• Type: Business and industry issue, Press release
  • Date: 8/4/2008

KPMG says Hong Kong should adopt more liberal exchange of information provision 

Hong Kong, 4 August 2008


Hong Kong should consider moving towards a more liberal exchange of information provision in order to secure a more comprehensive double taxation agreement (DTA) network, according to the latest report by KPMG.

Titled "Consultation on Exchange of Information provision in a Comprehensive Double Taxation Agreement", the report highlighted the currently adopted Exchange of Information (EOI) clause as the main hurdle for Hong Kong to reach DTA agreements with other counterparts, especially among countries under The Organisation for Economic Cooperation and Development (OECD). It also studied the benefits of a comprehensive double tax treaty (CDTA) network for Hong Kong.

"The government has announced its intention to enter into CDTAs with Hong Kong's major trading partners, but so far we have only concluded three CDTAs with Belgium, Thailand and China, and have signed a CDTA with Luxembourg which is awaiting ratification," said Ayesha Macpherson, Tax Partner, KPMG China. "Hong Kong is currently adopting the EOI clause based on the 1995 version of the model tax convention of the OECD. As a result, Hong Kong may face some difficulties during CDTA negotiations with OECD member countries which have adopted the 2004 version of EOI clause."

According to the report, the EOI clause in the OECD 2004 version stipulates that domestic tax interest requirements cannot hinder the exchange of information. Hong Kong cannot adopt this version without amending its legislation to expand the information seeking power of Hong Kong's Inland Revenue Department (IRD) to allow it to gather information requested by a DTA party solely for exchange purposes.

In support of widening Hong Kong's CDTA network, Ms Macpherson explained that "if Hong Kong has an effective network of tax treaties, Hong Kong companies conducting business in other jurisdictions will enjoy tax benefits that would not otherwise be available." As an example, companies can make savings in withholding taxes, which are usually reduced or in some instances completely eliminated under the terms of a CDTA. Ms Macpherson added "A well negotiated CDTA can also provide tax savings for Hong Kong businesses operating overseas through its definition of what constitutes a "permanent establishment" (PE). A CDTA will also offer certainty to investors by having standardised procedures to avoid discrimination and resolve disputes."

"A CDTA network would clearly enhance Hong Kong's position as an international and regional business centre. A reason commonly cited by multinationals for selecting Singapore over Hong Kong for the establishment of regional operations is Hong Kong's lack of a CDTA network, " Ms. Macpherson said. "Singapore has negotiated more than 50 CDTAs, which were concluded before the OECD introduced the expanded EOI provisions in 2004. Hong Kong can strengthen its competitiveness by adopting a more liberalised EOI provision."

Ms. Macpherson added that an effective CDTA network is all the more important if Hong Kong were to capitalise on the mainland's outbound investments. The mainland currently has more than 80 CDTAs and if Hong Kong were to establish itself as a wealth management centre for mainland's global investments, activities/income routed via Hong Kong must be entitled to at least the same, if not additional, tax benefits.

If Hong Kong fails to adopt the international standards of EOI, it will also be at risk of being the target for defensive measures being considered by many developed economies. Defensive measures are actions which can be taken by countries to neutralise the effects of harmful tax practices.

"The OECD is working on a list of uncooperative jurisdictions to which defensive measures could be applied. Hong Kong could be included in the list of uncooperative jurisdictions if it decides not to move to the OECD 2004 version of the EOI clause," Ms. Macpherson noted.

The report also rejected market fears about the potential rise in tax burdens as an EOI clause in a CDTA may result in the IRD gathering more information on the affairs of individual companies. In fact, experience has shown that EOI requests are limited in number. Therefore, alarmist fears that EOI will lead to a large number of requests from the treaty partners are unfounded.


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Click here to access the full report.

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