Over the past 12 months there have been numerous debates as to whether Hong Kong should enter into comprehensive double taxation agreements (CDTA) with its major trading partners.
In simple terms a CDTA is an agreement that limits the circumstances when a source of income may be taxed in both jurisdictions participating in the agreement. This is particularly beneficial for a jurisdiction that seeks to be regarded as a centre for international trade or, in Hong Kong’s situation, a financial centre. It can be argued that this may be a perception rather than a reality as most sophisticated tax jurisdictions provide their tax residents with the means of claiming relief for foreign taxes paid. However, CDTA’s do reduce withholding taxes on the payments of royalties, interest, dividends etc and provide guidance on a number of other taxing issues.
But beware these benefits come at a price; that is the necessity to enter into an exchange of information clause (EOI). More significantly, under the 2004 Organisation for Economic Co-operation and Development model agreements, the requirement extends beyond information that may be necessary to determine a liability to Hong Kong tax.
To accommodate such a clause would require an amendment to section 51(4)(a) of Hong Kong’s Inland Revenue Ordinance which currently only empowers the Inland Revenue Department (IRD) to seek information to assist in its determination of a taxpayer’s Hong Kong tax liability.
This severely limits the information available to the IRD about the assets and income of Hong Kong resident individuals as they do not pay tax on dividends, interest, capital gains etc. and to a lesser extent, the assets and income of companies carrying on business in Hong Kong.
This has caused a lively debate in Hong Kong i.e. is the free exchange of information too high a price to pay for a comprehensive CDTA network?
Frequently, I have thought about the pros and cons of this argument and was undecided in my opinion until I appreciated that Hong Kong is not a jurisdiction that condones non disclosure, tax evasion or even tax avoidance. Furthermore Hong Kong needs to compete with the likes of Singapore, Shanghai, Japan, Melbourne and Sydney as Asia’s leading financial centre.
However, what I loathe is the thought that Hong Kong is being bullied into entering EOI’s by the likes of the OECD countries. Having entered into a CDTA, Hong Kong’s treaty partners will have the opportunity to go on fishing exercises for information concerning their tax residents’ assets held in Hong Kong. This needs to be resisted and monitored at all costs.
In conclusion, I am strongly on the side of those who believe that it is time that Hong Kong promoted itself as Asia’s most prominent financial services centre and that it needs a comprehensive CDTA network that, at a minimum, puts it on a level playing field with its competitors. I am also of the opinion that Hong Kong needs to adhere to international standards and be respected as a well regulated jurisdiction. This cannot happen when foreign jurisdictions believe Hong Kong is the recipient of non disclosed income.
