U.S.-Hong Kong Tax Agreement a Step Forward for International Tax Cooperation

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HONG KONG – An agreement signed on Tuesday between Hong Kong and the United States on the exchange of tax information is set to become the first tax information exchange agreement (TIEA) signed by Hong Kong using the relevant legal framework established in July of last year.

The TIEA stipulates that the Hong Kong Inland Revenue Department (HKIRD) may, upon request, provide U.S. tax authorities with information “relevant to the determination, assessment and collection of taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.”

“The agreement is based on the goals of fighting global tax evasion and fulfilling Hong Kong’s international obligations for promoting tax transparency,” remarked the Secretary for Financial Services and the Treasury Professor, Chan Ka-keung, after signing the TIEA. Additionally, it is said to contain stringent safeguard measures to protect taxpayer privacy and the confidentiality of exchanged information.

The TIEA, which will be included among the Comprehensive Agreements for Avoidance of Double Taxation (CDTAs) previously signed by Hong Kong, is due to become effective after Hong Kong completes the necessary legislative procedures.

RELATED: China Gets Serious in the Fight Against Tax Evasion

In a wider context, the TIEA is expected to play an important role in Washington’s global anti-tax evasion campaign. The Foreign Account Tax Compliance Act (FATCA), signed into law in 2010 by President Obama and coming into effect in July of this year, requires foreign financial institutions to report the holdings of their American clients to the Internal Revenue Service (IRS) or have 30 percent of their U.S.-sourced income withheld by U.S. tax authorities.

This week’s agreement is seen by many as the first step toward establishing FACTA compliance in Hong Kong. For this, however, an additional intergovernmental agreement will be necessary due to the fact that such reporting may violate Hong Kong’s privacy laws.

The G-20 invited the Organization for Economic Cooperation and Development (OECD) to develop a global standard on automatic exchange of information in 2013. The resulting “Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard,” issued on February 13, 2014, is an aim to “multilateralize” FATCA.

Some analysts have claimed that China may also introduce its own version of FATCA to collect tax information of Chinese citizens globally. As mentioned in our article yesterday, the State Administration of Taxation renewed its pledge to combat tax evasion through heightened international cooperation during a teleconference held on March 18. Among the targets identified in the accompanying press release, cross-border tax evasion was singled out for more stringent measures to come.

In 2013, China became the last G20 nation – and one of fifty-six signees – to ratify an international convention (the Convention on Mutual Administrative Assistance in Tax Matters), initially proposed by the OECD and the Council of Europe, against tax evasion via the use of tax havens, and exchanged tax information with some forty-six countries. During the G20 Leaders’ Summit in St. Petersburg a week later, the members agreed to begin automatically sharing tax information by the end of 2015 and will develop a plan throughout 2014 to accomplish these goals.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

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