On July 10, 2013, the Hong Kong Legislative Council moved to enable Hong Kong to enter into stand-alone Tax Information Exchange Agreements and, more importantly for U.S. persons who have financial accounts there, to sign an “intergovernmental agreement” (IGA) with the U.S. for implementation of the Foreign Account Tax Compliance Act (FATCA).
It is expected that the U.S. and Hong Kong will agree on an IGA, and that financial institutions in Hong Kong will begin to comply with FATCA’s due diligence and automatic disclosure provisions next year.
This is the central point of the article, and also the only part that has anything to do with Hong Kong; the rest is merely another regurgitation of general FATCA information we all know already, though it’s nice to see that he mentions “quiet disclosure” as an option for coming into compliance in benign cases.
However, the claim that this amendment has anything to do with automatic disclosure is incorrect, as an informed reading of its actual text reveals. Furthermore, a speech about the amendment by a key pro-Beijing legislator provides striking insight into the attitude of the Hong Kong government (and quite probably, the attitude of Beijing as well) towards demands for information exchange which go beyond OECD standards — and despite the fact the speech doesn’t mention FATCA by name, it casts doubt on the seemingly-authoritative declaration that “it is expected that the U.S. and Hong Kong will agree on an IGA”.
What did the amendment actually do?
Here’s the LegCo agenda for 10 July 2013. That day saw readings of two Inland Revenue Ordinance amendment bills; for our purposes, the relevant bill is the first one, the Inland Revenue (Amendment) Ordinance, which allows Hong Kong to enter into tax information exchange agreements which are not attached to double taxation treaties. There appears to be some confusion about the numbering of the bill; there’s another Inland Revenue (Amendment) Ordinance, which has also previously been gazetted under the title of “No. 2 Ordinance”, but that one clearly is not the one under discussion, as it amends rates of tax & exemption thresholds and has nothing to do with information exchange
Anyway, the amendment bill consists of nine sections. Almost all of these are of the exact same form: adding, more or less verbosely, a phrase like “or arrangements for information exchange” everywhere that the phrase “arrangements for double taxation relief” already appears. There’s practically nothing worth quoting here, except for the amendments to the section on search warrants, which I will discuss a few paragraphs later.
What’s more important is what this bill does not amend: the procedures for information exchange described in the relevant subsidiary legislation, most notably the details which must be contained in a request for disclosure of information. Those details include the identity of the taxpayer, the name of the institution holding information about the taxpayer (e.g. the bank or brokerage where he holds an account, about whose balance & transactions a foreign government wishes to enquire). If the foreign government does not wish the taxpayer to be notified under § 5 of the information request (so that, for example, he can exercise his right under § 6 to ask for corrections to the information), it must also specify the reasons why not, which Hong Kong’s Inland Revenue Department will take into advisement when it makes its own decision on notification.
This means that the obvious tax law barriers to automatic information exchange under a FATCA Model 1 agreement remain in place: the IRS will not have any details about Hong Kong bank accounts except where taxpayers already disclosed them on Form 8938, and of course willful tax evaders — the people whom the U.S. government purports to be targeting with FATCA — are not likely to disclose such information. Of course, the amendments move part of the way towards permitting a Model 2 agreement, under which banks reach their own agreements with the IRS and upon request provide individual details to the U.S. via the local government — but there are also data privacy law barriers to either approach, which neither this tax amendment legislation nor any other current legislation make any effort to address.
Furthermore, there’s been no actual public confirmation of progress made in FATCA negotiations between Washington D.C. and either Hong Kong or Beijing; the only thing either Chinese or English media can report for sure is that discussions are ongoing, meaning they continue to fill up their column-inches with the same rank speculation we’ve been hearing for the past eighteen months. This is no doubt one of the reasons behind Treasury’s recent announcement of another half-year delay in FATCA’s effective date, even if they tried to spin that as reflecting a wonderful & enthusiastic international response from all their satrapies.
