Recent Developments in Hong Kong's Exchange of Tax Information

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:

•    Case-specific exchange – information exchange will be conducted on a case-by-case basis in response to legitimate requests by treaty parties without automatic or wholesale exchange of information;
•    Restriction to covered taxes – only information on taxes covered by the tax treaties (mainly income taxes) will be exchanged;
•    No fishing expeditions – the treaty partner must satisfy the IRD that the requested information is ‘necessary’ or ‘foreseeably relevant’ for the carrying out of the tax treaty or the administration or enforcement of its local tax laws;
•    Secrecy – the tax authorities of the treaty partner must treat the information obtained as secret information under its domestic laws;
•    No sharing – the tax authorities of the treaty party must not pass on the information to a third party (including another country or even another government department within its own country), notwithstanding contrary provisions of its domestic laws;
•    Specified purposes – the tax authorities of the treaty partner must only use the information provided for purposes specified in the request; and
•    Limit of domestic power – Hong Kong will not be required to exchange information that the treaty partner itself cannot obtain under its domestic laws if the information were within its own country.

The government has also proposed to put in place certain other safeguards through subsidiary legislation based on the following principles:

•    Decision by senior officer – a directorate officer of the IRD will decide whether to accept an information request by a treaty party (who has to be satisfied that the request is made in accordance with the provisions of the IRO and those of the relevant tax treaty);
•    Notice requirement – the IRD will be required to give notice to the person affected by the information exchange and provide such person with the information requested by the treaty partner (except in exceptional circumstances where notification would prevent or unduly delay an effective exchange of information or where prior notification would otherwise undermine the chance of success of the investigation conducted by the treaty partner); and
•    Right to correct information – the person affected can verify and correct the information with the IRD and will hold the right to request a review by the Financial Secretary (whose decision will be final) if the IRD refuses to accept the proposed correction to the information.

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:

•    Exhaustion of means – the IRD will require the treaty partner to confirm that it has pursued all means available in its own country to obtain the information (except those that would give rise to disproportionate difficulties);
•    Compliance with domestic law – the IRD will require the treaty partner to confirm that the request is made in conformity with its domestic law and administrative practices and that the treaty partner could obtain such information within its own country;
•    Grounds for belief – the IRD will require the treaty partner to state grounds for believing that the requested information is located in Hong Kong; and
•    Background information – the IRD will require the treaty partner to provide specific background information relating to the request (e.g., the tax purpose for which the information is sought, the reasons for the request, the taxes concerned and the relevant tax periods).

Next steps

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.