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Liberalisation of exchange of tax information
In conjunction with the upcoming G20 summit meeting in early April 2009, it is reported that the Organisation for Economic Co-operation and Development ("OECD") has prepared a paper summarizing the current situation with regard to international tax cooperation, including the issues of lack of transparency and lack of exchange of information internationally [note 1]. This OECD paper includes the fact that several jurisdictions do not have a single agreement that complies with the OECD's standard on the exchange of tax information. Based on the existing treaties that Hong Kong has concluded, it is possible that Hong Kong could be included as one of the jurisdictions named. While this would be a challenge to the Hong Kong SAR Government, the recent development in Hong Kong comes timely and is constructive for Hong Kong to comply with the international standards.
[note 1]: The OECD's article entitled "OECD principles on exchange of information for tax purposes: a model for bilateral conventions" (www.oecd.org/document/31/0,3343,en_2649_34487_42402911_1_1_1_1,00.html)
In this Issue of News Flash, we will revisit the OECD's standards; share our observations of the call of the international tax arena for liberalisation of exchange of tax information; and look at what the Hong Kong SAR Government has done to address the issue.
OECD's standards and recent developments
In its 1998 Report, "Harmful Tax Competition: An Emerging Global Issue", the OECD specified 4 factors in identifying tax havens. These factors are (a) no or only nominal taxes, (b) lack of effective exchange of information, (c) lack of transparency and (d) no substantial activities. "No or only nominal taxation" is a necessary condition for the identification of a tax haven, but to be labelled as a tax haven, other factors will need to be considered. The OECD's view as expressed in the report is "no or only nominal taxation combined with the fact that a country offers itself as a place, or is perceived to be a place, to be used by non-residents to escape tax in their country of residence may be sufficient to classify that jurisdiction as a tax haven."
Two years later, in its 2000 report entitled "Towards Global Tax Co-operation", the Committee on Fiscal Affairs of the OECD, following the instructions from the Council of the OECD, invited its members to make commitments to the elimination of harmful tax practices. At the same time, it also produced the OECD List of Uncooperative Tax Havens (so called "the Blacklist") from the list of jurisdictions meeting the tax haven criteria and not committing to transparency and effective exchange of information. The current Blacklist only contains Andorra, Liechtenstein and Monaco, though at the time of writing Liechtenstein had announced its intention to accept the OECD's standards on transparency and exchange of information and Andorra has indicated it's willingness to enter into tax information exchange agreements and an intention to eliminate strict bank secrecy for tax purposes by November 2009.
In preparation for the upcoming G20 summit meeting in early April 2009, France and Germany urged the OECD to expand the Blacklist to include jurisdictions deemed uncooperative in exchanging tax information.
Meanwhile, the recent tax legislative development in the United States has also aroused attention in the international tax practice arena. The new revised Levin and Doggett anti-tax-haven bills were introduced early March 2009 to the House of Representatives and reportedly received support from the Obama's Government. Among other things, the bills propose to allow the US tax authority to have more time to review tax returns involving "offshore secrecy jurisdictions", and would limit the ability of US companies to use tax opinions to claim a "reasonable cause" exception to penalties on transactions involving offshore secrecy jurisdictions. Hong Kong is currently included in the proposed list of 34 offshore secrecy jurisdictions. There is an increased likelihood that legislation addressing perceived abuses of offshore secrecy jurisdictions could be enacted in the United States later this year.
Another major trading partner of Hong Kong is the Mainland China. The Mainland China's tax authorities are noticeably gearing up the domestic tax rules to assess and counteract abusive use of treaties to take the tax advantages without sound commercial substance. For example the recently issued Guoshuihan [2009] No. 81 tightens the procedures for obtaining tax treaty benefits for dividends received by non-Chinese resident companies (For details, please refer to our China Tax News Flash 2009 Issue No. 7)
Steps taken by the Hong Kong SAR government
The Hong Kong SAR has a limited network of double tax agreements / arrangement (hereafter refer to as "treaties"). Currently it has signed treaties with Belgium (2003 [note 2]), Thailand (2005), the Mainland of China (2006), Luxembourg (2007) and Vietnam (2008). The Exchange of Information ("EoI") Article in these treaties has adopted the 1995 OECD model which requires the contracting jurisdictions to exchange information only if the same is of domestic tax concern. The later 2004 OECD model removed such restriction in the EoI Article. The OECD encourages treaty nations to adopt this more liberal version of EoI Article in signing treaties or at least to sign an EoI agreement of similar terms. This is consistent with its policy to remove harmful tax practices as explained above.