Search warrants & taxes other than income taxes
One matter of some interest: section 6 of the bill amended Inland Revenue Ordinance § 51B regarding the issuance of search warrants, so that it now reads:
|(1AA) Subsection (1) also applies to any tax (referred to in this subsection as the tax concerned) of a territory outside Hong Kong if—||(1AA) Subsection (1) also applies to any tax (referred to in this subsection as the tax concerned) of a territory outside Hong Kong if—|
|(a) arrangements having effect under section 49(1A) are made with the government of that territory; and||(a) arrangements having effect under section 49(1A) are made with the government of that territory; and|
|(b) the tax concerned is the subject of a provision of the arrangements that requires disclosure of information concerning tax of that territory, and, for the purposes of the application of subsection (1) under this subsection, a reference to a person’s income or profits chargeable to tax in subsection (1)(a) is to be construed as a reference to a person’s income or profits chargeable to the tax concerned, and a reference to a person’s liability for tax in subsection (1)(i) and (iii) is to be construed as a reference to a person’s liability for the tax concerned.||(b) the tax concerned is the subject of a provision of the arrangements that requires disclosure of information concerning tax of that territory, and, for the purposes of the application of subsection (1) under this subsection, a reference to a person’s income or profits chargeable to tax in subsection (1)(a) is to be construed as a reference to a person’s income or profits chargeable to the tax concerned or any other sums or values in respect of which a person is chargeable to the tax concerned, and a reference to a person’s liability for tax in subsection (1)(i) and (iii) is to be construed as a reference to a person’s liability for the tax concerned.|
This means that search warrants can be issued not just for information regarding assets on which income or profits tax could be imposed, but information regarding assets on which non-income taxes such as wealth taxes could be imposed. The driver behind this change is the multilateral demands of the OECD rather than the unilateral FATCA-related demands of the U.S., something that’s made even more clear when you read the speeches made by various Legislative Council members on the amendment bills — the most important of which I translate in the following section.
Likelihood of future amendments
The bill passed on 10 July contained amendments not just to the main Inland Revenue Ordinance but also to the subsidiary legislation on disclosure of information; if the Government had wanted to enable automatic information exchange, it certainly could have included such provisions in this bill, but in fact it did not do so. With this bill already passed and gazetted, any future amendment to the subsidiary legislation must be laid anew before the Legislative Council for its approval — a process which could take months even with broad support.
And there is hardly broad support for further amendments. Just before the third reading of this bill, Starry Lee, a member of the Executive Council (roughly equivalent to Canada’s Cabinet) as well as one of the rising stars of the largest party in the legislature — the pro-Beijing Democratic Alliance for the Betterment & Progress of Hong Kong (below, “DAB”) — made the following speech. I provide my own unofficial English translation below; it could be a couple of months before the official translation from the Hansard finally gets published.
