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Hong Kong’s Expanding Tax Treaty Network

By TreatyPro Editorial
08 November, 2013


Unusually for a major global business and financial centre, Hong Kong has only a limited network of double tax avoidance agreements, and until quite recently, had no comprehensive tax treaties in force at all. But as the global tax landscape shifts, and pressure increases on low-tax and offshore territories to become more transparent, the situation is beginning to change, as this special feature shows.


Background

Although Hong Kong is now a special administrative region (SAR) of China following the handover of sovereignty by the United Kingdom in 1997, it has been given a large degree of constitutional freedom by Beijing. Under article 151 of the Basic Law governing the relationship between the Mainland and the SAR, the territory can negotiate its own double taxation treaties independently of China using the abbreviation Hong Kong, China. The territory is however not able to take advantage of any double taxation treaties which China may enter into because only mainland taxes are mentioned in these treaties. Nor will China impose the terms of any double taxation treaties on the territory given that under articles 106-108 of the Basic Law it guaranteed Hong Kong the right to maintain an independent taxation system free of interference from the mainland until the year 2047.


Why Did Hong Kong Shun Tax Treaties?

The answer to this is a fairly simple one: since under Hong Kong’s "territorial principle" of taxation only Hong Kong source income is taxable, the double taxation of income does not usually occur, thereby obviating the need for double taxation treaties.

But it was also thought that the new breed of DTAs with exchange of information clauses that help tax authorities trace undeclared income in the partner state were not compatible with Hong Kong’s own laws on privacy. More on this in the following sections.


Reasons for Change

Until June 2001, the territory still had no comprehensive double taxation agreements in place. But things are slowly beginning to change as the government enters an increasing number of tax treaties of various types.

There had been some concern within Hong Kong that the territory may become 'black listed' by the Organisation for Economic Cooperation and Development (OECD), or be on the receiving end of sanctions for failing to implement the internationally-agreed standard on tax transparency and information exchange confirmed at the April 2009 G20 Summit in London. Secretary for Financial Services and the Treasury, Professor K C Chan assured lawmakers in May 2010 however, that the OECD had in fact commended Hong Kong's efforts to comply with these international standards.

A key development was legislation which came into operation in March 2010 allowing Hong Kong to enter into comprehensive DTAs, incorporating the OECD international standard on exchange of information. A number of privacy safeguards were incorporated in the legislation. For instance, the rules require that, unless exceptional circumstances exist, the Inland Revenue Department (IRD) must notify a subject person before any information relating to that person is disclosed. Additionally, the person may request a copy of the information and request the IRD to amend any information that the person considers factually incorrect. The rules also stipulate that an EoI request can only apply to income taxes, has to be approved by a directorate officer of IRD, and must set out the information that a DTA partner has to provide to ensure that the requests are justified, specific and relevant. The rules also prevent the IRD from disclosing any information that relates to a period before the effective date of the relevant DTA.

"The rules put in place domestic safeguards in addition to those provided by individual DTAs to protect privacy and confidentiality of the information exchanged,” a government spokesman said. “The government has taken into account the suggestions of Legco members and the business and professional sectors when finalizing the rules.”

In the days following the enactment of the legislation, DTAs were signed with Brunei, the Netherlands and Indonesia, and in the following month Commissioner of Inland Revenue, Chu Yam-yuen, declared that Hong Kong has entered a "new phase" in supporting the international effort to enhance tax transparency. Its next hurdle, Chu said, would be to sign at least twelve comprehensive double taxation agreements (DTAs), a target it has now achieved.

As of October 30, 2013, Hong Kong has comprehensive double tax avoidance treaties in force with the following countries:

Jurisdiction

Status

Dividends (Note 1)

Interest (Note 2)

Royalties

Notes







Defaults


0%

0%

4.95%/16.5% (Note 3)








Austria

Effective April 1, 2012

0%

0%

3%


Belgium

Effective April 1, 2004

0%

0%

4.95% (Note 4)


Brunei

Effective April 1, 2011

0%

0%

4.95% (Note 4)


Canada

In force October 29, 2013

0%

0%

4.95% (Note 4)

Effective April 1, 2014. Default rates apply.

China

Effective April 1, 2007

0%

0%

4.95% (Note 4)


Czech Republic

Effective April 1, 2013

0%

0%

4.95% (Note 4)


France

Effective April 1, 2012

0%

0%

4.95% (Note 4)


Guernsey

Signed April 23, 2013

0%

0%

4%

Not yet in force. Default rates apply.

