Asia & Tax Alert
July 2009
Author:
Clifford Ng
clifford.ng@klgates.com
+852.2230.3558
K&L Gates is a global law firm with
lawyers in 33 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
Hong Kong Opens the Books on Tax
Information
I. Overview
On June 26, 2009, the Hong Kong government introduced the Inland Revenue
(Amendment) (No.3) Bill 2009 (the "Bill”). The Bill amends the Hong Kong Inland
Revenue Ordinance (“IRO”) by adopting the 2004 Organisation for Economic Cooperation and Development (“OECD”) model exchange of information article in its
double tax agreements with other jurisdictions. This amendment, if passed, will
considerably expand the information which the Inland Revenue Department (“IRD”)
may access from a person, as well as from financial institutions and third parties with
which that person deals.
II. The Proposed Legislative Amendments
The current policy set out in section 51(4)(a) of the IRO gives the IRD power to
obtain information only in regard to any matter which may affect any liability,
responsibility or obligation of any person under the IRO. The proposed amendment
will extend the information seeking power of the IRD to 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:
1. There is a double tax agreement between Hong Kong and that territory and
such double tax agreement is having effect under the newly added section
49(1A) of the IRO; and
2. That tax is the subject of a provision of the double tax agreement that
requires disclosure of information concerning tax of that territory.
The IRD’s power to obtain search warrants in certain cases, as provided under the
existing provision of section 51B(1) of the IRO, will be extended by the proposed
amendments such that it will apply to information relating to any tax of a territory
outside Hong Kong if the above two conditions are satisfied. In most cases,
reasonable grounds to suspect that a person has made an incorrect return or supplied
false information resulting in an understatement of his/her income or profits
chargeable to tax are required.
Failure to provide the requested information 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 double tax agreement, the penalty provisions will apply to information requests
relating to tax of other territories with whom Hong Kong has concluded a double tax
agreement having effect under the new section 49(1A). Additionally, providing
Asia & Tax Alert
incorrect information in relation to any matter
affecting the person’s own liability to tax of other
territories with whom Hong Kong has concluded a
double tax agreement will also constitute an offence.
The amendment also confers power to the IRD to
seek information from third parties. The amendment
requires the assessor to give notice in writing to such
person, or to any other person whom he/she
considers may be in possession of information or
documents in regard to any such matter. Indeed, the
person subject to investigation does not have the
right to information relating to the exchange
between the IRD and the third party from whom the
information is sought. This does not require
disclosure by counsel of any privileged information
made to him/her in that capacity. However,
particulars, such as the full names of the relevant
parties, addresses, any consideration or fee paid and
other items enumerated under section 51(4A) of the
Bill are no longer considered privileged information.
With regard to the listed particulars, privilege from
disclosure shall not constitute any excuse for the
non-disclosure of information. However, once the
information is obtained, the IRD cannot share that
information with any parties other than the
requesting department.
2. There will not be any automatic or
wholesale exchange of information; and
3. The relevant authority of the contracting
party must observe the following protocols:
i.
It must show the IRD that the
information requested is “necessary” or
“relevant” for the carrying out of the
double tax agreement or the
administration or enforcement of its
local tax laws. This is an anti-fishing
expedition provision;
ii. It must treat the information provided
as secret information under its
domestic laws;
iii. It must not share the information
provided with any third party
(including a third jurisdiction or
another government department of its
own jurisdiction); and
iv. It must only use the information
provided for purposes specified in the
double tax agreement.
III. Safeguards to Protect Taxpayers’
Rights
IV. Impact on Present and Future
Double Tax Agreements
This broader definition of information exchange
represents a significant change to the IRD's access to
information and, on the other hand, taxpayers’ rights
to confidentiality. The Hong Kong government has
indicated that it will adopt safeguards at different
levels to protect individuals’ right to privacy.
It remains to be seen whether counterparties to
Hong Kong’s existing double tax agreements
(Belgium, Thailand, China, Luxembourg and
Vietnam) will seek amendments to the exchange of
information articles under their existing double tax
agreements with Hong Kong. In the existing
agreements, any information exchange is restricted
to types of taxes covered by the agreement.
However, if Hong Kong adopts the latest
international standards of exchange of tax
information together with the proposed amendments
to the IRO, any new double tax agreements will
likely incorporate the 2004 OECD model exchange
of information article which specifies that the
exchange of information is not restricted to the
types of taxes covered under a double tax
agreement.
In a briefing paper on exchange of information
under a double tax agreement 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 were listed as
measures available under the 2004 OECD model
exchange of information article for protecting the
confidentiality of the information exchange:
1. The information exchange will be
conducted on a case-specific basis in
response to legitimate requests;
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Asia & Tax Alert
V. Final Considerations
The Bill was introduced into the Legislative Council
on July 8, 2009. A Bills Committee has been
formed to consider the Bill and the next meeting is
scheduled for October, 2009. The Bill represents a
significant step towards fulfilling Hong Kong's
commitment to adopt international standards on the
exchange of tax information. Private clients and
financial institutions should keep abreast of these
developments. Financial institutions may need to
consider the information they have and seek from
clients.
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