The opinions expressed, of course, are only verifiably Lee’s own, but it’s highly unlikely that a major pro-Beijing legislator — especially one who knows she has a bright future ahead of her as long as she continues to toe the party line — would stand up and give a two-thousand word speech stating views which she knew to be direct opposed to the rest of the DAB or the folks in Zhongnanhai. (Certain less-charitable opposition commentators dispense with all the caveats and simply refer to the DAB as Beijing’s mouthpiece in the LegCo). Anyway, beginning at page 250 of the LegCo record of proceedings for 10 July 2013:
|李慧琼議員：主席，在2008年金融海嘯之後，多個西方國家都面臨嚴重的財政赤字，它們都千方百計增加財政收入，而不斷提高稅務交換 資料的廣度及深度，肯定是方向之一。||Hon. Starry Lee Wai-king: President, after the 2008 financial crisis, many Western countries faced serious financial deficits. They are all taking every possible measure to increase their fiscal revenues, and assuredly one of their directions is to increase continually the breadth and depth of tax information exchange.|
|相信大家還記得，2009年4月，在倫敦峰會上，20國集團同意打擊避稅天堂，OECD(經濟合作與發展組織(“經合組織”))隨即公布了3種名單，分別是黑名單、灰名單和白名單。當時，法國曾提出要把香港和澳門列入灰名單，亦即代表這些地區屬於“打擊避稅不足地區”。消息傳出後引起很大震盪，因為香港作為國際金融、貿易和航運中心，一旦被列入灰名單，會產生嚴重的後遺症。||I trust that everyone remembers, in April 2009, at the London Summit, delegations from twenty countries agreed to attack tax havens, and the OECD (Organization for Economic Cooperation and Development) then published three lists, namely a blacklist, a greylist, and a whitelist. At the time, France suggested that Hong Kong and Macau be placed on the greylist, which represented those jurisdictions which are “jurisdictions making insufficient efforts to attack tax evasion”. The news created a big shock after it came out, because if Hong Kong, an international finance, trade, and logistics centre, were to be greylisted, it could face serious complications.|
|後來，透過中央政府的協助，極力阻止本港被列入灰名單。結果，雖有其他某些地方被“染灰”，但本港卻避免跌入灰名單，為香港爭取了寶貴的時間，以便修改相關法例，回應國際社會的關注。||Afterwards, through the cooperation of the Central Government [ed.: Beijing], there was strenuous opposition to Hong Kong’s inclusion in the greylist. As a result, although certain other places were “painted grey”, Hong Kong avoided falling into the greylist, gaining valuable time for Hong Kong to amend the relevant ordinances in response to the attention from international society.|
|在2010年，政府修訂了《稅務條例》，令《經合組織收入及資本稅收協定範本》2004年版本中有關資料交換的條文，得以在香港落實。此舉實際上是讓稅務局可因應全面性協定夥伴提出的要求，收集和披露某些納稅人的資料，即使有關資料並不關乎本地稅務事宜。這種做法與國際標準接軌，而香港政府的努力亦獲得國際社會的認同。||In 2010, the Government amended the Inland Revenue Ordinance, allowing relevant provisions of the 2004 version of the OECD Model Convention for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital to be implemented in Hong Kong. This step in practise allowed the Inland Revenue Department to be able to meet requests submitted by partners with whom we have comprehensive agreements [ed.: for avoidance of double taxation, in contrast to agreements which solely cover transportation income], and to collect and disclose certain taxpayers’ information, even if the relevant information was not relevant to local tax matters. This approach accorded with international standards, and the efforts of the Hong Kong Government also received the approval of international society.|
|2011年10月，在經合組織有關稅務透明化及有效資料交換的全球論壇上通過了香港的評估報告，對香港致力提高稅務透明度的工作予以肯定。||In October 2011, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes adopted a Hong Kong assessment report, giving affirmation to Hong Kong’s work towards increasing tax transparency.|
|在法例修訂之後，由於香港採用了國際性的資料交換準則，對擴大本港全面性避免雙重課稅協定網絡因而大有幫助。據我瞭解，香港至今合共簽訂了29份全面性協定，而在法例修訂之前的2010年，香港只簽訂了5份全面性協定。||After the amendments to the Ordinance, because Hong Kong began to employ international information exchange standards, the expansion of Hong Kong’s network of comprehensive agreements for the avoidance of double taxation was greatly aided. As I understand, up to now Hong Kong has signed a total of 29 comprehensive agreements, whereas prior to the amendments in 2010 Hong Kong had only signed five comprehensive agreements.|
