FATCA in Hongkong
Hong Kong and the US signed a tax information exchange agreement, known as the TIEA, on March 25th, 2014. The agreement was a first of its kind, signed by Hong Kong, and allowed the free exchange of tax information on request between Hong Kong and the US. The HK-US TIEA would provide the necessary legal basis for Hong Kong to provide, upon request by the US, certain information that must be reported by the financial institutions in Hong Kong to the United States under the Foreign Account Tax Compliance Act, which we call FATCA. This then became effective from July 1st, 2014. Further to the TIEA, Hong Kong was under discussions with the US to enter into an intergovernmental agreement, known as the IGA, to facilitate financial institutions in Hong Kong for complying with FATCA.
The HK-US TIEA substantially followed the OECD Model TIEA with a few modifications. There was no material difference between the HK-US TIEA and the comprehensive double tax agreements (CDTAs) that Hong Kong has entered into so far in terms of the scope of information exchange and safeguards on confidentiality and privacy right. As the pressure for greater tax transparency still continues to grow and the automatic exchange of information (EoI) has successfully become the latest international standard on EoI, it is expected that the EoI regime in Hong Kong would still continue to evolve. Multinational corporations with cross-border transactions or operations are required to stay tuned for the development in these areas and be prepared to assess the possible impact of the changing EoI landscape on them.
Hong Kong and the United States signed a TIEA on March 25th, 2014. The agreement was the first of its kind and signed by Hong Kong after it changed its policy on EoI and amended its legislation for allowing the signing of a TIEA in July. One immediate impact of the HK-US TIEA was the facilitation of FATCA implementation in Hong Kong, as it was noted in the following statement in the press release which was issued by the HKSAR Government on 25th, March 2014 in connection with the HK-US TIEA:
“The TIEA with the US provides the necessary basis for Hong Kong to provide for you upon requests made in relation to the information reported by financial institutions in Hong Kong to the US under the US Foreign Account Tax Compliance Act (FATCA). Subject to the completion of the ongoing discussions, Hong Kong intends to enter into an intergovernmental agreement with the US for laying down the arrangements that help facilitate compliance by the financial institutions in Hong Kong. As a complementary measure, the signing of a TIEA with the US would allow the US tax authorities to file a request to the IRD for EoI under specified conditions.”
In summary, the HK-US TIEA has enabled Hong Kong to provide certain information as may be contemplated under a future HK-US IGA upon requests that were made by the US tax authorities.
KEY FEATURES OF THE HK-US TIEA
The key features of the HK-US TIEA include the following:
- The information exchange must be on a request basis satisfying the conditions in the TIEA, which does not provide for automatic information exchange.
- The ‘foreseeably relevant’ test is used to assess the validity of an EoI request made by the applicant Party (i.e. the contracting state requesting the information). The applicant Party would be required to provide certain specified information in its EoI request for demonstrating a prima facie case for the foreseeable relevance of the information requested.
- There is no ‘domestic tax interest’ requirement, which means that the requested Party (i.e. the contracting state receiving an EoI request) would be required to provide the information requested even though it does not need such information for its own domestic tax purposes.
- ‘Group request’ has been allowed, which means that the applicant Party could be asked for information on a group of taxpayers, without naming them individually, as long as the request is not a ‘fishing expedition.’
- The scope of information which needs to be exchanged includes information that has been held by the competent authority of the requested Party or information which is in the possession or control of persons within the area of the requested Party’s jurisdiction.
- In the case of Hong Kong, the types of tax covered under the TIEA are limited to income tax (i.e. profits tax, salaries tax, and property tax). On the other hand, in the case of the United States, the types of tax that are covered are federal income taxes, federal employment taxes, federal estate, gift taxes, and federal excise taxes.
- There are certain specified circumstances under which the requested Party might even decline an EoI request, including (1) where the applicant Party has not exhausted all the means in its own jurisdiction to obtain the required information, (2) where the supply of the required information would disclose a trade secret, (3) where the information is subject to a legal professional privilege, or (4) where the disclosure of the information is contrary to any of the public policy.
- In terms of confidentiality, the information that is being exchanged can only get disclosed to those concerned with the tax assessment, collection, and appeals and can only be used for such purposes. The disclosure of the information to any third party or jurisdiction will not be allowed.