Hong Kong Tax: Hong Kong issues new guidance on exchange of information
Early this year, it was widely reported that Hong Kong was reforming its tax law to allow it to adopt the latest international model on exchange of information (EOI) under comprehensive double taxation agreements (CDTAs). The amended law was enacted in January 2010 and took effect on 12 March 2010. The Inland Revenue Department (IRD), on 9 June 2010, issued Departmental Interpretation and Practice Notes No. 47 (DIPN 47), which sets out the IRD's practices and administrative guidelines for processing an EOI request under a CDTA and explains the safeguards available to taxpayers to protect their rights to confidentiality and privacy.
This article reviews the background to the new EOI regime, explains the major contents of DIPN 47 and offers comments on what the new EOI regime means to the public.
Before the amendment to the Inland Revenue Ordinance (IRO), the IRD could only collect taxpayer information for the purpose of administrating domestic tax law (i.e. for Hong Kong tax purposes only). In other words, the IRD was not empowered to collect tax information concerning foreign taxes to exchange with Hong Kong's treaty partners. For this reason, Hong Kong was unable to adopt the latest international standard for EOI (i.e. the 2004 version of the OECD Model Tax Treaty), which categorically states that the absence of a domestic tax interest is not a valid reason for refusing to collect and supply information requested by a treaty partner.
The amended IRO and related Inland Revenue (Disclosure of Information) Rules ("Disclosure Rules") came into effect on 12 March 2010, enabling the IRD to collect and disclose taxpayer information concerning foreign taxes in response to requests made by Hong Kong's treaty partners. Consequently, Hong Kong can now adopt the latest international standard for EOI in a CDTA.
The adoption of the latest international EOI standard enhances Hong Kong's tax transparency and clearly will facilitate CDTA negotiations and the development of Hong Kong's tax treaty network. Since the amendments to the IRO, Hong Kong has entered into eight more CDTAs with various countries and is negotiating more new treaties (see Appendix 1). In the meantime, Hong Kong is negotiating with some existing treaty partners to upgrade the EOI article to the new version. For example, Hong Kong recently signed the Third Protocol to the CDTA with the Mainland of China to incorporate the adoption of the new EOI article. This clearly evidences that Hong Kong is now on the fast-track to CDTA development.
Despite these positive steps, the public may be concerned about privacy and confidentiality under the new EOI regime. In this regard, the IRD has issued DIPN 47.
Know your rights and obligations under new EOI regime
Under the new EOI regime, corporations and individuals are obliged to provide information concerning foreign taxes, which the IRD may exchange with Hong Kong's treaty partners at the latter's request. Hong Kong has an obligation to exchange information in accordance with the provision of a CDTA. Nevertheless, DIPN 47 points out that Hong Kong will include the "most prudent safeguards" acceptable under the OECD Model to protect taxpayer rights to privacy and the confidentiality of the information exchange. It is therefore important to know the safeguards available under the new EOI regime.
EOI upon request only - The OECD Model allows an exchange of information in different ways, including: (i) upon request; (ii) automatically - i.e. EOI comprising many individual cases of the same type, such as details of income arising from the source country (e.g. dividends, interest, royalties, pensions, etc.) with information generally obtainable on a routine basis (e.g. through the reporting of the payments by the payer) by the sending country and thus available for transmission to its treaty partners; (iii) spontaneously - i.e. generally when one of the contracting parties believes that the information it obtained in the course of administering its own tax laws will be of interest to one of its treaty partners for tax purposes and it passes on this information to the treaty partners without the latter having asked for it; (iv) or a combination of the preceding. Hong Kong's policy on the EOI, however, is restricted to an exchange upon request and Hong Kong will not agree to engage in an automatic or a spontaneous exchange. This implies that EOI normally will be processed on a case-by-case basis and there should not be any automatic or spontaneous exchange of information.
Limited scope of information exchanged - Only information that is "foreseeably relevant" and "related to taxes covered" by a CDTA may be exchanged. The relevant authority of the requesting party must satisfy the IRD that the information it requests is "foreseeably relevant." This will prevent the contracting parties from engaging in "fishing expeditions," i.e. speculative requests for information that have no apparent nexus to an open inquiry or investigation or requesting information that is unlikely to be relevant to the tax affairs of a particular taxpayer. In addition, Hong Kong only authorizes the EOI and use of the information exchanged in relation to the administration and enforcement of taxes covered by a CDTA, which generally covers direct taxes.