|到了最近，G8元首在北愛爾蘭召開峰會，與會者的其中一項共識就是聯手打擊跨境逃稅或跨境避稅，同時促請各國修改法例，令現在屬於合法的避稅行為有機會變成非法。雖然峰會提出的多項措施均未有列明具體細節，不過，外界預期9月在聖彼得堡舉行G20峰會時或會簽署正式協議，所以估計打擊避稅天堂的工作將陸續推展。||Most recently, the heads of the G8 held a summit in Northern Ireland, and one consensus among the participants was to cooperate in attacking cross-border tax avoidance and cross-border tax evasion, and at the same time urging countries to amend their laws to make presently-legal tax avoidance behaviour illegal. Although there have not been specified any concrete details about the measures proposed as the summit, outsiders expect that at the G20 Summit in Saint Petersburg in September a formal agreement may be signed, and therefore it is believed that the work towards attacking tax havens will continue to move forwards.|
|今次政府提出修訂《稅務條例》，就是避免香港被列入避稅天堂名單的第二波工作。因為最新的資料交換國際標準訂明，一個稅務管轄區與其他稅務管轄區應同時備有全面性協定和交換協定兩種資料交換工具。針對這個標準，全球論壇將於今年9月再進行第二階段評估，所以，在現時完成制定交換協定的法律框架，實屬十分重要。||The amendments to the Inland Revenue Ordinance presently submitted by the Government are the second stage of the work of avoiding Hong Kong being listed as a haven for tax evasion. Because of the new international standards on information exchange, one tax jurisdiction may at the same time have two kinds of tools for information exchange with other tax jurisdictions, namely comprehensive agreements and exchange agreements. Targeting this standard, the Global Forum will conduct its Phase 2 assessment this September, and therefore it is highly important at the present time to complete the establishment of the legal framework for exchange agreements.|
|可以預見，國際社會對稅務資料的交換只會不斷提高要求，亦會不斷收緊評核準則，相信香港日後將要面對一輪又一輪的評核。民建聯的立場是支持作出最低度的修訂，以符合資料交換制度的規定，令香港能夠通過不同階段的評估，避免被指控為避稅天堂。||It can be foreseen that international society’s demands for the the exchange of tax information will only continue to increase, and the assessment standard will continue to be tightened, and I trust that in future days Hong Kong will have to face round after round of assessments. The DAB’s position is to support the minimum level of amendment which meets the regulations of information exchange regimes, to allow Hong Kong to pass the various stages of assessments, and to avoid accusations of being a tax haven.|
|主席，在過往多次相關討論中，議員的基本立場大致相同，那就是在稅務資料交換這個問題上，我們沒有需要超英趕美。在國際社會的要求下，香港這個細小而開放的經濟體只需要在最後階段符合最低要求，避免跌入避稅天堂名單中。至於背後的理據，大家當然非常明白，那是因為香港稅率低，稅種少，在資料制度框架下，相信香港企業會不斷被要求提供資料，但香港向外要求提供資料的機會則相對較少。||President, in previous relevant discussions, the basic positions of honourable members have been similar, that is, with regards to the problem of tax information exchange, we have no need to “surpass England and pursue the U.S.” [ed.: a Great Leap Forward-era Maoist slogan urging increased steel production, which Lee quotes sarcastically here to satirise the attitudes of proponents of increased information exchange]. Under the demands of international society, Hong Kong, this small and open economy, only needs to adhere to the minimum standards at the last stage in order to avoid being listed as a tax haven. As for the rationale behind this, everyone surely is quite clear, that Hong Kong has low taxes and few types of taxes, and under an information exchange framework, no doubt Hong Kong businesses will be continually requested to provide information, whereas the chances for Hong Kong to request others to provide information will be comparatively small.|
