at KPMG in Hong Kong. He has more than 25 years’ experience advising on corporate tax, wealth management, trust planning and estate succession matters. Since 1986, he has been the Chairman of the Joint Liaison Committee on Taxation, a quasi-governmental committee interfacing between tax practitioners and the Hong Kong Inland Revenue Department. Olesnicky is also the Chair of STEP in Hong Kong and chairs its China sub-committee.