HK moves closer to OECD benchmark on tax agreements
Tax authorities from Brunei, the Netherlands, Indonesia, Hungary, Kuwait, Austria, Britain, Ireland and the mainland can seek information on local taxpayers under a growing network of bilateral tax treaties that aims to bring the city in line with international standards.
The nine comprehensive double taxation agreements are three short of the 12 needed to satisfy Organisation for Economic Co-operation and Development, or OECD, requirements. The treaties must adopt the latest OECD standards on the exchange of information.
The ability to request data on overseas taxpayers is very appealing, especially to authorities from countries that levy high rates of tax on income. Attention is increasingly being focused on taxpayers abroad as governments face ballooning budget deficits amid the global downturn and European debt crisis.
With similar tax agreements expected to be signed with Japan in the coming one or two weeks and with France very soon, Hong Kong could grow its network of tax treaties to about 20 this year.
But this is a relatively small number, considering the mainland has about 90 such agreements while Singapore, Japan and Thailand have more than 50 each, Ayesha Macpherson, head of tax at accounting firm KPMG in Hong Kong, said.
Despite the growing network of tax treaties, there are glaring omissions, like the US, a key trading partner for Hong Kong. Macpherson said countries that levy high rates of tax on income may be reluctant to sign a CDTA since such agreements usually result in lower withholding tax, which is the amount deducted from income, such as royalties, to pay taxes. While gaining the ability to request data on overseas taxpayers is attractive, some governments may have overlooked this point, Macpherson said.
Since Hong Kong adopts the territorial principle of taxation, which only taxes income sourced locally, and does not tax capital gains or dividends paid on stocks, Hong Kong has only the exchange of tax information to negotiate a CDTA with. However, local tax authorities must first notify the taxpayer involved and share the information being requested.
Since March, Hong Kong has ratified CDTAs in quick succession. Secretary for Financial Services and the Treasury Professor Chan Ka-keung will sign the agreement with Britain in London today and with Ireland in Dublin tomorrow.
The existing treaty with the mainland was recently upgraded to incorporate the latest OECD standards.
Negotiations are under way to upgrade existing treaties with Vietnam, Belgium, Luxembourg and Thailand to the newest standards while local tax authorities have reached agreement on CDTAs with Japan, Switzerland and Liechtenstein. Talks commence this year on tax treaties with Malaysia, Spain, United Arab Emirates and Saudi Arabia.
Hong Kong currently has nine bilateral tax treaties with other countries
The number of agreements required to satisfy OECD requirements is: 12