LEGISLATIVE COUNCIL BRIEF

Page1LEGISLATIVECOUNCILBRIEFInlandRevenueOrdinance(Chapter112)INLANDREVENUE(AMENDMENT)(NO.3)BILL2009INTRODUCTIONAtthemeetingoftheExecutiveCouncilon23June2009,theCouncilADVISEDandtheChiefExecutiveORDEREDthattheInlandRevenue(Amendment)(No.3)Bill2009(theBill),atAnnexA,shouldbeintroducedintotheLegislativeCouncil(LegCo).TheBillamendstheInlandRevenueOrdinance(Cap.112)(IRO)toenableHongKongtoadoptthelatestinternationalstandardforexchangeofinformation(EoI)inacomprehensiveavoidanceofdoubletaxationagreement(CDTA).JUSTIFICATIONSBenefitsofCDTA2.Doubletaxation,whichariseswhenthesameincomeorprofitsissubjecttotaxinmorethanonejurisdiction,impedestrade,investmentandtheflowoftalentamongeconomies.Toavoidthisproblem,jurisdictionssignbilateralavoidanceofdoubletaxationagreementstoclarifyeachother’staxingrights.Besides,aCDTAwillnormallyresultinreducedwithholdingtaxratesonpassiveincomessuchasdividends,royaltiesandinterest.Asabusinessfacilitationinitiative,theGovernmenthasbeenseekingtosignCDTAswithourmajortradingpartners1since1998-99.1Sofar,wehaveconcludedCDTAswithBelgium(2003),Thailand(2005),MainlandChina(2006),Luxembourg(2007)andVietnam(2008)andarenegotiatingCDTAswith11economies.FileRef:FINCR12/2041/46Page2EoIArticle3.ACDTAwouldnormallyincludeanEoIarticlethatprovidesfortheexchangeofinformationnecessaryforthecarryingoutoftheagreementbetweenthetwocontractingparties.TheEoIarticlecurrentlyadoptedinourCDTAsisbasedonthe1995versionoftheOrganisationforEconomicCooperationandDevelopment(OECD)ModelTaxConvention(AnnexB).Accordingtothisversion,theInlandRevenueDepartment(IRD)mayrefusetocollectandsupplytheinformationrequestedbyanothercontractingpartyiftheDepartmentdoesnotneeditfordomestictaxpurposes.Mosteconomieshave,however,adoptedtheOECD2004versionoftheEoIarticle(AnnexC).Thisversioncategoricallystatesthatthelackofdomestictaxinterestdoesnotconstituteavalidreasonforrefusingtocollectandsupplytheinformationrequestedbyanothercontractingparty.ConstraintsunderHongKong’staxlaw4.HongKongcurrentlycannotadoptthe2004versionoftheEoIarticlebecauseundertheIRO,IRDcanonlycollecttaxpayers’informationfortheascertainmentofliability,responsibilityandobligationunderthedomestictaxlaw.Inotherwords,IRDcannotcollectanytaxinformationunlessitisfordomestictaxpurposes.ThislegalconstraintonIRD’sinformationgatheringpowerhasbeenamajorobstacletoourCDTAnegotiationsbecausemosteconomieshaveadoptedthe2004versionoftheEoIarticle.ThisconstrainthasreducedthenumberofourpotentialCDTApartners,andrestrictedtheprogressofournegotiations.ConsultationsonliberalisationofEoI5.Despiteourlegalconstraints,HongKonghasbeenverysupportiveofeffortsbytheinternationalcommunitytopromotetransparencyintaxadministration.Asearlyasin2005,weopenlyendorsedOECD’sPrinciplesofTransparencyandEffectiveExchangeofInformationattheOECDGlobalForumonTaxationheldinMelbourne.Onthedomesticfront,weconsultedthebusinessandprofessionalsectorsontheliberalisationofEoIunderCDTAsin2005and2008.Whileviewsweredividedinthe2005consultationexercise,mostofthestakeholdersinsome50businesschambers,professionalbodiesandadvisorycommitteesweconsultedbetweenJulyandOctober2008indicatedsupportforliberalisationsoastoexpandHongKong’sCDTAnetwork.Inviewofthisconsultationoutcome,theFinancialSecretaryannouncedinthe2009-10BudgetthattheGovernmentwouldputforwardlegislativeproposalsbythemiddleofthisyeartoalignourEoIarrangementswiththeinternationalstandard.BCPage3Recentdevelopment6.Ourinabilitytoadoptthe2004EoIversionhasalsocausednegativeperceptionsonthetransparencyofHongKong’staxregime.AttheLondonSummitheldon2April2009,G20Leaderscalledoncountriestoadopttheinternationalstandardforexchangeofinformation.AftertheSummit,theOECDpublishedthreelistsidentifyingrespectivelytaxjurisdictionswhichhavesubstantiallyimplementedtheOECDstandard,taxjurisdictionswhichhavecommittedtotheOECDstandardbuthavenotyetsubstantiallyimplementedit,andtaxjurisdictionswhichhavenotcommittedtothestandard2.TheOECDdidnotputHongKongonanylist,butpointedoutourcommitmenttoimplementtheOECDstandardinafootnotetothelists.G20Leadersalsoagreedtodevelopatoolboxofcountermeasuresbytheendof2009andreviewcountries’implementationoftheOECDstandardatthenextG20FinanceMinistersandCentralBankGovernorsMeetingtobeheldinNovember2009.7.WehaveexplainedtooverseasauthoritiesthatHongKongmaintainsasimpleandhighlytransparenttaxregimeandourrelativelylowtaxrateisnotbecauseofanywishtoperformastaxhavenbutaresultofourprudentfiscalpolicy.Recently,theDirectoroftheOECD’sCentreforTaxPolicyandAdministrationpublishedanarticletocommendHongKong’seffortincomplyingwiththeinternationalstandardsoftransparencyandEoI.HepointedoutinhisarticlethatundertheOECDcriteria,HongKongwasnotconsideredataxhaven.8.WhiletheinternationalcommunityhasgenerallyacceptedthatHongKongshouldnotbecomparedtothosejurisdictionswhichseektoattracttaxevadingforeigncapitalsthroughzeroornominaltaxrates,complicatedandopaquetaxrules,aswellasbanksecrecylaws,anynegativeperceptionsonthetransparencyofourtaxregimewouldharmHongKong’sreputationasaninternationalfinancialcentre,andcouldlea