Steven Sieker and Pierre Chan explain how the Government of Hong Kong Special Administrative Region has moved to markedly improve transparency in information exchange between tax treaty partners without compromising confidentiality or privacy.
In April 2009, the OECD published three lists which grouped various countries by reference to their compliance with the OECD standard. The OECD did not put Hong Kong on any of the three lists, but noted its commitment to implement the OECD standard.
On 26 June 2009, the Government of Hong Kong Special Administrative Region introduced into the Legislative Council the Inland Revenue (Amendment) (No.3) Bill 2009 (the Bill). This served the purpose of amending the ‘Inland Revenue Ordinance’ (IRO) to enable Hong Kong to adopt the 2004 version of the ‘OECD Exchange of Information’ article (OECD EoI (2004)) contained in their Model Tax Convention.
As of today, the limited number of tax treaties which Hong Kong has entered into contain exchange of information articles based on the 1995 version of the ‘OECD Exchange of Information’ article (OECD EoI 1995). This version does not require Hong Kong to exchange information with a treaty partner if the information requested is not required for administering Hong Kong tax. That is, if a treaty partner requests information relating to income that is not subject to tax in Hong Kong (e.g., interest income), Hong Kong is not required to collect and exchange such information. Moreover, under the IRO as it currently stands, Hong Kong lacks the authority to collect such information.
OECD EoI (2004) requires Hong Kong to collect and exchange information despite Hong Kong not requiring such information for Hong Kong tax purposes.
Broadening domestic information-seeking power
Under the existing provisions of the IRO, the Inland Revenue Department of Hong Kong (IRD) can only collect information relating to matters which may affect any Hong Kong tax liability, responsibility or obligation of any person. Such information-seeking power is not sufficient to support OECD EoI (2004), because it does not enable the IRD to collect information relating to the taxes imposed by a treaty partner.
The Bill seeks to extend the IRD’s information-seeking power so that, in the context of a tax treaty, the IRD can obtain information on any matter that may affect any liability, responsibility or obligation of any person under the law of another country with which Hong Kong has a tax treaty that requires Hong Kong to disclose such information to the treaty partner. The Bill also seeks to broaden the IRD’s power to obtain a search warrant in certain cases (such as where there are reasonable grounds for suspecting that a person has made an incorrect return, or has supplied false information resulting in an understatement of his income or profits chargeable to tax under the laws of that treaty partner if certain conditions are satisfied).
In addition to broadening the IRD’s information-seeking power, the Bill would make it an offence to fail to provide requested information, or to obstruct the discharge of a search warrant where the information sought is required for the purpose of exchange of information under a tax treaty. The Bill would also make it an offence to give any incorrect information (without reasonable excuse) in relation to any matter affecting any person’s liability to tax under the laws of the treaty partner.
Measures for safeguarding privacy
In proposing to adopt the OECD EoI (2004) article in Hong Kong’s future tax treaties, the government has indicated that it will include safeguards to protect an individual’s right to privacy and confidentiality of the information exchanged. This will be done by incorporating appropriate restrictions and requirements in individual tax treaties or in documents of record between the two treaty parties in relation to the scope and usage of information exchanged pursuant to the treaties. Specifically, the government has outlined the following principles:
The government has also proposed to put in place certain other safeguards through subsidiary legislation based on the following principles:
In addition, the IRD will issue a practice note setting out the procedural safeguards they must adhere to when processing exchange of information requests. The practice note will set out a number of procedural requirements, including:
The Legislative Council has set up a bills committee to review the proposed amendments to the IRO. At this stage, it is not clear how much time is required to discuss and approve the Bill. Once the Bill is enacted, the government will be in a position to enter into new tax treaties under the OECD EoI (2004). Currently, the government is negotiating tax treaties with 11 countries. The wider information exchange power will remove one of the major barriers to treaty negotiations, and the government will thereafter be able to conclude new treaties more easily. The government can also update its existing tax treaties with the wider information exchange power, where necessary.
Given the current environment, the move towards transparency and international cooperation appears to be a necessary step for sustaining Hong Kong’s position as a major financial market. It remains to be seen whether the wider scope of the information exchange will lead to a significant increase in the number of information requests processed in the future as Hong Kong increases the number of its tax treaties going forward.
Steven Sieker and Pierre Chan, Baker & McKenzie