On January 6, 2010, LegCo passed the Inland Revenue (Amendment) Ordinance 2010 (“the Amendment Ordinance”). This has enabled Hong Kong to adopt the 2004 Organisation for Economic Cooperation’s (“OECD”) version of the Exchange of Information Article in its comprehensive double taxation treaties with other jurisdictions. The amendments to the Inland Revenue Ordinance (“IRO”) enacted by the Inland Revenue (Amendment) Ordinance 2010 provide legislative authority to the Inland Revenue Department (“the Department”) to disclose information of a tax nature requested by a treaty partner, irrespective of whether the Department requires the information for domestic tax purposes. The Amendment Ordinance also extends the existing provisions in the IRO relating to the power to issue a search warrant, and penalties for failing to comply with the disclosure requirements under an EoI article in a Comprehensive Double Taxation Treaty (“CDTA”). Similar amendments have also been made to the Personal Data (Privacy) Ordinance to expand the definition of the word “tax” to include tax that is the subject of a disclosure request under a CDTA.
The Government has endeavoured to reassure the business community that it will take a cautious approach to the exchange of information with a treaty partner. The Government has sought to protect an individual’s right to privacy and confidentiality by adopting three tiers of safeguards: the first is the incorporation of prudent safeguards in the CDTA; the second is the implementation of a set of Inland Revenue Rules that stipulate how the Department is to approach a request for information from a treaty partner, and the third is the publication of a non-binding Departmental Interpretation and Practice Note (“DIPN”) that will explain the Department’s procedural guidelines.
The Inland Revenue (Disclosure of Information) Rules (“the Rules”) came into operation at the same time as the Amendment Ordinance. The Rules are, in practical terms, an integral part of Hong Kong’s tax law and require the same legislative procedures and approvals. At the present time the DIPN has not been published.
Many people have voiced concerns about how the Amendment Ordinance will be implemented. In particular, I am troubled about the lack of clarity regarding the steps the Department will take to determine whether a treaty partner has valid grounds to ask for the information that is the subject of an EoI request. Most EoI articles require that the information be “foreseeably relevant” to the carrying out of the CDTA or to the administration or enforcement of domestic laws of the treaty partner. Whilst the use of the phrase “foreseeably relevant” may seem to be a safeguard against random “fishing expeditions”, there is very little judicial interpretation of this phrase, so in the words of the Legislative Council Secretariat, the term “will have to be construed in accordance with its ordinary dictionary meaning, which is to be applied to the facts of each case”. This is certainly an area that will have to be monitored closely, as there will have to be clear justification for any request that is made.
Another worry is whether the information exchanged with a treaty partner will fall into the hands of a third party, e.g. other European Union members. Whilst the Department may look to rely on OECD safeguards, I would hope that the issue of confidentiality and the restrictions placed on the sharing of information are established during the negotiation stage of each new treaty.
The Department has stated that it will notify anyone who is the subject of an information request by a treaty partner, and will consider amendments proposed by that person to the information that the Department intends to supply. Whilst this is admirable, the Rules state that such notification will not be required if “the notification is likely to undermine the chance of success of the investigation in relation to which the request is made”. Furthermore, if the Commissioner is under a tight time constraint to disclose the information, and if such a delay would frustrate the efforts of the treaty partner to confirm its tax laws, the Rules empower the Department to release the information to the treaty partner before the information is given to the person concerned. Although there may be good reasons for these two exceptions, it nonetheless weakens a taxpayer’s safeguards against unnecessary information being given to a treaty partner, and places a great deal of discretion with officers of the Department.
This leads me to question the qualifications and competencies required of the individuals able to approve the disclosure of information to treaty partners. According to the Rules, the request must be approved by the Commissioner of Inland Revenue (“the Commissioner”) or, if authorised in writing by the Commissioner, a Chief Assessor, Assistant Commissioner or Deputy Commissioner. Whilst I appreciate that there is a need to have a core group of people in place to deal with such requests, I question whether such authority should be delegated to officers below the status of Assistant Commissioner.
If someone is dissatisfied with the information to be supplied by the Department and has asked the Commissioner to amend the disclosure, but the request has been refused or partly refused, the taxpayer may request, in writing, that the Financial Secretary review the basis on which the Commissioner has made his decision. Certain lobbyists have considered the scope of this objection procedure to be inadequate and have sought the introduction of an independent tribunal to review such objections. The Government was of the opinion that this would not be cost-effective, and therefore rejected the proposal. It is noted that the Financial Secretary’s power is restricted to the accuracy of the information to be exchanged.
I cannot help but ponder whether, in the Department’s enthusiasm to adhere to its obligations under its new treaty network, information may be supplied to third parties either unnecessarily or without notifying the person concerned. Clearly, as Hong Kong’s treaty network expands, considerable care will need to be exercised by all concerned to ensure that the procedures for the exchange of information, whilst complying with the law, safeguard people’s right to privacy and confidentiality.
