We cannot dodge the issue of tax evasion

PUBLISHED : Thursday, 01 April, 2010, 12:00am
UPDATED : Thursday, 01 April, 2010, 12:00am

One of the legacies of the global financial crisis is the moral and political momentum it has added to the international pursuit of tax evaders. It surfaced at the summit of the Group of 20 large economies a year ago, when a dispute over tax havens resulted in Hong Kong being left with unclear status, neither in compliance with international tax standards nor in flagrant defiance of them. Rather, the issue - pushed by French President Nicolas Sarkozy - seems to be our confidentiality rules for taxpayers. But for the intervention of presidents Hu Jintao and Barack Obama the city may have been branded a haven.

The incident understandably gave rise to concern about Hong Kong's reputation as an international finance centre. As a result, lawmakers passed a government bill in January that gives the city's tax authorities greater power to gather information on suspected evaders for other governments.

Now it has emerged that the government is in contact with at least 15 countries including the United States about tax agreements, having signed a comprehensive double taxation agreement with the Netherlands last month.

This is not the first attempt since the handover to negotiate tax pacts with major trading partners, which can protect people from double taxation as well as deterring evasion. The first, more than a decade ago, was based on a model for the exchange of information issued by the Organisation for Economic Co-operation and Development in 1995. In the intervening years, however, few agreements have been concluded. Several stalled because of resistance to compliance with a more sweeping model for exchange of information between governments adopted by the OECD in 2004.

This led to the government launching a further consultation on whether to fall in line. The catalyst for the new urgency in trying to conclude tax agreements was a threat of sanctions by the G20 against countries that refused to adopt the OECD's latest standards, and the implications for the city's standing.

Compliance with international standards of transparency poses problems for the simple low-tax regime that has served us well. For example, other countries require banks and securities houses to report interest income, dividends and securities details such as capital gains annually, and no doubt would like to have access to such information from Hong Kong. Because our city does not tax these things, the Inland Revenue Department does not have this kind of information on file. If it is to be collected or accessed for the purpose of assessment of tax payable elsewhere, privacy concerns would have to be taken into account. The question of what information can be legally shared is therefore central to participation in the new global crackdown.

Hong Kong does not operate secret banking services like Switzerland, where UBS last year agreed to pay US$780 million to settle charges of helping American clients to dodge taxes. However, it has benefited from account holders not having to supply information on their financial affairs for tax purposes, as evidenced by the number of accounts operated by non-residents.

Greater sharing of information will impact on private banking and the wealth management industry. It must be handled delicately. But if the city is serious about wanting to be recognised as a world financial centre it has no choice but to be seen to respect international standards of transparency.