As a jurisdiction, the Hong Kong Special Administrative Region (“Hong Kong”) has long been characterized as a tax regime of low and simple taxation. It has also remained a jurisdiction with source-based taxation, meaning that profits arising from activities outside Hong Kong have generally been free of tax. As a result, Hong Kong has historically had very little need for tax treaties, but the increase in trade and investment across borders has created a demand by local businesses for a network of tax treaties both to reduce withholding taxes and to eliminate such double taxation as might arise. In support of this objective, the government of Hong Kong began to negotiate comprehensive double taxation agreements (CDTAs) in 1998–1999. The problem that the government had encountered was that under the existing provisions of the Inland Revenue Ordinance (IRO), the Inland Revenue Department of Hong Kong (IRD) could collect information relating only to matters that might affect the Hong Kong tax liability, responsibility, or obligation of any person. Because Hong Kong’s taxation was very limited, the information collected by the IRD was correspondingly limited. Information on interest or dividends, for example, both of which are normally not subject to tax in Hong Kong, was collected only in rare circumstances. The result was that Hong Kong was able to disclose only a very limited amount of information to treaty partners and thus very few CDTAs were concluded.

At present, the few tax treaties that Hong Kong has entered into contain exchange of information (EoI) articles that are based on the 1995 version of the EoI article of the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD). The 1995 OECD version does not require Hong Kong to exchange information with a treaty partner if the requested information is not required for administering Hong Kong tax. As a result, if a treaty partner requests information relating to income that is not subject to tax in Hong Kong (e.g., interest income), Hong Kong is not required to collect and exchange such information.

On 26 June 2009, the government of the Hong Kong Special Administrative Region introduced the Inland Revenue (Amendment) (No. 3) Bill 2009 (“Bill”) into the Legislative Council for the purpose of amending the IRO to enable Hong Kong to adopt the 2004 OECD version of the EoI. The 2004 OECD version requires Hong Kong to collect and exchange information even though Hong Kong does not need such information for Hong Kong tax purposes. 

The impact of the Bill is to expand the IRD’s power to obtain information so that, pursuant to a request from a treaty partner, it could obtain information on any matter that might affect the liability, responsibility, or obligation of any person under the law of the requesting treaty partner. The Bill would broaden the IRD’s power to obtain a search warrant in support of such enhanced information gathering.

The Bill would also make it an offense to fail to provide requested information or to obstruct the discharge of a search warrant where the information sought is required for the purpose of exchange of information under a tax treaty. It would also be an offense to give any incorrect information (without reasonable excuse) in relation to any matter affecting any person’s liability to tax under the laws of the treaty partner. In short, the Bill is intended to give the IRD the full range of powers that it would need to obtain information for domestic purposes pursuant to an EoI request.

Safeguarding Privacy
In proposing to amend the IRO and adopt the 2004 OECD version of the EoI article for Hong Kong’s future tax treaties, the government plans to include safeguards to protect an individual’s right to privacy and confidentiality with respect to the exchanged information. This matter has been a major concern of an otherwise supportive community. The government has indicated that the safeguarding of privacy will be done by incorporating appropriate restrictions and requirements in individual tax treaties or in documents of record between the two treaty parties in relation to the scope and use of information exchanged pursuant to the treaties. Specifically, the government will seek to adopt the following safeguards:

• Information exchange will be conducted only on a case-by-case basis in response to legitimate requests by treaty parties. There will be no automatic or wholesale exchange of information.


• Only information on taxes covered by the tax treaties (mainly income taxes) will be exchanged. This safeguard, however, may prove to be a major point of contention between treaty partners owing to Hong Kong’s limited scope of taxation.


• The treaty partner must satisfy the IRD that the requested information is “necessary” or “foreseeably relevant” for the carrying out of the tax treaty or the administration or enforcement of its own tax laws. This safeguard is intended to prevent so-called fishing expeditions.


• The tax authorities of the treaty partner must treat the information obtained as secret information under its domestic laws.


• The tax authorities of the treaty partner must not pass the information on to a third party (including another country or even another government department within its own country), notwithstanding contrary provisions of its domestic laws.


• The tax authorities of the treaty partner must use the information provided only for the purposes specified in the request.


• Hong Kong will not be required to exchange information that the treaty partner itself could not obtain under its domestic laws were the information available within its own country.

The government has also proposed that certain other safeguards, based on the following principles, be enacted in subsidiary legislation:

• A directorate officer of the IRD will decide whether to accept an information request by a treaty partner. The officer must be satisfied that the request is made in accordance with the provisions of both the IRO and the relevant tax treaty.


• The IRD will be required to give notice to the person affected by the information exchange and provide such person with the information requested by the treaty partner (except in those circumstances where notification would prevent or unduly delay an effective exchange of information or where prior notification would otherwise undermine the likelihood of success of the investigation by the treaty partner). This safeguard is an important development because it is not the current IRD practice under existing CDTAs.


• As part of this notification process, the person affected can verify and correct the information with the IRD, with the right to request review by the Financial Secretary (whose decision is final) if the IRD refuses to accept the proposed correction to the information. Although not explicit, the person should also be able to seek judicial review in appropriate circumstances.

As a further measure, the IRD plans to issue a practice note that sets out the procedural safeguards it must adopt in processing exchange of information requests. The practice note will set out a number of procedural requirements, including that the treaty partner must

• confirm that it has pursued all means available in its own country to obtain the information (except those means that would give rise to disproportionate difficulties);


• confirm that the request is made in conformity with its domestic laws and administrative practices and that the treaty partner could obtain such information were such information available within its own country;


• state its grounds for believing that the requested information is located in Hong Kong; and


• provide specific background information relating to the request (e.g., the tax purpose for which the information is sought, the reasons for the request, the taxes concerned, and the relevant tax periods).

The Way Ahead
The Bill is currently before a bills committee of the Legislative Council, which has invited comments on the proposed amendments from members of the public. Comments have generally been supportive of the objectives of the Bill because it is widely believed that Hong Kong needs a broader network of CDTAs to support its growth as a financial center.

Once the Bill is enacted, the government will be in a position to enter into new tax treaties containing the 2004 OECD version of EoI. The government has been in formal negotiations with at least 11 jurisdictions, and several others are interested in an agreement based on the 2004 EoI provision. Once the wider powers regarding information exchange are in place, one of the major barriers to treaty negotiations will be removed and it is expected that the government will thereafter be able to conclude a number of new treaties rapidly.

Given the current environment, the move toward transparency and international cooperation appears to be a necessary step for sustaining Hong Kong’s position as a major financial market. In April 2009, the OECD published three lists that categorized various countries according to their compliance with the OECD standard. Although the OECD did not put Hong Kong on any of the three lists, it noted Hong Kong’s commitment to implement the OECD standard. Having committed to information exchange and enjoying the support of the business community, the government is now obligated to live up to that commitment.

Steven Sieker is a partner at Baker & McKenzie’s Hong Kong office.

Pierre Chan is special counsel at Baker & McKenzie’s Hong Kong office and is the author of LawInContext’s Private Banking Helpdesk Hong Kong Country Report.