Apr-20-2009 NEW BLOGPOST: Hong Kong is NOT a Tax Haven

Clearly to do this section 4 of the Inland Revenue Ordinance needs to be amended;

 

4(1)     [Duty] Except in the performance of his duties under this Ordinance, every person who has been appointed under or who is or has been employed in carrying out or in assisting any persons to carry out the provisions of this Ordinance shall preserve and aid in preserving secrecy with regard to all matters relating to the affairs of any person that may come to his knowledge in the performance of his duties under this Ordinance, and shall not communicate any such matter to any person other than the person to whom and shall not communicate any such matter to any person other than the person to whom such matter relates or his executor or the authorized representative of such person or such executor, nor suffer or permit any person to have access to any records in the possession, custody or control of the Commissioner.

 

There are exceptions to this but these do not cover the supply of information to overseas tax jurisdictions. The other source of information is the “Exchange of Information” articles in double taxation treaties. Hong Kong has currently entered into comprehensive agreements with Thailand, Mainland China, Luxemburg and Belgium; there are also a number of negotiations currently in progress that may lead to the development of a larger tax treaty network. The Exchange of Information articles within these agreements provide for the exchange of information to facilitate the carrying out of the Agreements and for the prevention of fiscal evasion.

 

Assuming that the Hong Kong Government enters into the spirit of the exchange of personal and corporate information gained through the filing of taxes returns it is interesting to note what information they in fact will be able to provide to overseas authorities;

 

 

Individuals file a Salaries Tax return. This requires the disclosure of information of assessable employment income earned by the taxpayer. It does not include details of dividends, interest received, capital gains, assets acquired or sold etc.

 

 

Hong Kong companies are required to have an audit and the audited accounts are to be attached to the corporate tax return i.e. the “Profits Tax Return”. Hence, the Inland Revenue Department will have details of all income accruing to a Hong Kong company and details of assets, liabilities and capital disclosed in the accounts.

 

It can be seen from the above that for individuals living in Hong Kong and filing a salaries tax return the information available to the Inland Revenue Department is extremely limited.  Indeed if the individual is not in receipt of income from employment which has a Hong Kong source there is no information disclosed in the return that is of interest to anyone. However, the position is different for a corporation although, depending on the group structure, there may be no need to file a consolidated group account. Frequently, if the Hong Kong company does not have Hong Kong sourced income or is not carrying on business it will not be required to file a Profits Tax return.

 

The concern of all individuals and corporations alike are the fishing expeditions that tax authorities embark upon i.e. random, vague requests for information in the hope that something interesting may materialise. I question how the Inland Revenue Department will deal with these requests. Furthermore, will it be empowered to obtain information not contained in a tax return, if this is the intention will the Government also need to amend the Data Privacy Ordinance?

 

I am concerned as to the direction that this whole initiative is moving. To my mind it is an excuse for the G20 and OECD countries to cover up their own problems. Indeed, I am in agreement with David Harvey, the CEO of the Society of Trust and Estate Practitioners (STEP).

 

“STEP believes that the G20 leaders should further recognise, as the IMF has done, that most Offshore Finance Centres (OFCs) are well regulated in comparison to international standards and as measured against G20 countries themselves.” The IMF has noted that “compliance levels of OFCs are, on average, more favourable than those for other jurisdictions assessed by the Fund in its financial sector work….”

 

Hong Kong is not a tax haven; it is a well regulated low tax jurisdiction. It is administered cautiously and its tax revenues are used in maintaining a first class infrastructure. I trust the requirement to keep tax legislation simple, easy to understand and an effective provider of tax revenues remains. Certainly there is no need for higher rates of taxation or unnecessary invasion into peoples’ privacy, Hong Kong is not a centre for fiscal evasion.