Hong Kong Tax News Flash

Nov 2009, Issue 11

Progress in liberalising the exchange of tax information in Hong Kong

As reported in our Hong Kong Tax News Flash, July 2009 Issue 7, the Hong Kong SAR Government introduced Inland Revenue (Amendment) (No.3) Bill 2009 ("Bill") in June this year to amend the existing provisions of the Inland Revenue Ordinance so as to enable Hong Kong to adopt the more liberal 2004 version of the Exchange of Information ("EoI") article endorsed by the Organisation for Economic Co-operation and Development ("OECD").

This News Flash looks at the progress made by Hong Kong since the gazette of the Bill in June against the backdrop of the latest international developments on countering tax havens or non-cooperative jurisdictions ("NCJs").

Current status of the Bill

Further to the gazette of the Bill in June this year and its first reading at the Legislative Council ("LegCo") in July, the LegCo has formed a Bills Committee to study the Bill. Before the summer recess of the LegCo, the Bills Committee decided to invite business deputations, accountancy firms and professional bodies to give their views on the Bill. One of the key concerns expressed on the Bill is the safeguards that will be put in place by the Hong Kong SAR Government to protect taxpayers' right and to ensure the privacy and confidentiality of the information exchanged.

In response to this concern, the Hong Kong SAR Government issued a legal brief to the Bills Committee in October ("Brief") setting out the various safeguards that will be adopted in the exchange of information under Comprehensive Double Tax Agreements ("CDTAs"). The Brief contains the following Annexes:

Annex A - Safeguards incorporated in any CDTAs to be concluded in respect of the scope of information exchange and the usage of information exchanged;
Annex B - Outline of the proposed safeguards on the protection of the taxpayers' right to be covered by the Inland Revenue (Disclosure of Information) Rules ("Rules"); and
Annex C - Draft Departmental Interpretation and Practice Notes - Implementation Details of Exchange of Information Provisions under Comprehensive Double Taxation Agreements (Extract of the part on "Administrative Guidelines") ("DIPN Extract").

Comments on the Rules and the DIPN Extract were further sought by the Bills Committee before its meeting in early November.

Three levels of safeguards for protecting taxpayers' rights

The key measures in the three levels of proposed safeguards set out in the Brief are summarised below.

International safeguards: Safeguards incorporated in CDTAs, protocol or similar instruments

Provisions of the standard 2004 OECD EoI article

The information must be "foreseeably relevant" for carrying out the CDTA or the local tax laws;
The information shall be treated as secret information under the domestic laws of the requesting party;
The information shall only be used for purposes specified in the CDTA; and
There are certain circumstances where there will be no obligation to supply the information requested.

Modifications to the standard 2004 OECD EoI article sought by the Hong Kong SAR Government

The scope of information exchange shall be confined to taxes covered by the CDTA;
Disclosure of information shall be confined to the tax authorities but not their oversight bodies;
The information shall not be disclosed to any third jurisdiction; and
Exchange information only upon request i.e. no automatic or spontaneous exchange.

Domestic safeguards: Subsidiary legislation (i.e. the Inland Revenue (Disclosure of Information) Rules)

A disclosure request may be approved only by the Commissioner of Inland Revenue ("CIR") or any chief assessor authorised by the CIR
Unless in certain exceptional circumstances, the CIR must give a prior notification of the request and the nature of information sought to the affected parties
The affected parties can request for a copy of the information to be exchanged and request the CIR to amend the information on the grounds that (1) the information does not relate to the person; or (2) the information is factually incorrect
The affected parties can appeal to the Financial Secretary if the CIR only partially approve or refuse the request for amendment

Procedural safeguards: DIPN

A list of information / confirmation that the requesting party must provide to avoid fishing expeditions and ensure request is made on a specific and legitimate basis

The latest international developments

Meanwhile, a few international developments in monitoring the implementation of effective EoI and in putting in place a more concrete plan of imposing sanctions / counter measures against the NCJs have taken place.

Establishing a peer review process

At the meeting held in Mexico in September this year, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes ("OECD Global Forum") agreed to set up a Peer Review Group ("PRG") to review the implementation of the standards of transparency and exchange of tax information. The PRG will develop the methodology and detailed terms of reference for a robust, transparent and accelerated review process. There will be two phases for the peer review and both phases will begin in early 2010. Phase one is a review of the legal and regulatory framework in each jurisdiction and phase two is an ongoing evaluation of the implementation of the OECD standards in practice. The OECD Global Forum will meet by June 2010 and make preliminary assessments of the progress of the peer review program at that time.

Continuous monitoring of legal instruments for EoI

In addition to the peer review process mentioned above, the OECD Global Forum will monitor the implementation of legal instruments for EoI (e.g. CDTAs and tax information exchange agreements) on a continuous basis, distinguishing between agreements in force and agreements signed but not in force. The first report from the OECD Global Forum is expected by December 2009.