Confidentiality of information exchanged/Use of information for tax purposes only - Under the OECD standard, any information exchanged must be kept confidential and be treated as secret in the same manner as information obtained under the domestic laws of the requesting party. This ensures that information relating to a taxpayer and his/her affairs remains confidential and is protected from unauthorized disclosure.
The information received by the requesting party may be disclosed only to persons or authorities (including courts and administrative bodies) concerned with assessment or collection, enforcement or prosecution in respect of taxes covered by the CDTA. The information may be disclosed in public court proceedings or in judicial decisions. However, the information exchanged may not be used for purposes other than that for which it has been exchanged. In other words, the information cannot be used for non-tax purposes, e.g. the information should not be used for the prosecution of non-tax related crimes or offenses.
No disclosure to third jurisdictions - As mentioned above, the information exchanged may be disclosed only to the tax authorities or other select persons of the requesting jurisdiction. Accordingly, the information may not be disclosed to a third jurisdiction for any purpose. In some of Hong Kong CDTAs (those that include the old version of the EOI article), it is stated that information may not be disclosed to a third jurisdiction without the consent of the originating party. DIPN 47 points out that the IRD does not envisage any circumstances under which it would give consent for such disclosure.
No disclosure to oversight authorities - While the OECD Model permits disclosure of information exchanged to the oversight authority of the requesting party, Hong Kong's policy is more restrictive. Hong Kong does not permit disclosure to oversight authorities of the requesting party, except where there are legitimate reasons (e.g. the administrative or governmental structure of the treaty partner permits or requires the oversight authorities to have access to tax information). Oversight authorities are authorities that supervise the tax administration and enforcement authorities as part of the general administration of the government of the contracting parties. For example, in Hong Kong, the Financial Services and the Treasury Bureau are the oversight authorities.
No retroactive effect - As with other provisions under a CDTA, the EOI article will have effect only after the agreement enters into force, so an EOI will be possible only after the relevant provisions have effect. The IRD will not disclose information relating to any tax period before the effective date of the CDTA. DIPN 47 states that it is the IRD's policy that, if a document contains information relating to periods before and after the effective date of the CDTA, insofar as the information relating to those periods can be allocated to one period or the other, the information relating to the posteffective date can be exchanged. However, if the information is inseparable, no information will be exchanged. These rules apply regardless of the date the information comes into existence or is collected by the IRD.
Legal professional privilege still applies - The general law on legal professional privilege will be maintained under the new EOI regime. A contracting party may decline to provide information where the information constitutes a confidential communication between a client and an attorney, solicitor or other admitted legal representative. The protection of legal professional privilege has always been provided under section 51(4A) of the IRO.
Notification and correction of information - Absent exceptional circumstances (explained below), the Commissioner must, prior to the disclosure of information to the requesting party, notify the person to whom the information request is related in writing about the disclosure. The Commissioner must notify the person of the nature of information request and notify the person that he/she has a right to request a copy of the information the Commissioner is prepared to disclose.
A request for a copy of the information must be made in writing to the Commissioner within 14 days after the notice of disclosure request is provided. The person may request that the Commissioner amend part of the information to be exchanged provided that request is made in writing and submitted to the Commissioner within 21 days after the date the person is provided with a copy of the information by the Commissioner. The amendment request must specify how the information should be amended and the grounds for the request, together with any documentary evidence in support of the request. Grounds for an amendment are that the information does not relate to the person or that the information or a part thereof is factually incorrect.
Review mechanism - If the Commissioner denies a request to amend the information (either in whole or in part), the person has the right to request the Financial Secretary to review the Commissioner's decision. This review request should be made within 14 days after the Commissioner's notice of decision. The Financial Secretary may approve (either in whole or in part) or refuse the request. The decision of the Financial Secretary is final.
Exceptional cases where notification is not required
Under exceptional circumstances, notification of the disclosure is not required provided the Commissioner has reasonable grounds to believe the following:
1. All of the addresses of the person known to the Commissioner are undeliverable;
2. Prior notification is likely to undermine the chance of success of the investigation in relation to which the request is made; or
3. The Commissioner is under a tight time constraint to disclose the information in response to the request so that it is not practicable for notification to be given and the failure of the Commissioner to disclose the information to the requesting party within the time constraint is likely to frustrate the efforts of the requesting party in enforcing its tax laws.
Nevertheless, the Commissioner is still required (in point c) to notify the person at the time information relating to the person is disclosed in response to a disclosure request. In that case, the person can request a copy of the information and an amendment to the information. The Commissioner will still be required to inform the requesting party of any amendments made.
