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A step towards liberalising the exchange of tax information in Hong Kong: The Inland Revenue (Amendment) (No.3) Bill 2009
As reported in our March 2009 Issue 3 and June 2009 Issue 5 of Hong Kong Tax News Flashes, there have been international pressures for Hong Kong to adopt the international standard of tax transparency.
In February this year, the Financial Secretary announced the 2009/10 Fiscal Budget which contained a proposal to amend the existing provisions in the Inland Revenue Ordinance ("IRO") to accommodate the more liberal international standard of exchange of tax information endorsed by the Organisation for Economic Co-operation and Development ("OECD").
On 26 June 2009, Inland Revenue (Amendment) (No.3) Bill 2009 ("the Bill") was gazetted. The Bill introduces the necessary legislative amendments to the IRO for Hong Kong to adopt the 2004 OECD model Exchange of Information ("EoI") article in concluding comprehensive double tax arrangement / agreement ("CDTA"). In this News Flash, we highlight the proposed legislative changes and share our observations on this latest development.
The proposed legislative changes
The proposed amendments to the IRO introduce a new section, section 49(1A), which empowers the Chief Executive to declare any arrangement made with a view of resolving double taxation will have effect on any Hong Kong taxes under the IRO as well as on the disclosure of information concerning taxation matters of another jurisdiction related to taxes covered by the EoI article of the arrangement that Hong Kong has concluded with that jurisdiction.
The existing provision of the IRO, section 51(4)(a), only grants power to the IRD to obtain information in regard to any matter which may affect any liability, responsibility or obligation of any person under the IRO. The proposed legislative amendments will extend the information seeking power of the IRD so that it can obtain full information in regard to "any matter that may affect any liability, responsibility or obligation of any person... under the laws of a territory outside Hong Kong concerning any tax of that territory" if the following two conditions are met:
- there is a CDTA between Hong Kong and that territory and such CDTA is having effect under the newly added section 49(1A) of the IRO; and
- that tax is the subject of a provision of the CDTA that requires disclosure of information concerning tax of that territory.
Similarly, the IRD's power to obtain search warrant in certain cases (e.g. where there are reasonable grounds for suspecting that a person has made an incorrect return or supplied false information resulting in a understatement of his income or profits chargeable to tax under the IRO) as provided under the existing provision of section 51B(1) of the IRO will be extended by the proposed amendments such that it also applies to any tax of a territory outside Hong Kong if the above two conditions are satisfied.
Failure to provide the requested information, or obstructing / hindering the discharge of a search warrant under the existing provisions, is an offence under the IRO and is subject to a penalty. By extending the information covered by the existing provisions to information required for the purpose of exchange of information under a CDTA, these offence / penalty provisions will also be applicable to information requests with regard to tax of other territories of which a CDTA having effect under the new section 49(1A) has been concluded with Hong Kong.
Provision of incorrect information for domestic tax purposes without reasonable excuse is also an offence under the existing provisions of the IRO. Similarly, under the proposed amendments, a person who without reasonable excuse gives any incorrect information in relation to any matter or thing affecting the person's own liability (or the liability of any other person) to tax of other territories of which a CDTA having effect under the new section 49(1A) has been concluded with Hong Kong will also commit an offence.
PwC observations
We set out below a number of our observations about the proposed amendments and the issues involved in adopting the more liberal 2004 OECD model EoI article.
Information exchange under the existing CDTAs 
The exchange of information under the five currently concluded CDTAs will continue to be governed by the existing provisions in the IRO and the restrictive 1995 OECD model EoI article. So far, the Hong Kong SAR Government has been silent on whether there is any plan to incorporate the wider scope of tax information exchange into the existing CDTAs, for example, by renegotiating the EoI article in such CDTAs and signing a protocol to the CDTAs concerned. It also remains to be seen whether Hong Kong's existing CDTA partners will make any requests for liberalising the EoI article under their existing CDTA with Hong Kong.
Taxes covered by the Eol article
The Bill itself does not specify the types of tax (e.g. income tax, property tax, turnover tax and stamp duty, etc.) to which the exchange of information applies. Rather, the wording of the Bill provides flexibility as to the types of tax that will be covered and effectively leaves the determination to the provisions of the EoI article in the individual CDTAs, as one of the conditions for exchanging information set out in the Bill is "...if that tax is the subject of a provision of the arrangements that requires disclosure of information...". The 2004 OECD model EoI article specifies that the exchange of information is not restricted to the taxes covered by a CDTA. Hence, under the 2004 OECD model EoI article, information pertaining to taxes that are not covered by a CDTA may also be exchanged, provided that the other provisions in the EoI article are complied with. In the CDTAs signed by Hong Kong so far, any information exchange is restricted to taxes covered by the CDTA. However, if Hong Kong is to adopt the latest internationally agreed standard of exchange of tax information and with the proposed amendments to the IRO, any new CDTA concluded by Hong Kong in the future will likely incorporate the above said provision in the 2004 OECD model EoI article.