[note 2]: The year in the brackets is the year when the agreement / arrangement was signed.
The existing provision of the Inland Revenue Ordinance ("Ordinance") only allows assessing officers of the Inland Revenue Department to seek from any person any information that will affect the tax liabilities or obligations under the Ordinance. The restriction in this provision makes it impractical for the Hong Kong SAR Government to adopt the 2004 OECD version of EoI Article.
There are negative impacts of being unable to adopt the 2004 OECD version of EoI Article in treaties negotiated by Hong Kong. Many countries are reluctant to sign a treaty with the 1995 version of EoI Article, in light of the OECD's initiatives in this area. Although the Hong Kong SAR Government is still negotiating treaties with Austria, Czech Republic, Italy, Macao SAR, Netherlands, Kuwait, Pakistan and Spain, currently Hong Kong's inability to adopt the 2004 EoI Article has been a hurdle that has delayed progress in the treaty negotiations with these and other countries.
Although one has to wait and see what G20 will recommend on this issue, adopting an EoI Article not complying the OECD's standard has already put Hong Kong under the international tax spotlight.
In view of the restriction in the Ordinance, in the middle of last year the Hong Kong SAR Government launched a consultation on the liberalisation of the EoI Article for treaties with the business communities and professional bodies to solicit their views on this issue. Following this consultation, in the 2009/2010 Fiscal Budget announced on 25 February 2009, Hong Kong's Financial Secretary proposed to put forward amendments to the existing provisions in the Ordinance to accommodate the more liberal EoI Article as a response to the requests of Hong Kong's trading partners for having more "liberal requirements on the exchange of tax information under such agreements".
This move is very timely. Removing the stumbling block for a more liberal EoI Article should help accelerate the Hong Kong SAR Government's treaty negotiations with other countries, and also ease some of the international pressure on Hong Kong in this area. Being unable to adopt the more liberal version of EoI Article poses a number of risks for the Hong Kong economy and local businesses, as well as hampering the tax treaty negotiations as discussed above. One of these risks is the possible unilateral sanctions by other countries against Hong Kong. For example, other countries may disallow tax deductions or seek to impose a withholding tax on transactions with entities in jurisdictions that have restrictive exchange of tax information provisions. Stringent reporting and auditing requirements on business transactions carried out by companies in their own countries with these jurisdictions may also be imposed.
The OECD has already announced in a press release issued on 12 March 2009 its support for the steps taken by the Hong Kong SAR Government to allow it to negotiate agreements implementing the OECD standard for effective exchange of information [note 3].
[note 3]: The OECD's article entitled "Moves by financial centres boost OECD fight against tax evasion" (www.oecd.org/document/16/0,3343,en_2649_33745_42339984_1_1_1_1,00.html)
PwC observations
Having a relatively low income tax rate is a necessary but not sufficient factor to render a territory to be classified as an uncooperative tax haven. In strengthening its attractiveness as one of the preferred locations for regional investment headquarters in the Asia Pacific region, the Hong Kong SAR Government may still maintain its low and simple tax system, but it needs to take positive step towards improving transparency and establishing effective exchange of tax information with other tax jurisdictions.
This move is crucial for the continued development of the Hong Kong economy, but what is even more critical is to avoid damaging Hong Kong's international reputation as a result of being labelled as offshore secrecy jurisdiction or restrictive in exchange of tax information. Updating the relevant provisions in this area in the Ordinance will help mitigate this risk and also help Hong Kong expand its tax treaty network. Such a measure should therefore be welcomed by the international business community. Progress in implementing the Government's proposals in this area, including receiving support from Hong Kong's Legislative Council, will hopefully occur on a timely basis.
The clear trend for increased measures to facilitate exchange of tax information at an international level, coupled with the domestic tax authorities' efforts of cracking down on both domestic and cross-border tax evasion should be welcomed by the vast majority of law-abiding taxpayers. But it also poses challenges for multi-national businesses. It is imperative for multi-nationals to get well prepared in reviewing their tax positions in cross-border business transactions, including ensuring they have legitimate ownership structures and operating business models, supported by contemporaneous documentation. |
