2 April 2014 2014 Issue No. 8
Hong Kong Tax alert Hong Kong braces itself for a heightened level of transparency – tax information exchange agreement signed with the US On 25 March 2014, Hong Kong signed a standalone tax information exchange agreement (TIEA) with the US for the enforcement and assessment of taxes. This is the first TIEA signed by Hong Kong after the legal framework for entering into TIEAs with other jurisdictions was put in place last July. The TIEA, based on the model developed by the Organization for Economic Co-operation and Development (OECD), sets out the scope and mechanism for the exchange of information (EoI) between Hong Kong and the US in respect of taxpayers. Information will only be exchanged upon receipt of a specific request by one party from the other in respect of taxes specified in the TIEA. In Hong Kong, if the information requested is not available in the tax files of the Inland Revenue Department (IRD), the Commissioner of Inland Revenue (CIR) will exercise his information gathering power to obtain the information from the taxpayer concerned or any other parties.
Taxes covered
Effective date
The TIEA covers the following taxes:
The TIEA will come into force after the relevant ratification procedures have been completed. The information exchanged will be in respect of any period that starts on or after the date of entry into force, and for all charges to tax arising on or after the date of entry into force, of the TIEA.
(a) In the case of the US: ► ►
Federal taxes on income; Federal taxes related to employment and selfemployment;
►
Federal estate and gift taxes; and
►
Federal excise taxes.
TIEA and Foreign Account Tax Compliance Act of the US Under the Foreign Account Tax Compliance Act (FATCA), US persons, including those who live outside the US, are required to report to the US tax authorities their financial accounts held in other jurisdictions. Furthermore, foreign financial institutions, including those in Hong Kong, are required to report certain financial information in respect of their US clients to the US tax authorities on a general basis.
(b) In the case of Hong Kong: ►
Profits tax;
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Salaries tax; and
►
Property tax
No tax examination abroad The TIEA has excluded the “Tax Examination Abroad” Article contained in the OECD model. As a result, neither party can conduct a tax examination in the other’s jurisdiction. The Hong Kong government has also indicated that its current policy is not to undertake any tax investigative or enforcement actions in Hong Kong on behalf of other jurisdictions.
Safeguards as to the privacy and confidentiality of information The TIEA has essentially incorporated all the safeguards for the privacy and confidentiality of information that were promised by the government when the law was changed last July. The safeguards under the TIEA will be the same as those afforded under a comprehensive avoidance of double taxation agreement (CDTA). In addition, the domestic tax law of Hong Kong also provides an additional safeguard for EoI under either a TIEA or CDTA. This additional safeguard is in the form of a notification and review mechanism not commonly found in the domestic tax law of other OECD countries. Under this mechanism, once the CIR approves an EoI request, he is required to notify the person who is the subject of the request in writing as to the nature of the information sought by the relevant tax authority. The person concerned will then have the right to review and amend the information to be exchanged by the CIR. If the CIR refuses to amend the information, the person has the right to request the Financial Secretary to review the CIR’s decision. For details of other safeguards, clients may refer to our Hong Kong Tax alert issued on 23 April 2013 (2013 Issue No. 6).
Hong Kong now intends to enter into an intergovernmental agreement with the US to lay down the arrangements to help financial institutions in Hong Kong comply with the FATCA. The government also considers that the TIEA is a FATCA compliant measure. As a complementary measure, the TIEA will allow the US tax authorities to make specific requests to the IRD for information pertaining to specific taxpayers under specified conditions.
Commentary The government has noted its preference to conduct the EoI process under a CDTA rather than a TIEA. However, under the international standard for tax transparency, Hong Kong’s preference for concluding CDTAs rather than TIEAs is not a reason for refusing a TIEA if the other party requests a TIEA. The government prefers to conduct the EoI process under a CDTA because under a CDTA Hong Kong will benefit by way of avoiding double taxation on cross-border transactions and receive other tax benefits that will facilitate the flow of investment and talent between Hong Kong and the jurisdiction concerned. However, the only purpose of a TIEA is for the EoI and thereby the enforcement and assessment of taxes. Nonetheless, given Hong Kong’s commitment to the international standard, Hong Kong’s preference for negotiating CDTAs may not prevail if other jurisdictions prefer to conclude a TIEA. Furthermore, the OECD is considering implementing a FATCA-type initiative on a global basis1. Clients should therefore brace themselves for a heightened level of transparency globally as regards tax matters. Should you have any questions on the issues discussed in this alert, please contact your tax executives. 1.
Clients may refer to our Global Tax Alert issued on 20 February 2014 for details of the OECD initiative: http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--OECDreleases-Common-Reporting-Standard
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Hong Kong office Agnes Chan, Managing Partner, Hong Kong & Macau 22/F, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong Tel: +852 2846 9888 / Fax: +852 2868 4432 Principal tax contact Tracy Ho +852 2846 9065 tracy.ho@hk.ey.com International tax services partners
Hong Kong Tax partners Agnes Chan +852 2846 9921 agnes.chan@hk.ey.com
May Leung +852 2629 3089 may.leung@hk.ey.com
Alice Chan-Loeb +852 2629 3882 alice.chan@hk.ey.com
Martin Richter +852 2629 3938 martin.richter@hk.ey.com
Joe Chan +852 2629 3092 joe-ch.chan@hk.ey.com
Grace Tang +852 2846 9889 grace.tang@hk.ey.com
Joe Kledis +852 2846 9808 joe.kledis@hk.ey.com
Edvard Rinck +852 2849 9188 edvard.rinck@hk.ey.com
Owen Chan +852 2629 3388 owen.chan@hk.ey.com
Jo An Yee +852 2846 9710 jo-an.yee@hk.ey.com
Becky Lai +852 2629 3188 becky.lai@hk.ey.com
Carine Sabot +852 2849 9510 carine.sabot@hk.ey.com
Wilson Cheng +852 2846 9066 wilson.cheng@hk.ey.com
Rex Young +852 2629 3020 rex.young@hk.ey.com
Cherry Lam +852 2849 9563 cherry-lw.lam@hk.ey.com
Chee Weng Lee +852 2629 3803 chee-weng.lee@hk.ey.com
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Š 2014 Ernst & Young Tax Services Limited. All Rights Reserved. APAC no. 03000671 ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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