Onus on government to convince businesses of need to embrace more liberal exchange of information before ordinance can be amended
Is the 'exchange of information' a reasonable price for a comprehensive double taxation agreement network? This is a question being asked by the Hong Kong government as it seeks to assuage fears that failing to move towards the more liberal exchange of information with other jurisdictions may see the territory blacklisted by the Organisation for Economic Co-operation and Development (OECD).
Hong Kong has concluded comprehensive double tax agreements (CDTAs) with Belgium, Thailand and China, and has signed one with Luxembourg that is awaiting ratification. These agreements allow Hong Kong companies doing business overseas to enjoy tax benefits that would not otherwise be available. These benefits include reductions in withholding tax, permanent establishment protection, exemption from personal tax and greater certainty for investors.
For the tax agreements to work there must be an approved exchange of information provision (EoI) between signatory countries. Hong Kong uses an EoI provision based on the 1995 version of the OECD's model tax convention. Under this version, the requested side is not obliged to supply information that is not obtainable under the laws of either side. In the context of Hong Kong, this means that the Inland Revenue Department (IRD) may only seek tax information for exchange purposes if a domestic tax interest exists.
This level of information exchange is regarded by some in Hong Kong taxation circles as the main hurdle in reaching further CDTAs. The problem is that many other countries, particularly those in the OECD, have moved on to a 2004 version, which expands the scope of exchange of information between jurisdictions so as to combat tax evasion at the international level.
Under the 2004 version the requested party is not permitted to decline to supply the requested information solely because it has no domestic tax interest in such information. Developed nations with whom Hong Kong may want to negotiate a CDTA are insisting that it too needs to adopt the 2004 clause.