In 2014, Hong Kong signed seven Tax Information Exchange Agreements (TIEAs) with the US and six Nordic jurisdictions. The signing of the TIEAs marks a new era of Exchange of Information (EOI) in Hong Kong.
Subject to the increasing pressure for greater tax transparency and closer cross-border cooperation among tax authorities, it is expected that Hong Kong may need to continue to expand its TIEA network with jurisdictions currently not intending to enter into Comprehensive Double Taxation Agreements (CDTAs) with Hong Kong. Furthermore, subsequent to the release of the new international standard on automatic EOI by the Organisation for Economic Co-operation and Development (OECD), Hong Kong will need to reconsider its current policy regarding EOI and adopt the new standard in the near future.
A) Background and peer reviews conducted by the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD
The Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD conducted Phase 1 and Phase 2 Peer Reviews on Hong Kong in 2011 and 2013 respectively. These reviews examined Hong Kong’s legal framework for EOI. The OECD used a four-tier rating system (non-compliant, partially compliant, largely compliant, compliant) when reviewing and assessing the framework. The overall rating for Hong Kong is largely compliant.
According to the Phase 1 peer review report published in October 2011, the Global Forum commented that Hong Kong has generally implemented the necessary legal framework for EOI. However, Hong Kong was advised to put in place a legal framework for entering into TIEAs.
In July 2013, Hong Kong amended its Inland Revenue Ordinance and Inland Revenue (Disclosure of Information) Rules extending the Inland Revenue Department’s (IRD) information gathering power and allowing the IRD to exchange information under TIEAs.
In November 2013, the Global Forum published the Phase 2 peer review report. The report concluded that Hong Kong is compliant with exchanging information in a timely manner. Furthermore, Hong Kong was assigned an overall rating of largely compliant and a rating of compliant for six elements out of ten elements of the international standard of transparency and EOI. Among the 50 jurisdictions that have undergone both Phase 1 and Phase 2 peer reviews and been assigned the overall compliance rating, 18 jurisdictions were assigned the highest rating of compliant; 26 jurisdictions were rated largely compliant; two jurisdictions were rated as partially compliant and the remaining four jurisdictions were rated as non-compliant.
Generally speaking, the Phase 2 peer review report confirmed that Hong Kong’s EOI regime is largely compliant with best practice and recognised that Hong Kong has the capability to respond to EOI requests from its treaty partners in an effective manner by exercising its power to obtain bank, ownership, identity and accounting information during the period from July 2009 to June 2012. Moreover, Hong Kong has been considered by its treaty partners as an efficient and cooperative partner according to the timeliness and the content of the information provided.
However, the Phase 2 peer review report pointed out some recommendations required to improve Hong Kong’s legal and regulatory framework to ensure an effective EOI. The recommendations are as follows:
Hong Kong should bring its existing CDTAs that do not meet the standard up to the standard.
Hong Kong should enter into agreements of EOI, regardless of whether a CDTA or a TIEA, with all relevant partners who are interested in entering into one.
Hong Kong should monitor the application of its new legislation to ensure information that precedes the effective date of an EOI agreement can be exchanged, where it relates to a taxable period subsequent to the effective date of the EOI agreement.
B) TIEA signed with the US (HK-US TIEA)
On 25 March 2014, Hong Kong signed the HK-US TIEA with the US for the enforcement and assessment of taxes. The agreement is the first of this kind of agreement signed by Hong Kong subsequent to the change of policy on EOI and the amendment of its legislation for entering TIEAs with other jurisdictions in July 2013.
Key features of the HK-US TIEA:
The HK-US TIEA is based on the model developed by the OECD and sets out the scope and mechanism for the EOI between Hong Kong and the US in respect of the taxpayers.
In the case of Hong Kong, the types of tax covered under the HK-US TIEA are limited to income tax, i.e. profits tax, salaries tax and property tax. In the case of the US, however, the types of tax covered under the HK-US TIEA are federal income taxes, federal employment taxes, federal estate and gift taxes and federal excise taxes.