IRD'S practices and administrative procedures
In processing an EOI request, the IRD will follow the above safeguards available to taxpayers. Details are as follows:
Approval of disclosure request by authorized person - The Disclosure Rules provide that a disclosure request may only be approved by the Commissioner or an officer of the IRD not below the rank of chief assessor (authorized in writing by the Commissioner). The authorized person must be personally satisfied that the disclosure request complies with the provisions in the CDTA before he can approve the disclosure request. For example, the authorized person will have to ensure that the information being requested is "foreseeably relevant" for carrying out the provisions of the CDTA or the enforcement of the domestic law of the requesting party. When approving the request, the authorized person must have due regard to any procedures prescribed in the agreements (e.g. protocols, memoranda of understanding, agreed minutes of meeting, or exchanges of correspondence) entered into with the treaty parties after signing the relevant CDTA.
Particulars to be provided by requesting party - The authorized person of the IRD must ensure that the disclosure request sets out the particulars prescribed in the Schedule (see Appendix 2) to the Disclosure Rules, which is a statutory requirement. As a general rule, the requesting party should provide all details relevant to the request, as specified in the Schedule. The Commissioner may permit departure from this requirement on reasonable grounds, but the requesting party must provide ground(s) for the waiver of any of the particulars. DIPN 47 points out that, as a bare minimum, the Commissioner would require the following to be provided in the request or the request will not be entertained:
- Identity of the subject person;
- Purpose of the request and the relevance of the information to that purpose (i.e. the "foreseeably relevant" requirement); and
- Nature of the information required.
DIPN 47 includes an example in which the Commissioner may permit departure where the requesting party has supplied the name of the person believed to have possession of the information requested (together with other essential particulars), but has genuine difficulty in supplying an up-to-date address.
Cases without prior notification - DIPN 47 states that, if prior notification is not given to the person on the grounds that prior notification would likely undermine the chance of success of the investigation in relation to which the request is made, it is up to the requesting party to substantiate this claim. For example, the requesting party has to provide information and reasons why it believes that the subject person would destroy or deface records, whether similar offenses were committed in the past or whether the person is the target of a covert criminal investigation.
In the case of an urgent request where prior notification would frustrate the timely enforcement of the requesting party's tax laws, the authorized person of the IRD must be satisfied that the urgency is genuine, for example the information isrequired before a certain date because there is an imminent statutory time limit for raising the relevant tax assessment.
Subsequent amendments made to the information disclosed - For cases where notification is made to the subject person at the same time as the information is disclosed and where the Commissioner or the Financial Secretary has approved an amendment to the information, DIPN 47 states that the IRD is obliged to disclose the amended information to the requesting party. Nevertheless, the IRD will not communicate any further information that only came to its knowledge after the disclosure request has been fully complied with.
Other administrative matters - In general, a disclosure request must be made in writing by the competent authority of the requesting party as set out in the relevant CDTA under which the request is made. Unless otherwise agreed between the parties, the request must be in English.
The standard response time to an EOI request set by the OECD is 90 days after receipt of the request. DIPN 47 states that the IRD will try to comply with the standard response time to the extent possible. If the IRD is unable to meet the time limit, it will inform the requesting party and explain why it was unable to comply.
Examples in DIPN 47
The following examples are included in DIPN 47 to clarify the IRD's positions on particular issues:
Person covered - One example is used to illustrate that the EOI is not limited to information relating to the affairs of residents of the contracting parties or either of them. In other words, the IRD may exchange information regarding the tax affairs of non-Hong Kong residents. However, the IRD does not have an obligation to provide information on third-country residents that is neither held by nor in the possession or control of persons in Hong Kong.
Third party's information appears in information exchanged - DIPN 47 points out that, where documents contain data of a third party that will be useful in verifying the accuracy of information shown in the document or otherwise assist in the proper administration of the domestic tax laws of the requesting party, the information will not be crossed out and the document will be transmitted to the requesting party in the manner produced. Typical examples are sales invoices and multi-party service contracts. However, the IRD would remind the requesting party that the requesting party is prohibited from making a reference to or relying on information concerning any third party against that third party. If the requesting party makes a separate request for information in respect of that third party which makes any reference to or relies on such information, the IRD will not entertain the request.
Information held by nominee or agent - The IRD specifically points out that an EOI request cannot be declined because the information is held by a nominee or a person acting in an agency or fiduciary capacity or because it relates to an ownership interest. This implies that the IRD may exchange the information that is held in the hands of a nominee or an agent.
