A. EXCHANGE OF INFORMAION (EoI)
Hong Kong has adopted the most prudent safeguards acceptable under the Organisation for Economic Co-operation and Development (OECD) and HK laws provide a set of fair procedures to protect confidentiality and privacy right. Further the restriction on disclosure of legally privileged materials is legally binding on HK Inland Revenue Department (IRD) and information covered by legal professional privilege will not be exchanged.
There are two types of exchange of information instruments: the exchange of information article incorporated in the Comprehensive Double Taxation Agreements / Arrangement (CDTAs) and Tax Information Exchange Agreements (TIEAs). CDTA is only applicable if a tax payer is subject to taxes in two countries and wants to get tax relief. Taxes in HK are on territorial, not worldwide, basis which means that only profits arise in or are derived from HK are subject to HK taxes, so there are only few cases where such relief will be claimed.
Hong Kong's EoI policy is that information (that is foreseeably relevant for carrying out the provisions of the CDTA, TIEA or to the administration or enforcement of the domestic laws of the treaty partners concerning taxes) will only be exchanged upon specific and bona-fide requests received from the competent authority of a treaty partner in justifiable cases. The information exchanged shall not be used for purposes other than those for which it has been exchanged and strict confidentiality of information exchanged is preserved by the EoI instrument and the applicable domestic laws of the treaty partner.
Based on the standard of "foreseeable relevance", IRD states that a treaty partner is not allowed to engage in "fishing expeditions" (i.e. speculative requests for information that have no apparent nexus to an open inquiry or investigation) or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer. The "foreseeable relevance" will be evaluated with reference to the strength of the information supplied in the disclosure request submitted by a treaty partner. In brief, IRD will only exchange information if a treaty partner can satisfy the following conditions and some other legal requirements :
- it is checking the tax affairs of an identified tax resident or a group of taxpayers; and
- it has already got some information indicating that IRD or an identified person in HK has the information relevant to that tax resident's or group's tax affairs.
OECD states that where the request relates to a group of taxpayers not individually identified, the treaty partner needs to provide a detailed description of the group and the specific facts and circumstances that have led to the request, an explanation of the applicable law and why there is reason to believe that the taxpayers in the group for whom information is requested have been non-compliant with that law supported by a clear factual basis. It further requires a showing that the requested information would assist in determining compliance by the taxpayers in the group.
IRD will give prior notification to the subject person before the information is exchanged unless exceptional circumstances exist. The subject person concerned will have the right to request a copy of the information and to amend factual errors. The person can appeal to the Financial Secretary if the amendment request is refused.
A disclosure request to be submitted by a treaty partner needs to include the following for IRD to evaluate if information should be exchanged :
- The purpose of the disclosure request and the tax type concerned.
- The identity of the person who is the subject of the disclosure request.
- A statement on the information requested, including-
- the nature of the information;
- the relevance of the information to the purpose of the disclosure request; and
- the form in which the competent authority wishes to receive the information from the Commissioner.
- The ground for believing that the information requested is held by the Commissioner or is in the possession or control of a person in Hong Kong.
- The name and address of any person believed to have possession or control of the information requested.
- A statement that -
- the disclosure request complies with the laws and administrative practices of the requesting government's territory;
- 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
- the disclosure request complies with the relevant arrangements.
- 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.
B. AUTOMATIC EXCHANGE OF FINANCIAL ACCOUNT INFORMAION (AEOI)
Under the AEOI standard, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions, to collect the reportable information of these accounts and furnish such information to IRD, and a self-certification form for declaring the country of tax residence of the person or company is required for a new bank account opening starting from 2017. IRD will start to exchange the information with the tax authorities of the AEOI partner jurisdictions on an annual basis by end of 2018.
However, Fls are not required to report a financial account if any one of the following conditions has been met:
- The account holder is a tax resident at a jurisdiction without entering an AEOI agreement with HK.
- It is a pre-existing entity account (corporate financial account opened before 2017) with an aggregate account balance of no more than 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.HK$1,950,000 (or equivalent foreign currency) at 31 December of any year since 2016.
- It is a HK tax resident which means a HK company subject to taxation in HK as a resident regardless of where its effective management is. Fls may ask the company to prove this by providing a self-certification form and tax demand notes. The legal definition of tax resident is in the paragraph below:
Resident for tax purposes, in relation to a territory, means-
- an individual who is subject to taxation as a resident in the territory; or
- an entity that-
- is subject to taxation as a resident in the territory; or
- has its effective management situated in the territory and is not subject to taxation as a resident in any other territory.
- IRD's sample self-certification form http://www.ird.gov.hk/eng/pdf/2016/ir1456.pdf
- all the agreements HK has signed with its treaty partners on country basis http://www.ird.gov.hk/eng/tax/dta_country.htm
- the AEOI ordinance http://www.gld.gov.hk/egazette/pdf/20162026/es12016202622.pdf
- Departmental Interpretation and Practice Notes on EoI http://www.ird.gov.hk/eng/pdf/e_dipn47.pdf