27 July 2017
Comments on HK’s AEOI legal framework
A jurisdiction that commits itself to the Standard for Automatic Exchange of Financial Information in Tax Matters (the CRS) may sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Multilateral Convention) or conclude agreements with external parties. The jurisdiction becomes a CRS participating jurisdiction by joining the Multilateral Convention and signing Multilateral Competent Authority Agreement (the MCAA) pursuant to Article 6 of the Multilateral Convention. Alternatively it becomes the CRS participating jurisdiction by signing the bilateral double tax agreements (DTAs) under Article 26 of the OECD Model Tax Convention and the bilateral competent authority agreement (the CAA) with another participating jurisdiction.
Hong Kong has the power to enter competent authority agreements (the CAAs) under DTAs or Tax Information Exchange Agreements (TIEAs) with other jurisdictions under Section 49 of the Inland Revenue Ordinance, pursuant to Article 151 of the Basic Law of the Hong Kong Special Administrative Region. The Multilateral Convention is open to signing by sovereign states only. At the time of China's joining the Convention, the Government of the Hong Kong Special Administrative Region opted out of the Convention after a consultation between the Central People’s Government of China and the Hong Kong government, as provided under Article 153 of the Basic Law of Hong Kong Special Administrative Region. Therefore, Hong Kong is not a party to the Multilateral Convention at this moment. See explanation given by the PRC State Administration of Taxation i and the decision by the Standing Committee of the National People's Congress of China ii and China’s declaration that it did not extend the application of the Convention to Hong Kong in the ratification of the Convention. iii
Reportable and participating jurisdictions
In regard to the terms “reportable jurisdiction” and “participating jurisdictions”, the HK CRS texts have given two separate lists for each of the terms under Part 1 and Part 2 of Schedule 17E in the Inland Revenue Ordinance respectively. The list of reportable jurisdictions is published in the Gazette by the Hong Kong government, iv and released on the website of the Inland Revenue Department. The list of participating jurisdiction has been removed from the IRD website for some period of time. The following findings may explain what has been going on for Hong Kong.
However, Hong Kong now faces a risk of not meeting the assessment criteria of the OECD and the EU with respect to AEOI compliance. If listed as a non-cooperative jurisdiction, Hong Kong could be subject to counter-measures that would make it an unattractive place for investment and business. Upon the request of the government Hong Kong, the Central People’s Government has recently given in-principle approval to extend the application of the Convention to Hong Kong. v
The OECD CRS guidance provides that the term “Participating Jurisdiction” qualifies a jurisdiction with which an agreement on the automatic exchange of financial account information (i.e. the information specified in Section I) is in place, whilst the term “Reportable Jurisdiction” qualifies a Participating Jurisdiction with which an obligation to provide financial account information is in place. vi
The OECD CRS guidance also provides that the obligation to provide financial account information has two versions: reciprocal and non-reciprocal. vii Non-reciprocal version will be adopted in situation where a jurisdiction imposing no income tax (jurisdiction A) and a jurisdiction imposing income tax (jurisdiction B) enter into a CAA, pursuant to which the exchange of financial account information will be a one-way street, flowing from jurisdiction A to jurisdiction B.
We can take two examples here to conclude this commentary. A non-reciprocal bilateral CAA has been concluded between Singapore that imposes income tax and Cayman Islands that imposes no income tax. From the perspective Singapore, Cayman Island is a participating jurisdiction to which Singapore owes no obligation to exchange of financial account information. viii From the perspective Cayman Islands, Singapore is both a participating and a reportable jurisdiction. ix
Except for the profits generated from air and shipping services, Hong Kong does not impose any tax income by reason of the residence of a person. Instead, taxes are imposed on the profits arising in or derived from activities a person carries on in Hong Kong in respect of a trade, business or profession in a fiscal year. x Taxes are also imposed on royalty income if the right is exercised in Hong Kong and imposed on interest income if the credit is provided in Hong Kong. As Hong Kong does not need the information about non-Hong Kong source income for tax purposes, some of the CRS participating jurisdictions may choose to sign a non-reciprocal bilateral CAA with Hong Kong. A non-reciprocal bilateral CAA will be concluded between Singapore and Hong Kong. From the perspective Singapore, Hong Kong is a participating jurisdiction to which Singapore owes no obligation to exchange of financial account information. From the perspective Hong Kong, Singapore is both a participating and a reportable jurisdiction. xi
Under the CRS framework, the concept of a participating jurisdiction embraces that of a reportable jurisdiction. A reportable jurisdiction will also be a participating jurisdiction but not the other way round.
i Information released by the General Office of the State Administration of Taxation on 3rd Feb 2016: http://www.chinatax.gov.cn/n810341/n810760/c2004643/content.html
ii The decision passed on 1st July 2015 at the 15th Meeting, the Standing Committee of the Twelfth National People's Congress: http://www.npc.gov.cn/npc/xinwen/2015-07/02/content_1940459.htm
iii Declaration contained in the instrument of ratification deposited with the Secretary General of the OECD, on 16 October 2015 – Or. Engl.
v See Paper for discussion on 5th June 2017 by the Panel on Financial Affaire of the Legislative on Council in HK. P5.
vi Standard for Automatic Exchange of Financial Account Information in Tax Matters, OECD, p194
x Section 14(1) of IRO: Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.
(2) In the case of-
(a) a corporation; and
(b) a corporation (relevant corporation) to which a share of the assessable profits of a partnership is apportioned under section 22A and is charged in the partnership name under section 22,
profits tax shall be charged on the assessable profits of that corporation, or on that share of the assessable profits of that relevant corporation, as the case may be, at the rate specified in Schedule 8. (Added 56 of 1993 s. 8)