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. Adoption isn't as simple as it might sound. Hong Kong cannot accept the 2004 version without amending legislation to expand the information seeking power of the IRD to allow it to gather information requested by a DTA party solely for exchange purposes. This puts the onus on the government to convince the business sector that upgrading to the 2004 clause is the right thing to do, before introducing a bill into the Legislative Council to amend the Inland Revenue Ordinance. A third round of consultation was launched this summer to gauge sentiment. Consultations in 2001-02 and 2005 found no overwhelming views in support of or against Hong Kong changing the EoI provisions. In support of widening Hong Kong's CDTA network, Ayesha Macpherson, tax partner, KPMG China, said that there were advantages of working towards a comprehensive DTA network. 'A well-negotiated CDTA can also provide tax savings for Hong Kong businesses operating overseas through its definition of what constitutes a 'permanent establishment',' she said. 'A CDTA will also offer certainty to investors by having standardised procedures to avoid discrimination and resolve disputes.' Scrutiny of EoI agreements has increased following the Liechtenstein tax evasion scandal in February. The international community has become more stringent about requiring countries to meet an internationally accepted level of information exchange. Hong Kong is one of five jurisdictions that do not meet this standard. It joins Singapore, Malaysia, the Philippines and Cyprus in adhering to the 1995 EoI clause. China has adopted the 2004 version and even though Singapore uses the 1995 version it had already negotiated more than 50 tax treaties with jurisdictions worldwide before the 2004 version came into effect and thus has a CDTA network in place. 'The OECD is working on a list of unco-operative jurisdictions to which defensive measures could be applied,' Ms Macpherson said. 'Hong Kong could be included in the list of unco-operative jurisdictions if it decides not to move to the OECD 2004 version of the EoI clause.' Defensive measures to reduce the effect of harmful tax practices could include imposing additional withholding tax on payments made by a domestic company to a company resident within a blacklisted country, a move that could threaten Hong Kong's position as an international business and finance centre, Ms Macpherson said. 'If we don't have a network then we could also lose business. But how real is that threat? We don't know. The OECD has come across as quite determined but nobody really knows how genuine the threat is until those defensive measures have been introduced.' Not establishing an effective CDTA network could also hinder the territory's ability to capitalise on the mainland's outbound investments. 'The mainland currently has more than 80 CDTAs and if Hong Kong were to establish itself as a wealth management centre for the mainland's global investments, activities or income routed via Hong Kong must be entitled to at least the same, if not additional, tax benefits,' Ms Macpherson said. Speaking to the Taxation Interest Group of the Hong Kong Institute of Certified Public Accountants last October, Alice Lau Mak Yee-ming, commissioner of Inland Revenue, said that co-operation between tax jurisdictions through exchange of information was an international trend that Hong Kong could not afford to ignore. She noted that liberalising the territory's EoI provisions was no guarantee of further CDTAs with other jurisdictions some of whom were mainly interested in standalone information exchange agreements. 'Our policy is that we would only pursue the expanded EoI within the ambit of a CDTA so that some benefits in terms of tax rates and concessions could also be agreed in the same package,' she said.