Hong Kong needs to catch up with latest global tax standards

Hong Kong, as a world financial centre, will undertake legislative changes to implement automatic exchange of information of account holders

Exchange of information is a recognised tool to enhance tax transparency and combat cross-border tax evasion. As a major financial centre, Hong Kong is committed to following global standards.

While the city practises a simple and territorial-based tax regime, it needs to catch up with the latest international standards to facilitate exchange of tax information with other jurisdictions.

As one of its key priorities, the Financial Services and the Treasury Bureau launched in April a consultation exercise to gauge views on proposals to apply, with adaptations for Hong Kong, the latest standard published by the Organisation for Economic Cooperation and Development on automatic exchange of financial account information in tax matters.

Under the new standard, jurisdictions are required to collect from financial institutions account information of non-domestic tax residents and exchange the information with jurisdictions of residence of the account holders on an annual basis.

In general, a person will be resident for tax purposes in a jurisdiction if he pays or should be paying tax required under the law. As the tax residence of account holders may change and the tax laws may differ among jurisdictions, account holders will have to verify and update their tax residence.

Financial institutions will rely on the update of account holders but they should follow due diligence requirements in certifying it.

How is the new standard different from the existing one? Hong Kong has so far signed 32 comprehensive avoidance of double taxation agreements and seven tax information exchange agreements with other jurisdictions, which allow the exchange of information on a request basis.

The automatic exchange of information will require fundamental changes to the city’s policy and legal framework.

One frequently asked question in the consultation was why Hong Kong has to rush into implementing the new standard which requires substantial legislative changes and impacts significantly on the financial services sector.

Since the promulgation of the new standard by the OECD in July last year, 90 jurisdictions, including many key trade and investment partners of Hong Kong, have expressed commitment to the new standard.

As a responsible member of the international community and to avoid being labelled as an “uncooperative” jurisdiction, which will affect our position as a financial centre, Hong Kong indicated in September last year its support for implementing the new standard on a reciprocal basis with appropriate partners, with a view to starting the first information exchange by the end of 2018, the latest timeline allowable for implementation.

The commitment was premised on the condition that Hong Kong could put in place necessary legislation by 2017.

I do not underestimate the challenge facing the financial services sector. We expect 2,900 financial institutions – banks, custodians, insurance companies and investment entities – will be affected. They will need to put in place necessary infrastructure and enhance their customer relationship mechanism so as to collect the required information from the foreign account holders for reporting to the tax department.

While the international community has been advocating for implementing automatic exchange of financial account information on a multilateral basis, we prefer conducting it with our existing and potential tax partners on a bilateral basis.

We would identify those jurisdictions which are capable of meeting the OECD standard and have laws to safeguard data privacy and confidentiality.

The international landscape on tax cooperation has seen rapid changes in recent years. The latest standard on automatic information exchange represents a major step towards stronger cooperation on tax transparency at the global level.

As an international financial centre, Hong Kong has no choice but to comply with the new standard. We aim to introduce an amendment bill in the Legislative Council early next year for it to be in place by 2017 and start the first automatic information exchange by end-2018.

Professor Chan Ka-keung is the Secretary for Financial Services and the Treasury