Trade, business and other secrets - The IRD is not obligated to supply to the treaty partner information that would disclose a trade, business, industrial, commercial or professional secret or trade process. Nevertheless, the IRD is of the view that whether information constitutes a "trade or business secret" should not be interpreted too broadly. The IRD will determine whether or not to pass on sensitive information. According to OECD guidelines, a trade or business secret is generally understood to mean facts and circumstances that are of considerable economic importance and that can be exploited practically and the unauthorized use of which may lead to serious damage. Financial information, including books and records, does not by its nature constitute a trade, business or other secret.
The IRD further explains that ordinary tax secrecy protects trade and business secrecy in all countries, when these come into the hands of the tax authorities. It is not expected that the tax authorities would demand access to trade and business secrets in the first place, since their information-seeking powers generally permit the collection of "tax" information only. In any event, taxpayers in Hong Kong can dispute the supply of information claimed to be trade or business secrets, or initiate legal action to challenge the IRD's actions in colleting such information. The issue will ultimately be decided by the courts.
Know your rights and obligations - Under the new EOI regime, the IRD is empowered to collect and disclose tax information of corporations and individuals with Hong Kong's treaty partners. It is vital to know your obligations and rights.
Under the new EOI regime, corporations and individuals are obliged to provide tax information even if there is no domestic tax interest. It is not possible to avoid the obligation simply because the corporation or individual is not a Hong Kong resident or because the information is held by a nominee or a person acting in an agency or a fiduciary capacity. While cooperating with the IRD for EOI, a subject person should examine the various safeguards available under the new EOI regime as mentioned in DIPN 47 to protect one's rights to privacy and confidentiality. For example, the person has the right to be notified and can request the IRD to provide a copy of information to be provided to the treaty partner.
Due care in every tax submission - Given the fact that the IRD is empowered to collect and disclose taxpayer information to treaty partners under the new EOI regime, care should be exercised in every tax submission. Tax experts should be consulted before making a submission if there is any doubt about information that could affect the overseas tax position.
While any person has the right to request an amendment to the information to be exchanged, an amendment should be made only if the information is factually incorrect or does not relate to the person. It should be noted, however, that providing incorrect information to the IRD may constitute an offense. In this connection, one should ensure that all information submitted to the IRD is correct and should not wait for a last minute amendment when the information is about to be disclosed to the requesting party. This is particularly true since there may be cases in which notification is not required or the notification is made at the time the information is disclosed to the requesting party.
Hong Kong's CDTA network
CDTAs entered into before the Belgium, Luxembourg, Mainland China,
amendment to the IRO Thailand, Vietnam
CDTAs signed after the amendment Austria, Brunei, Hungary, Indonesia, An agreement has also been
to IRO (awaiting ratification) Ireland, Kuwait, Netherlands, U.K. reached, in principle, with Japan
Particulars to be contained in disclosure request:
1. The identity of the person or authority that makes the disclosure request ("competent authority").
2. The purpose of the disclosure request and the tax type concerned.
3. The identity of the person who is the subject of the disclosure request.
4. A statement on the information requested, including:
a. The nature of the information;
b. The relevance of the information to the purpose of the disclosure request; and
c. The form in which the competent authority wishes to receive the information from the commissioner.
5. The grounds for believing that the information requested is held by the Commissioner or is in the possession of a person in Hong Kong.
6. The name and address of any person believed to have possession of the information requested.
7. A statement that:
a. The disclosure request complies with the laws and administrative practices of the requesting government's territory;
b. The competent authority is able to obtain the information under the laws of the requesting government's territory or in the normal course of the administrative practices of the requesting government's territory; and
c. The disclosure request complies with the relevant arrangements.
8. A statement that the requesting government has pursued all means available in its territory to obtain the information, including getting the information directly from the person who is the subject of the disclosure request.
9. The tax period for which information is requested.
10. The period within which the competent authority wishes the disclosure request to be met.
11. If applicable, a statement:
a. Confirming that the competent authority is of the opinion that notification to the person who is the subject of the disclosure request is likely to undermine the chance of success of the investigation in relation to which the request is made; and
b. Giving reasons for the opinion.
12. If applicable, a statement:
a. Confirming that the competent authority is of the opinion that prior notification to the person who is the subject of the disclosure request is likely to frustrate the timely enforcement of the tax laws of the requesting government's territory; and
b. Giving reasons for the opinion.