Declarations and progress reports issued by the G20

A declaration was issued by G20 after the meeting of the G20 Finance Ministers and Central Bank Governors held in London on 4 and 5 September this year. As far as tackling NCJs is concerned, the declaration mentioned that the G20 will be "standing ready to use counter measures against tax havens from March 2010". In addition, a progress report on the economic and financial actions was issued by the G20 on 5 September 2009 which mentioned, inter alia, that (1) individual countries have been considering options for counter measures against those jurisdictions that do not meet the international standards of tax transparency and (2) a toolbox of measures (both positive and negative incentives) will be developed by February 2010 the latest to promote adherence and cooperation among jurisdictions.

The latest meeting of G20 Finance Ministers and Central Bank Governors was held in St. Andrews, Scotland in early November. In its communiqué and progress report issued following the meeting, the G20 welcomed progress made by the OECD Global Forum and its work on the possible use of a multilateral EoI instrument and the peer review program, and called on the relevant international institutions to further develop incentives and countermeasures as appropriate to continue tackling NCJs, including through publishing a list of NCJs. The progress report also reconfirmed that the toolbox of potential measures will be finalised by February 2010 as scheduled and made available to various jurisdictions at the time the peer review process is initiated.

PwC observations

As can be seen from the above international developments on countering tax havens and NCJs, there is a growing pressure for Hong Kong to speed up its efforts in implementing the internationally agreed standard of exchange of tax information. The progress achieved by the other jurisdictions also means that Hong Kong has to move fast on this matter. For example, Singapore has already passed a bill that amends its existing legislations to allow Singapore to adopt the more liberal 2004 OECD EoI article in October this year and has either concluded a revised CDTA or signed a protocol to the existing CDTA with 13 of its treaty partners as of mid November. As the number of agreements signed by Singapore has passed the threshold of 12 set by the OECD Global Forum, Singapore has now being moved into the category of jurisdictions that have substantially implemented the international tax standard (i.e. the so called OECD white list). Macao has also passed the relevant legislation that enables it to adopt the international standard.

While the Hong Kong SAR Government has taken swift actions in coming up with the Bill, the Rules and the DIPN Extract, the challenge ahead is for Hong Kong to strike the right balance between being compliant with the international standard and protecting the interests and rights of investors in Hong Kong. In connection with this, we set out below our comments on some of the safeguards proposed in the Rules and the DIPN Extract.

Legal status of the procedural safeguards

Currently, the proposed procedural safeguards (i.e. the list of information / confirmation that the request party must provide in its disclosure request) are included in the Appendix of the DIPN, which is not law and is not legally binding. On the other hand, it appears that the approvers of disclosure requests are legally obligated under the Rules to consider if the requests comply with those procedures set out in the DIPN. We consider that a clarification on the legal status of these procedural safeguards is warranted. In addition, consideration should be given to the effective enforcement of such procedural safeguards if they are not legally binding.

Amending the information to be disclosed

As mentioned in the table above, the grounds on which the affected parties may request the CIR to amend the information to be disclosed are confined to (1) the information does not relate to the person or (2) the information is factually incorrect. We consider that the right to verification and appeal should not be confined to these two grounds but should also be with respect to whether such information is complete and within the scope of exchange under the relevant CDTA.

Usage of the information exchanged

Among the information that the requesting party must provide in its disclosure request is the identity of the person(s) in relation to whom the information is requested i.e. the so called "subject person". This is one of the measures to ensure the request is specific and made on a legitimate basis.

We are of the view that based on the spirit of no fishing expeditions, the information obtained by the requesting party from a disclosure request made with respect to the subject person should only be used for the purpose of investigating the tax matters of that subject person and not any other persons. If the requesting party would like to carry out an investigation of a person other than the subject person, it should initiate a separate disclosure request in respect of that other person so that such other person is given the rights to verify or correct the information as specified in the Rules.

No retrospective effect

Annex A of the Brief refers to the commencement Article in a CDTA as the basis of declining any request from treaty partners to give retrospective effect of the EoI arrangement. While we support the view that the EoI provisions in any newly signed CDTAs or protocols, etc. should not have retrospective effect, we believe it is important for the Hong Kong SAR Government to agree with the treaty partners on what does "retrospective effect" mean and seek to incorporate the agreed interpretation in a protocol for the avoidance of doubt. For example, it is possible for a piece of information that exists before the signing of a CDTA to be relevant to a taxable period after the CDTA is signed. In such case, there could be different views as to whether a request for such information constitutes retrospective application of the EoI provisions and whether the commencement Article of the CDTA constitutes a legitimate basis of declining such request. One of the possible interpretations is that the EoI provisions in any newly signed CDTAs or protocols, etc. should not have effect with regard to the taxable periods before such documents are signed.

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