by Roddy Sage on August 22nd, 2012

In 2010, the Inland Revenue Ordinance was amended to enable Hong Kong to enter into comprehensive double taxation agreements (“CDTAs”) with other countries. Although the Government issued a consultation paper to assess public opinion at that time, I was never in any doubt that it would push ahead with the enactment of amending legislation. The Government simply did not want to defend Hong Kong’s right to maintain the privacy of people’s financial data against international pressure, particularly from those countries seeking excuses for their governments’ poor budgetary management. Of the 24 CDTAs that have been concluded, and the three awaiting signature, all contain a clause enabling the respective governments to exchange information relating to the income and assets of nationals of the treaty partner.

As Hong Kong does not tax non-Hong Kong-source income or withhold tax from payments of interest and dividends, the only negotiating tool available to Hong Kong was the agreement to exchange financial information relevant to a potential treaty partner’s taxpayers. Of course the Government always seeks to emphasise the benefits obtained for Hong Kong’s taxpayers, i.e., the reduction in withholding tax rates on dividends, interest, royalties etc.

The Government has now concluded another consultation exercise, this time to allow it to enter into a Tax Information Exchange Agreement (“TIEA”) with those countries that have been unwilling to enter into a CDTA with Hong Kong, in particular the USA, Australia and Germany. I have no doubt that whatever the outcome of the consultation process, the Government will proceed as it sees appropriate. I am of this opinion simply because Hong Kong is the only country out of the 109 members of the Global Forum on Transparency and Exchange of Information for Tax Purposes that does not have legislation permitting its government to enter into a TIEA.

Assuming that the Government will go ahead as anticipated, I question whether it will have the strength of character to enter into TIEAs only with those countries where there is an acceptable purpose, as opposed to a vague hope of increasing government revenues. There is also the question of ensuring that a TIEA partner does not provide the information to third parties, whether within that country or to others with whom the TIEA partner also shares information. Finally, I wonder whether the Hong Kong Government will resist any suggestion that foreign agencies should be allowed direct access to documents retained in Hong Kong.

Whatever the outcome, it is quite clear that smaller jurisdictions cannot fight the threat of sanctions from the dominant, powerful countries that are desperate for revenues to cover up their inadequacies.

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