The big buzz in the wealth management industry around the world has been the growing attempts by governments to obtain information about their taxpayers who might be holding undeclared funds abroad. Switzerland and Liechtenstein have been obvious targets for these attacks, but it is inevitable that other havens will be under increasing pressure to disclose taxpayer information to foreign tax authorities.
Hong Kong was lucky to avoid being named on the Organisation for Economic Cooperation and Development’s (OECD) ‘shame’ list, but clearly does not wish to be put on susbsequent lists and does not want to be exposed to economic, tax and other sanctions from its major investment and trading partners. As a result, along with many other jurisdictions, the Hong Kong government has taken active steps to introduce a regime to allow for exchange of information between tax authorities.
It is starting from a zero base. None of Hong Kong's five existing comprehensive tax treaties permit exchange of taxpayer information to anywhere near the extent that the prevailing OECD standard requires. The exchange provisions in these treaties are modelled on the 1985 OECD exchange of information provision, which is far removed from the current 2005 version.
One reason for this is that the Hong Kong tax authorities do not have the legislative power to gather and exchange information that they do not require for Hong Kong's own domestic tax purposes. As an example, Hong Kong does not tax bank deposit interest, and therefore the Hong Kong tax authorities have no power to collect information about bank deposit interest earned by United States (US), British and other taxpayers on their Hong Kong bank accounts. As a result of the new international environment, however, the government has introduced appropriate legislation, which is likely to become effective in early 2010.
Of course, this leaves Hong Kong with the task of putting into place at least a dozen or so tax treaties to provide for comprehensive exchange of information.
There is another dynamic in play here. The Hong Kong government also wants Hong Kong to have a series of comprehensive double tax agreements with its major investment and trading partners, to make Hong Kong a more attractive investment environment, to encourage the establishment of regional headquarters operations and to facilitate Hong Kong companies who invest and carry on business in other countries.
Truthfully, Hong Kong has little to offer to other countries to induce them to enter into comprehensive tax treaties because it does not impose withholding taxes on dividends and interest; the normal withholding rate on royalties is already very low (4.95per cent); and the threshold for taxability in Hong Kong is already (arguably) higher than the normal tax treaty ‘permanent establishment’ standard.
The only thing that Hong Kong can offer as a trade for a comprehensive tax treaty is exchange of information. It is perhaps for this reason that the new legislation has been drafted to ensure that Hong Kong can only exchange information under a comprehensive double tax treaty, but not under a stand alone tax information exchange agreement. Hong Kong does now want a stand-alone agreement because it would not give Hong Kong a quid pro quo. Thus, the message from Hong Kong is clear: we will give you the information, but you need to give us a comprehensive tax treaty in return.
The strategy might already be working. In anticipation of the legislation, Hong Kong has already commenced new negotiations with Netherlands, Ireland, United Kingdom and other major jurisdictions. A draft tax treaty with France has already been initialled. It is a brave new world.
Hong Kong is still a long way away from achieving her goal of having in place a full range of double tax treaties, but that journey has begun. One would expect major countries to have a reciprocal interest in obtaining information from Hong Kong and thus Hong Kong's dream of a comprehensive tax treaty network might be achieved earlier than expected.
To secure the passage of the legislation, the tax authorities have announced safeguards that will be imposed before information is made available to foreign tax authorities, including the giving of prior notification to the taxpayer and even giving the taxpayer a right to review and amend the information to be provided.
In particular, the government has indicated that information exchange will be conducted only on a case-specific basis. It is not proposed to allow for any automatic or wholesale exchange of information. A notable point is that only information about those taxes that are specifically covered under a tax treaty will be exchanged, rather than about all taxes as provided for in the existing OECD standard. (The author is somewhat sceptical that this restriction will be applied, in view of the clear provisions of the OECD 2005 standard on this issue.) Finally, a foreign tax administration that requests information must satisfy Hong Kong that the information is ‘necessary’ or ‘foreseeably relevant’ for carrying out the tax treaty or the administration or enforcement of its domestic tax laws. So-called ‘fishing expeditions’ will not be entertained.
In other news from Hong Kong, the reform of trust and corporate laws is continuing. It will be at least a couple of years before we see a more modern-style corporate law regime in place in Hong Kong. On the trusts side, the government consultation programme has ended but there is yet no word as to how a government will respond to the various submissions that have been made to it. It is expected that, in due course, Hong Kong will have a modern trusts law system (the consensus being that the new law will not contain many of the more exotic provisions that are found in some other jurisdictions).
Regretfully, there has been no indication so far as to whether tax exemptions will be clarified to ensure that trusts managed in Hong Kong will not attract tax liability either with respect to the trust fund or with respect to the companies that are administered by trustees in Hong Kong. Unless the government is prepared to take a holistic approach that will cover trust, corporate and tax issues in one package, it is difficult to see how Hong Kong could become attractive and improve on the clarity of Singapore's laws in these regards.
Michael Olesnicky 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.