Tax information exchange agreements ("TIEAs")
Instead of signing a CDTA, some jurisdictions meet the international standard of tax information exchange by concluding a TIEA with other jurisdictions following the OECD model TIEA. A TIEA is a bilateral agreement for the promotion of international co-operation in tax matters through exchange of information without considering the issue of double taxation nor providing any bilateral agreement on the reliefs for double taxation. As mentioned above, the proposed section 49(1A) of the IRO empowers the Chief Executive to declare a CDTA (i.e. an agreement with a view of resolving double taxation issues) to have effect on any Hong Kong taxes under the IRO and on the exchange of information concerning tax of other jurisdictions with which Hong Kong has concluded a CDTA. Since a TIEA is simply an arrangement for exchange of tax information, it appears that the proposed amendments will not empower the Hong Kong SAR Government to exchange information concerning tax of another jurisdiction under a TIEA. This may be an indication that the Hong Kong SAR Government does not plan to sign any TIEAs.
Safeguards for protecting taxpayer's rights
Taxpayers' rights include maintaining the confidentiality of the information exchanged under any EoI arrangements and preventing abusive use of such arrangements under a CDTA. Both have been concerns of the business community in Hong Kong. In the press release announcing the gazette of the Bill, the Hong Kong SAR Government indicated that it will "adopt prudent safeguards at different levels to protect individuals' right to privacy and confidentiality of the information exchanged". In a briefing paper on exchange of information under a CDTA presented by the Financial Services and the Treasury Bureau to the Panel of Financial Affairs of the Legislative Council in May 2009, the following safeguards are listed as measures available under the 2004 OECD model EoI article for protecting the confidentiality of the information exchanged:
- The information exchange will be conducted on a case-specific basis in response to legitimate requests;
- There will not be any automatic or wholesale exchange of information; and
- The relevant authority of the contracting party must observe the following protocols:
- It must satisfy the IRD that the information requested is "necessary" or "relevant" for the carrying out of the CDTA or the administration or enforcement of its local tax laws. This is a safeguard against "fishing expeditions";
- It must treat the information provided as secret information under its domestic laws;
- It must not share the information provided with any third party (including a third jurisdiction or another government department of its own jurisdiction); and
- It must only use the information provided for purposes specified in the CDTA.
With respect to whether the affected parties would have the right to know about the details of any exchanges of information, the IRD expressed in Departmental Interpretation and Practice Notes No. 44 ("DIPN 44") on the CDTA between Mainland China and Hong Kong that "Hong Kong's existing legislation (including the Personal Data (Privacy) Ordinance) does not provide that the IRD should inform the taxpayer concerned if it has passed on information relating to him to the competent authority of the Mainland. Accordingly, the IRD would not provide taxpayers with details of any such exchanges". Although DIPN 44 is specifically on the CDTA between Mainland China and Hong Kong, it is likely that the same principle will be adopted by the IRD in carrying out the exchange of information provisions in other CDTAs concluded by Hong Kong. The practice adopted by the other countries in protecting taxpayers' rights in the exchange of tax information may serve as a reference for the Hong Kong SAR Government to consider what the best approach for Hong Kong would be. For example, in China, a circular has been issued by the China State Administration of Taxation (i.e. Circular [2006] 70) setting out the working guidelines for international exchange of tax information under a CDTA. The guidelines set out in details the types and scope of information exchange, the procedures put in place to protect the confidentiality of the information exchanged (e.g. there are different levels of confidentiality for which different confidential periods apply), and the administrative procedures for the information exchange process, etc. One of the articles in the circular specifies that the relevant tax authority can inform the taxpayer or withholding agent concerned or other affected parties of the purpose of collecting the information, the source of the information obtained and the content of the information obtained. Similar to Hong Kong, the Ministry of Finance in Singapore issued in late June a draft bill entitled "Income Tax (Amendment) (Exchange of Information) Bill" for public consultation. The Singapore draft bill seeks to amend the Singapore Income Tax Act ("ITA") and other existing tax legislation to allow Singapore to adopt the more liberal 2004 OECD model EoI article in a CDTA. The legislative amendments also propose to add a new schedule to the ITA. The schedule lists out the information to be included in a request for information under a CDTA to support the legitimacy of such request. This documentary requirement, where incorporated into the ITA as part of the law, may better serve as a safeguard to ensure that requests that are frivolous or spurious in nature or fishing-expeditions may be rejected by the tax authority in Singapore. The IRD may consider issuing a DIPN on exchange of information under CDTAs to provide taxpayers with information about the process of exchanging information so as to increase the transparency of the process.
Concluding remarks
The Bill was introduced into the Legislative Council on 8 July 2009. A Bill Committee may be formed to consider the Bill when the Legislative Council resumes its meetings after the summer recess. While the Bill represents an important and significant step taken by the Hong Kong SAR Government towards implementing the latest internationally agreed standard on exchange of tax information and demonstrates its commitment to tax transparency, a thorough discussion and consideration of the safeguards that need to be put in place to govern the exchanges of information and to protect the confidentiality of information exchanged should be conducted before enacting the proposed legislative amendments in the Bill.
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