Do you know why Hong Kong has now enacted legislation to allow it to start negotiating Tax Information Exchange Agreements (TIEAs)?
I think Hong Kong is fearful that its OECD Phase 2 Assessment, which looked at the adequacy of its administrative machinery to exchange information (EOI) to current standards and its response to shortcomings identified in its Phase 1 Assessment, will not be favourable.
For Hong Kong, like many other low-tax offshore financial centres (OFC), the availability of tax treaties enhances its competitive position. As a result, it has focussed on building a network of these agreements which prevent double taxation, fiscal evasion; and in most cases apply the current EOI standard through the inclusion of Article 26 of the OECD Model Tax Convention.
In fact, both Hong Kong’s Executive branch and its Legislative Council have long expressed a strong preference to continue to enter into comprehensive tax agreements rather than TIEAs. For Hong Kong, and other members of the OECD Global Forum on Transparency and Tax Information Exchange (Global Forum) offering EOI as part of a tax treaty has been a helpful negotiation point.
However, it has been reported that the Global Forum recommended that Hong Kong establish a legal framework for entering into TIEAs (independent of any DTA) coming out of its Phase 1 Assessment. (Tax Analysts, a subscription service)
This, even though the executive summary of Hong Kong’s Phase 1 Assessment did not suggest that Hong Kong make any changes to its legislation to accommodate TIEAs. Instead it recognised Hong Kong’s importance as an international financial centre and that:
“regardless of their form it should ensure that it has agreements that meet the international standard with all of its relevant partners”.
Moreover, in the assessment the only reference to TIEAs was that “one request was made of Hong Kong to negotiate a TIEA and that recent amendments made to its domestic legislation to allow for exchange of information with respect to tax treaties did not extend to TIEAs or other forms of information exchange”.
There was no specific mention of the need for Hong Kong to change its law to allow it to conclude TIEAs.
Indeed a request by one party, not identified as a ‘relevant partner’ to conclude a TIEA would seem insufficient to activate such heavy legislative machinery.
Nevertheless Hong Kong, has pushed to have just this sort of legislation enacted before its Phase 2 Assessment is published this September.
Why should Hong Kong be so concerned about an initial negative Phase 2 assessment?
After all the Global Forum has maintained that these assessments are ongoing, and with no OECD ‘blacklist’ announced at the end of the last G20 summit, why should Hong Kong move to pass this legislation in time for September, almost two years since the initial report was published?
I think the answer may lie in this part of the G20 communique made this year after its April meeting of Ministers of Finance and Central Bank Governors:
“we are looking forward to overall ratings to be allocated by year end to jurisdictions reviewed on their effective practice of information exchange and monitoring to be made on a continuous basis. In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress.”
As of June 13, neither China on behalf of Hong Kong, nor Hong Kong in its own right had signed the OECD Convention; and no expression of interest in the Convention has been signalled by either party.
This means that without the amendment to its domestic law to address what Hong Kong clearly feels may be viewed as a deficiency in its legal regime, the country might be faced with two strikes against it by the time the OECD starts to allocate its rankings.
(Former President Sarkozy and U.S President Obama. Image: Whitehouse)
Perhaps like me, Hong Kong too is concerned that the ‘allocation of rankings’ referred to by the G20, may mean that the 2013 G20 Summit will culminate with a ‘roll-call’ of ‘blacklisted’ or uncooperative jurisdictions – as occurred under the Chairmanship of French President Sarkozy – based on the outcome of Phase 1 and 2 assessments, and the acceptance (or otherwise) of automatic exchange of information by Global Forum members.
That this domestic law also allows Hong Kong to start FATCA IGA negotiations with the US may be additional insurance against any fallout from the OECD, G20- mandated ‘ranking’ exercise.