Hungary

Effective April 1, 2012

0%

0%

4.95% (Note 4)


Indonesia

Effective April 1, 2013

0%

0%

4.95% (Note 4)


Ireland

Effective April 1, 2012

0%

0%

3%


Italy

Signed January 14, 2013

0%

0%

4.95% (Note 4)

Not yet in force. Default rates apply.

Japan

Effective April 1, 2012

0%

0%

4.95% (Note 4)


Jersey

In force July 3, 2013

0%

0%

4%

Effective April 1, 2014. Default rates apply.

Kuwait

In force July 24, 2013

0%

0%

4.95% (Note 4)

Effective April 1, 2014. Default rates apply.

Liechtenstein

Effective April 1, 2012

0%

0%

3%


Luxembourg

Effective April 1, 2008

0%

0%

3%


Malaysia

Effective April 1, 2013

0%

0%

4.95% (Note 4)


Malta

Effective April 1, 2013

0%

0%

3%


Mexico

In force March 7, 2013

0%

0%

4.95% (Note 4)

Effective April 1, 2014. Default rates apply.

Netherlands

Effective April 1, 2012

0%

0%

3%


New Zealand

Effective April 1, 2012

0%

0%

4.95% (Note 4)


Portugal

Effective April 1, 2013

0%

0%

4.95% (Note 4)


Qatar

Signed 13 May 2013

0%

0%

4.95% (Note 4)

Not yet in force. Default rates apply.

Spain

Effective April 1, 2013

0%

0%

4.95% (Note 4)


Switzerland

Effective April 1, 2013

0%

0%

3%


Thailand

Effective April 1, 2006

0%

0%

4.95% (Note 4)


United Kingdom

Effective April 1, 2012

0%

0%

3%


Vietnam

Effective April 1, 2010

0%

0%

4.95% (Note 4)


Notes

1. Hong Kong's default dividends withholding tax rate is 0%. A treaty may stipulate a higher rate.

2. Hong Kong's default interest withholding tax rate is 0%. A treaty may stipulate a higher rate.

3. The higher rate is imposed where the payment is deemed to have been made between associated parties, unless the Commissioner of Tax deems that the 'property' on which the royalty is being paid has never been owned by any person doing business in Hong Kong.

4. The treaty specifies a different rate but the default rate is lower and would therefore apply.

Perhaps another reason why Hong Kong has belatedly begun to enter into comprehensive DTAs is because of their value in terms of attracting new business and investment to the territory. Indeed, it has been suggested in Hong Kong business circles that the SAR’s lack of comprehensive tax agreements has prompted some major companies to consider relocating. This issue has been identified by Tung Chee-chen, the chairman and chief executive of Orient Overseas (International) Ltd, who told a business conference in Hong Kong in March 2013 that more comprehensive DTAs would "reduce companies' costs but also improve Hong Kong as a trade, financial and shipping centre". The historic decision by China Navigation, the shipping arm of John Swire & Sons Ltd., to relocate its operations to rival Singapore in 2009 was thought to be at least partly motivated by Hong Kong’s lack of a comprehensive DTA network. By contrast, Singapore has signed 77 double tax conventions, the majority of which are in force.


Tax Information Exchange Agreements

In 2013, the Financial Services and the Treasury Bureau (FSTB) of the Hong Kong Government committed to an expansion of Hong Kong's network of comprehensive DTAs with its trading and investment partners. At the same time, it has accepted the international trend of enhancing tax transparency and has confirmed that it will continue to ensure that Hong Kong's tax information exchange (TIE) arrangements are on a par with the international standard.

The legislation in effect since March 2010 to allow Hong Kong to begin exchanging more comprehensive tax information with treaty partners was welcomed by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes in its Phase 1 Peer Review of Hong Kong in 2011. However, it was also noted in the review that Hong Kong’s laws didn’t allow for the establishment of standalone tax information exchange agreements (TIEAs), and advised that: “Given Hong Kong’s importance as an international financial centre, it is essential that it has agreements (regardless of their form) that meet the international standard with all relevant partners. It is recommended that Hong Kong continue updating and expanding its network of agreements for international exchange of information in tax matters, and ensures that all its relevant information exchange partners have access to full exchange of information.”

In November 2012, the FSTB briefed the Legislative Council's (LegCo) Panel on Financial Affairs on the progress of its CDTA negotiations. It also consulted with the Panel on its detailed legislative proposals in relation to TIE arrangements with a view to enhancing the existing arrangements to meet international standards by putting in place a legal framework for also entering into tax information exchange agreements (TIEAs) with other jurisdictions, where necessary.