Information will only be exchanged upon receipt of a specific request by one party from the other in respect of the taxes specified in the HK-US TIEA.
A contracting party must provide certain specified information to demonstrate to the other contracting party that the information requested is relevant for tax purposes. For example, Hong Kong can request information from the US in relation to Hong Kong profits tax, salaries tax and property tax. Neither party can use the information obtained from the other contracting party for non-tax related purposes.
There is no domestic tax interest, which means that the contracting party receiving the request will need to provide the information requested even though it does not need such information for its own domestic tax purposes.
The parties may request information that is possessed or controlled by a person in the other jurisdiction. In Hong Kong, if the information requested is not available in the tax files of the Inland Revenue Department, the Commissioner of Inland Revenue will exercise his information gathering power to obtain the information from the taxpayer concerned or any other suitable parties.
The agreement has excluded the Tax Examination Abroad article contained in the OECD model. As such, neither party can enter into the territory of the other party to interview individuals, examine records, or present at a tax examination.
An information exchange request may be denied in certain specified circumstances, including: where the applicant party has not exhausted all the means in its own jurisdiction to obtain the information; where the information would disclose a trade, business, industrial, commercial or professional secret or trade process; where the information is covered by a legal professional privilege; or where disclosure of the information would be contrary to public policy.
Under the notification and review mechanism, once the Commissioner of the Inland Revenue (CIR) approves an EOI request, the IRD is required to notify the person who is the subject of the request in writing to report the nature of information requested by the relevant tax authority. The affected person will then have the right to review and amend the information to be exchanged by the CIR. If the CIR refuses to amend the information according to the affected person’s comment, the person has the right to request that the Financial Secretary reviews the CIR’s decision.
The information exchanged will be in respect of any period that starts on or after the effective date of the HK-US TIEA, i.e. 20 June 2014. Regarding the information that existed or was generated before 20 June 2014, the information may be exchanged if the information is relevant to the tax imposed in periods starting after 20 June 2014.
The OECD model TIEA precludes disclosure of the exchanged information to a third party unless a written consent is given by the requested party. However, the US-HK TIEA only states that the information exchanged may not be disclosed to any third party, without the written consent condition.
HK-US TIEA and the US Foreign Account Tax Compliance Act (FATCA)
The HK-US TIEA allows the exchange of tax information on request between Hong Kong and the US, which will help Hong Kong to meet FATCA requirements.
In brief, under the FATCA, foreign financial institutions (FFIs) are required to sign agreements with the US Internal Revenue Service (IRS) to identify and disclose detail regarding their US account holders. These FFIs will be required to withhold tax for relevant US account holders who do not give consent to such disclosures, or to close such accounts. An FFI which does not sign an agreement or is not otherwise exempt will face a punitive 30% withholding tax on all ‘withholdable payments’ derived from US sources, initially including dividends, interest and certain derivative payments.
The HK-US TIEA provides the necessary basis for Hong Kong to provide for EOI upon requests made in relation to the information reported by financial institutions in Hong Kong to the US under the FATCA.
Furthermore, Hong Kong now intends to enter into an intergovernmental agreement with the US to lay down the arrangements to help financial institutions in Hong Kong to comply with the FATCA.
C) TIEAs signed with six Nordic jurisdictions (HK-Nordic TIEAs)
On 22 August 2014, Hong Kong entered into HK-Nordic TIEAs with six Nordic jurisdictions, namely, Denmark, the Faroes, Greenland, Iceland, Norway and Sweden. To date, Hong Kong has signed TIEAs with seven jurisdictions subsequent to July 2013 when the legal framework enabling Hong Kong to enter standalone TIEAs with other jurisdictions was implemented.
Similar to the HK-US TIEA, the HK-Nordic TIEAs are all based on the model developed by the OECD. Key features of the TIEAs are as follows:
Information will only be exchanged upon receipt of a specific request by one contracting party from the other contracting party in respect of the kinds of taxes specified in the HK-Nordic TIEAs.
