NEWS
Jul-29-2009 Exchange of Information Bill Introduced into LEGCO
By Roddy Sage
The adoption of the more liberal OECD 2004 Exchange of Information Article ("AOI") moved a step closer following the introduction of the Inland Revenue (Amendment) (No.3) Bill 2009 into the Legislative Council on 8th July 2009.
In case you are not familiar with the impact of this article it provides that;
"The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention..."
The Inland Revenue Department ("The Department") has gone to great lengths to assure Hong Kong's business population and residents that it will only entertain genuine requests for information in relation to a current tax investigation and will not accept any non-specific request for information. The Department has also stated that it will inform Hong Kong resident persons of such requests and will advise them of the information the Department intends to supply before it is sent to the competent authority of the treaty partner. The inference being that the person will be allowed to comment on the appropriateness of the information.
The Government has also stated that it will endeavour to incorporate "safeguards" to protect people's rights of privacy and confidentiality during the negotiation process of a comprehensive double taxation agreement ("CDTA"). These will include restrictions in terms of scope, usage and restrictions imposed by Domestic Laws of the requesting party.
The purpose of these restrictions is to ensure that the information required is "necessary" or "foreseeably relevant" for the carrying out of the CDTA and that the information provided to a treaty partner cannot be shared with another jurisdiction or another Government department within the treaty partner.
Whilst this will be appreciated by the community there are a number of issues to be resolved, a couple of the more interesting being;
(1) How will the Department be able to establish if there is indeed a bone fide tax investigation in progress by the treaty partner?
(2) Clause 3(i)b of the Bill is so widely drafted that the Government/the Department will be able to change the wording of an AOI Article as required by a treaty partner, OECD or other relevant party without public consultation.
The latter is disturbing as most countries entering into treaty negotiations with Hong Kong are primarily interested in the exchange of information, particularly in relation to taxation. The proposed legislation places considerable power in the Government's hands as to when, under what circumstances and the extent of the information that will be shared with another jurisdiction.
The Department has stated that it will issue a Departmental Interpretation and Practice Note to assist taxpayers understand the safeguards referred to above but in essence this merely provides guidance to taxpayers as to the potential action that the Department will take. One must also appreciate that the Department is not legally bound to follow its own Practice Notes.
A Bills Committee is to be formed to consider the form and drafting of the Bill. Hopefully the Committee will consider the full implications of what has been proposed.
To read more of Roddy's posts, visit: www.roddysrant.com