Hong Kong saved from tax-haven tag in final communique

PUBLISHED : Saturday, 04 April, 2009, 12:00am
UPDATED : Saturday, 04 April, 2009, 12:00am

Chief Executive Donald Tsang Yam-kuen yesterday leapt to the defence of Hong Kong's tax standards, after a row over the city's compliance with global rules threatened to derail the G20 summit.

Mr Tsang pointed out that the government was seeking lawmakers' approval for changes to tax laws this year to allow information to be shared with foreign authorities to crack down on tax evasion - a move already announced in this year's budget.

Hong Kong's tax rules fell under the international spotlight on Thursday amid moves that threatened to see the city declared a tax haven in the G20 final communique. That humiliation was apparently averted after President Hu Jintao refused to countenance the inclusion of a list of tax havens in the communique.

In a compromise brokered by US President Barack Obama, the existence of such a list - compiled by the Organisation for Economic Co-operation and Development - was instead 'noted' in the communiqu?.

Hong Kong and fellow SAR Macau were ultimately not explicitly listed by the OECD as tax havens. Instead, they were mentioned in a fine-print notation as having merely committed to implement internationally agreed tax standards.

'Our tax rate is low, but that does not mean that we harbour irregularities in our system,' Mr Tsang said. 'There has been some concern [in Hong Kong] about disclosure of personal information for tax purposes by other authorities. But this is a matter we have already agreed, to ensure that our policy will become compatible with international practices.'

There are 38 other jurisdictions on the OECD 'grey list' whose behaviour is defined in the same way as Hong Kong and Macau. Of these, 30 are specifically described as 'tax havens' - including Liechtenstein, Bermuda and the Cayman Islands.

The other eight, including Singapore, Switzerland and Luxembourg, are merely described as 'other financial centres'.

The OECD does not make clear to which of these two subsets Hong Kong and Macau belong.

The only four jurisdictions that are on the blacklist of non-cooperative tax havens are Costa Rica, Labuan in Malaysia, the Philippines and Uruguay.

Speaking in London following the G20 summit, Permanent Secretary for Financial Services and the Treasury Au King-chi said she welcomed the decision not to include Hong Kong on any tax haven blacklist. She said Hong Kong had introduced 'effective measures' against tax evasion, and it had a simple, transparent taxation system.

The Hong Kong government, she said, would take the initiative to brief the foreign and finance ministries on efforts Hong Kong had made to strengthen the taxation system, and on improving transparency.

Tim Lui Tim-leung, a partner of PricewaterhouseCoopers, said the local tax laws did not yet reflect agreed-to international standards.

'The international tax standard required counties to sign dual agreements to exchange information to crack down on tax evasion, but many countries refused to sign the agreement with Hong Kong, as local tax laws prohibited Hong Kong's Inland Revenue from giving information on taxpayers to the overseas regulators to chase if anyone used Hong Kong to hide their tax-evasion practices,' Mr Lui said.

Many countries are on the OECD's blacklist or grey list because of their bank secrecy laws - but Mr Lui said this was not a problem in Hong Kong as it did not have such rules.

Democratic Party legislator Kam Nai-wai supported the tax law changes but said the government had been late doing so. 'The government should have made the law changes many years ago to enhance our transparency. It appears we have lagged behind international practices, and this should be changed as soon as possible,' Mr Kam said.

Paul Chan Mo-po, legislator for the accountancy sector, said many multinationals would like to set up operations in Hong Kong to enjoy the low tax rates - but this did not mean the city was a safe haven for tax evaders.

Additional reporting by Chong Hiu-yeung in London