Finance Focus

industries may be negatively perceived by other jurisdictions. Of particular concern is how such incentives may be viewed within the context of the base erosion and profit shifting (BEPS) project undertaken by OECD.

While it is commendable that the Hong Kong government is mindful of the progress of the BEPS project, the project should not of itself be a reason to disregard the use of tax incentives. The focus of the OECD is not to preclude jurisdictions from providing tax incentives, but rather to develop more effective solutions to harmful tax practices, priorities being improving transparency and requiring substantial activity in support of preferential regimes. As such, provided that Hong Kong addresses the necessary concerns of the OECD, any tax incentives introduced should not be perceived negatively.

Q

What can you tell us about the new stand-alone tax information exchange agreements (TIEA) in Hong Kong?

The law that was passed in July last year allows the Hong Kong government to enter into an agreement with the government of a territory outside Hong Kong for exchanging of information in relation to any tax imposed by the laws of Hong Kong or the territory (i.e. a TIEA). Previously Hong Kong could only exchange information with its tax treaty partners. Now Hong Kong can sign TIEA’s with countries that you would not otherwise sign a tax treaty (i.e. tax haven countries like the Cayman Islands, BVI, and Bermuda). The only purpose of a TIEA is to

exchange information in respect of taxpayers for the prevention of tax evasion.

The passage of the new law will enable Hong Kong to comply with the latest international standard on tax transparency and maintain its reputation as an international business and financial centre. In particular, the new law helped Hong Kong to pass the Phase 2 peer review conducted by the Global Forum in November last year. Having passed the Phase 2 peer review, Hong Kong is considered to have in place an adequate legal and regulatory framework to facilitate effective exchange of information.

The relaxation of the restrictions on information that can be exchanged under the treaty framework may also help Hong Kong persuade certain key jurisdictions to commence negotiations with Hong Kong toward a treaty, thus further expanding Hong Kong’s treaty network.

Q

How do TIEAs impact doing business in Hong Kong?

These measures reflect the increasing trend in international tax towards global transparency and greater sharing of information. While this trend may lead to increased costs of doing business, it is important to understand that a TIEA cannot simply be used by another country to obtain any information they desire in so called ‘fishing expeditions’. Under a TIEA, information will only be exchanged upon request. Hong Kong has not yet agreed to exchange information on an automatic or spontaneous basis. Information, including bank information, will only be supplied upon specific and bona-fide requests received

from the competent authority of an agreement partner.

Q

How has Hong Kong furthered its exchange of information practices?

Whilst Hong Kong has yet to sign a stand- alone TIEA, it is understood that Hong Kong is currently negotiating with the United States and certain Nordic European countries with a view to concluding a TIEA. Given Hong Kong’s preference for negotiations through tax treaties, the government is actively seeking to update its old tax treaties to incorporate the latest version of the OECD exchange of information article. In January this year, HK signed a second protocol to the Vietnam treaty for this very purpose.

Q

What are your recommendations for ensuring continued tax compliance

and efficiency for those operating in Hong Kong?

Given the rapid pace that the OECD and G20 are moving forward with their work on the BEPS project, companies should be reviewing their operating models and legal structures to ensure that they are supportable from a tax perspective. As greater information about taxpayers is shared between countries, there will be increasing competition for a share of the global tax pie. Evaluating your supply chain to determine where value is created and how different assets, functions and risks should be deployed and located will become even more critical in managing the tax costs and tax risk.

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