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 Organisation 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.
The TIEA covers the following taxes:
(a) In the case of the US:
- Federal taxes on income;
- Federal taxes related to employment and self-employment;
- Federal estate and gift taxes; and
- Federal excise taxes.
(b) In the case of Hong Kong:
- Profits tax;
- 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 to enable Hong Kong to enter into TIEAs with other jurisdictions. The safeguards under the TIEA will be the same as those accorded 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 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 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.
The agreement came into force on 20 June 2014 and shall have effect for requests in respect of any period that starts on or after 20 June 2014 and for all charges to tax arising on or after that date.
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 their financial accounts held in other jurisdictions to the US tax authorities. 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.
On 9 May 2014, Hong Kong was added to the list of jurisdictions that have reached an 'agreement in substance' for the pending Model 2 Intergovernmental Agreement (IGA) with the US under FATCA. The IGA lays down the arrangements to help financial institutions in Hong Kong comply with the FATCA. The TIEA would complement the IGA by enabling the US tax authorities to make specific requests to the IRD for information pertaining to specific taxpayers under specified conditions.
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, its 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 basis.
Taxpayers should, therefore, brace themselves for a heightened level of transparency globally as regards to tax matters and seek professional advice where necessary.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.