The applicant party must provide to the requested party certain information such as the identity of the person, the tax purpose for which the information is sought and the types of tax concerned etc., so as to demonstrate the relevance of the requested information to the administration and enforcement of the tax jurisdiction of the applicant party.
In the case of Hong Kong, the types of tax covered under the HK-Nordic TIEAs are limited to direct income tax, i.e. profits tax, salaries tax and property tax. While in the case of the six Nordic jurisdictions, the types of tax covered under the HK-Nordic TIEAs included direct taxes and certain indirect taxes such as value added tax, goods and services tax and estate, inheritance or gift taxes.
Information that precedes the effective date of the HK-Nordic TIEAs can be exchanged if the information requested is foreseeably relevant to a taxable period after the effective date of the HK-Nordic TIEAs.
To ensure efficiency, the requested party has to provide the information within 90 days of receipt of the request. Further, the requested party has to notify the applicant party within 60 days from the receipt of the request if there is any deficiency in terms of information required to be furnished in the request.
The information exchanged must be treated as confidential and may be disclosed only to persons and authorities in the assessments or collection of; enforcement or prosecution in respect of; or determination in relation to the taxes covered by the HK-Nordic TIEAs. Moreover, the information exchanged may be disclosed by the applicant party to any other person or jurisdiction provided that express written consent is obtained from the requested party. Please note that the latter condition is not stated in the HK-US TIEA. As such, the HK-US TIEA is perceived as providing more protection on confidentiality.
Similar to the HK-US TIEA, the HK-Nordic TIEAs exclude the Tax Examination Abroad article contained in the OECD model. As such, neither party can enter into the territory of the other party to interview individuals, examine records, or present at a tax examination.
Similar to the HK-US TIEA, under the notification and review mechanism, once the CIR approves an EOI request, the IRD is required to notify the person who is the subject of the request in writing to report the nature of information requested by the relevant tax authority. The affected person will then have the right to review and amend the information to be exchanged by the CIR. If the CIR refuses to amend the information according to the affected person’s comment, the person has the right to request the Financial Secretary reviews the CIR’s decision.
D) Automatic EOI
In February 2014, the OECD released a new global standard for automatic exchange of financial account information between governments. The new standard involves the Common Reporting Standard (CRS) which contains reporting and due diligence, and the Model Competent Authority Agreement (CAA) which helps to execute the automatic EOI in an efficient manner.
Under the CRS, the competent authorities are required to automatically exchange the information reported by the financial institutions with other jurisdictions on an annual basis. On the other hand, the Model CAA links the CRS with the legal basis for automatic EOI. Financial information obtained from the financial institutions will thus be exchanged on an automatic basis pursuant to the legal instrument on automatic EOI.
In July 2014, the OECD published the first edition of the CRS — Standard for Automatic Exchange of Financial Account Information in Tax Matters (the Standard), including commentary and guideline for the effective implementation of the Standard by the competent government and financial institutions as well as the detailed Model CAA.
Over 65 jurisdictions, including all the G20 members, have committed to implement the Standard. It is expected that more jurisdictions will follow in the near future. However, Hong Kong has neither adopted the Standard nor agreed to exchange information on an automatic basis. According to the revised Departmental Interpretation and Practice Notes No. 47 on EOI issued in January 2014, it is stated that Hong Kong has not yet agreed to exchange information on an automatic or spontaneous basis. In addition, under the current legislation, Hong Kong would supply tax information upon specific and valid requests from the competent authority of a tax agreement partner.
In light of the vast and increasing global support of the Standard, Hong Kong will be under immense pressure to reconsider its current policy regarding EOI and adopt the Standard in the near future. If Hong Kong decides to adopt the Standard, the HKSAR government will need to provide a legal framework for the automatic EOI. Furthermore, specific administrative resources will be required to implement the automatic information exchange system in an efficient manner.