LegCo’s panel meeting of February 4, 2013, looked again at this issue, and it was said that it is becoming obvious that Hong Kong's negotiations with those trading partners could be helped by providing flexibility in the coverage of tax types and relaxing the limitation on TIE disclosure, under the CDTA framework.

On tax types, the FSTB had up to this point restricted TIE to income taxes or taxes of similar character. It was noted that, even among those jurisdictions with which Hong Kong successfully concluded CDTAs, some of them, such as the Netherlands, the United Kingdom, France, Japan, Mexico and Italy, had already raised concerns during negotiations on its restrictive position in the coverage of tax types for TIE.

As for limitations on disclosure, Hong Kong has traditionally adopted a highly stringent approach not to entertain any request for any information relating to a period before the provisions of the relevant CDTA have taken effect. However, this has also posed practical problems and fallen short of meeting CDTA partners' requirements.

The FSTB therefore proposed to amend the Inland Revenue Ordinance (IRO) to the effect that arrangements can be made with foreign governments, not only for the purpose of affording relief from double taxation in relation to income tax and any tax of a similar character, but also for the purpose of exchanging information in relation to any tax imposed by the laws of Hong Kong or the territory concerned. The amendments would also allow the IRD to exercise its power to obtain and disclose information if satisfied that such information relates to tax assessments in respect of any period after the date on which the relevant CDTA or TIEA comes into operation.

The FSTB considers that its proposals are the minimum necessary to address the concerns of Hong Kong's treaty partners, and should enable Hong Kong to meet its international obligation in tax transparency. In pursuing the changes, however, it will remain mindful of some concerns about taxpayers' privacy and the confidentiality of information exchanged, and will ensure that necessary safeguards are in place.

In pursuing the changes, however, remains mindful of some concerns about taxpayers' privacy and the confidentiality of information exchanged, and will ensure that necessary safeguards are in place. Therefore, it will only exchange information upon receipt of a request and no information will be exchanged on an automatic or spontaneous basis; information sought should be foreseeably relevant (i.e. no fishing expeditions); information received by treaty partners should be treated as confidential; and Hong Kong will not accede to any requests from treaty partners for tax examinations abroad and assistance in the collection of taxes.

Hong Kong's Legislative Council enacted the Inland Revenue (Amendment) Bill 2013, which enables the Government to enter into stand-alone TIEAs with other jurisdictions where necessary, on July 10, 2013.

The Secretary for Financial Services and the Treasury, Professor K C Chan, welcomed the bill's passage and stressed that it "signifies a major step forward to enhance tax information exchange and to bring Hong Kong on par with the international standard on tax transparency and co-operation."

"We remain committed to expanding our CDTA network. With the passage of the Bill, we would enhance the existing EoI arrangement in terms of the coverage of tax types and the limitation on disclosure of information," Chan added. "Only through doing so will Hong Kong be able to continue with its efforts in negotiating CDTAs with existing as well as potential partners whilst providing in place a legal framework for TIEAs for Hong Kong to meet its international obligations."

On the other hand, he also emphasized that "the Government will continue to adopt the existing highly prudent safeguards to protect taxpayers' privacy and confidentiality of information exchanged under both CDTAs and future TIEAs. The safeguards are provided at two levels – in the bilateral agreement and in domestic law."

While the legislative amendments aim to relax the tax types to be covered by the EoI arrangement under comprehensive DTAs and future TIEAs, the Commissioner of Inland Revenue would continue to disclose information in response to an EoI request if the Commissioner is satisfied that such information relates to tax assessments in respect of any period after the date on which the relevant comprehensive DTA or TIEA comes into operation.

However, Hong Kong will fulfil its international obligation by providing EoI under TIEAs with those jurisdictions which are not interested in signing CDTAs, and, in view of the emerging mode of international EoI standard, the Government will continue to engage local stakeholders and address relevant policy and legal issues, with a view to developing a sustainable model of EoI for Hong Kong.


Conclusion

It is expected that Hong Kong’s network of comprehensive DTAs will continue to expand in the years ahead, although it will take some time before it is on a par with Singapore and other well-connected business jurisdictions. The challenge for Hong Kong though may be its traditional reluctance to embrace information sharing initiatives that could harm its banking sector, such as the European Savings Directive, and the US Foreign Account Tax Compliance Act and others as they are rolled out worldwide.


Further Information

Additional information on tax, investment and business law in Hong Kong can be found in the Hong Kong knowledge base of our partner site, www.lowtax.net.




 

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