HK Enters New Tax Policy Phase

by Mary Swire, Tax-News.com, Hong Kong

08 April 2010

Commissioner of Inland Revenue, Chu Yam-yuen, has said that Hong Kong has entered a new phase in supporting the international effort to enhance tax transparency, and its next hurdle is to sign at least twelve comprehensive double taxation agreements (DTAs).

Legislation which came into operation in March now allows Hong Kong to enter into comprehensive DTAs, incorporating the Organisation for Economic Cooperation and Development (OECD) international standard on exchange of information.

This legislation, the Inland Revenue (Amendment) Ordinance 2010, enables the Inland Revenue Department (IRD) to collect and transfer a person's information upon a legitimate and justified request from its tax treaty partners.

However, to ensure taxpayers' privacy, and to protect the confidentiality of the information exchanged, the Inland Revenue (Disclosure of Information) Rules also came into operation at the same time, Chu Yam-yuen said. The rules stipulate a notification and review mechanism, and only an IRD directorate officer can approve an information request.

It was pointed out that an article by Jeffrey Owens, the director of the OECD's Centre for Tax Policy and Administration in Paris, has praised Hong Kong for its effort in building its position as an international financial centre on the basis of free markets, low tax rates and a transparent tax system. "Under the organization's criteria, Hong Kong is not considered a tax haven," he has said.

Chu Yam-yuen noted that the passage of the legislation will not only help Hong Kong expand its network of comprehensive DTAs, but also significantly enhance its position as a transparent tax jurisdiction.

It has been said that Hong Kong’s competitiveness against other Asian countries, such as Singapore, will be strengthened. Mainland-Chinese enterprises could also benefit from the agreements if they set up a business in Hong Kong and use it as a stepping stone for their outbound investment.

"The agreement will eliminate double taxation instances encountered by investors doing business in each other's jurisdiction, and bring about tax savings and certainty in tax liabilities in connection with cross-border economic activities," he said. "A treaty will help promote bilateral investment, and the exchange of technology, people and expertise between two places.”

He added that, in its work towards the signing of at least twelve comprehensive DTAs adopting the OECD standard: "We have been negotiating with our partners and achieved good progress. Recently we signed agreements with Brunei, the Netherlands and Indonesia. We have also reached consensus with Austria, Hungary, France, Ireland, Liechtenstein and Japan.”

"We have also started negotiations with [the] Czech Republic, Denmark, Italy, Kuwait, Macau, Pakistan, Spain, Switzerland, United Arab Emirates and the UK,” he continued. “For the five existing treaty partners, we are negotiating with them to upgrade the exchange of information article to the new version. Our target is to sign the new comprehensive agreement with all our trade partners.”

While Hong Kong faces challenges when negotiating DTAs with other countries, such as differences in defining "resident" and limitation of benefits, Chu is “hopeful we will able to meet the OECD’s twelve-agreement threshold in the near future.”

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