|所以，民建聯認同政府今次提出的修訂建議，並認為它符合最低規定的要求，包括不會接納有關追溯性評稅及海外稅務調查的稅務資料要求。此外，政府亦承諾只會根據國際協定的條文及香港法律，披露所要求的有關資料。||Therefore, the DAB agrees with these suggested amendments proposed by the Government, and believes that they meet the minimum regulatory demands, including that they do not accept tax information demands relating to retrospective assessment of tax or overseas tax investigations. Aside from this, the Government should commit to disclosing relevant requested information only on the basis of international agreements and of Hong Kong law.|
|對於國際社會對提高稅務透明度、防止和打擊避稅的期望越來越高，香港社會尤其是商界及中小型企業必須提高警覺，並要有心理準備。因為在很多國家眼中，香港經常被視作避稅天堂，而這個想法的背後其實有兩大理由。第一，香港單獨執行地域管轄權，只對香港境內的個人收益和企業利潤徵稅，而內地對於外商投資又一直實行一系列免稅政策，以致如有任何香港公司的利潤主要在境外產生，便很容易形成了雙重免稅。第二，香港稅項較少，稅率較低，企業的所得稅率較其他國家低，加上香港不徵收利息稅、資本增值稅或遺產稅等，容易吸引大量外國資金流入。所以，為免香港成為國際社會的眼中釘或被視為不合作的稅務管轄區，香港有需要修改法例，配合國際稅務標準的基本要求。||With regards to increasing tax transparency in international society, and the increasing view towards preventing and combatting tax evasion, Hong Kong society, especially the business community and small & medium enterprises, must be increasingly vigilant, and must make psychological preparations. Because in the eyes of many countries, Hong Kong is commonly seen as a tax haven, and behind this way of thinking there are two main reasons. The first is that Hong Kong, as a separate territorial jurisdiction, only imposes tax on individuals’ income and corporations’ profits that arise in Hong Kong, and the mainland has implemented a series of policies of tax exemption for foreign investment, meaning that if any Hong Kong company’s profits arise primarily outside of Hong Kong, it is quite easy for double non-taxation to result. Second, Hong Kong’s taxes are few, and the tax rate is low, with a lower rate of corporations tax than other countries, and on top of that Hong Kong does not impose a dividends tax , a capital gains tax, or an estate tax, making it easy to attract the influx of large amounts of foreign capital. Therefore, in order to avoid Hong Kong becoming a thorn in the side [ed.: literally, a "nail in the eye"] of international society or being seen as an uncooperative tax jurisdiction, Hong Kong must amend its laws to meet the basic requirements of international tax standards.|
|既然香港要履行國際社會責任，配合國際稅務標準，民建聯促請稅務局為香港納稅人把好這一關卡。對於其他地區提出的資料交換要求，取態必須從嚴，只披露所要求的最低限度資料，同時必須確保所交換的資料只向有關當局披露，從而保障納稅人的利益，以及回應企業的憂慮。||Since Hong Kong must fulfill its responsibilities in international society, and adhere to international taxation standards, the DAB urges the Inland Revenue Department to draw a line [ed.: literally, "bar the gate well"] on behalf of Hong Kong taxpayers. With regards to information exchange demands submitted by other territories, it should take a strict attitude, and disclose only the minimum standard of requested information; at the same it must ensure that the information that is exchanged will only be disclosed to the relevant authorities, and to protect the interests of taxpayers, and respond to the concerns of businesses.|
|最後，雖然民建聯支持今天的法例修訂建議，但考慮到政府與其他地方簽訂全面性避免雙重徵稅協定，是更能促進香港商業活動的措施，我們促請當局將日後的工作重點，放在擴展香港與主要貿易和投資夥伴的全面性協定網絡之上。主席，我謹此陳辭。||Finally, although the DAB supports today’s proposed amendments, but considering that Hong Kong’s signing with other governments of comprehensive agreements for the avoidance of double taxation are a better measure to promote commercial activities in Hong Kong, we urge the authorities in their future work to place emphasis on expanding Hong Kong’s network of comprehensive agreements with our major trade and investment partners. President, that is all.|
If you scroll up a few pages in that PDF file you can see a legislator named Kenneth Leung making a rather different speech, criticising the amendments for being insufficiently far-reaching. He even spoke in English — for the benefit of international observers, rather than the entirely natively-Chinese-speaking Legislative Council and the 95% of its voters who are native Chinese speakers — so that there’s no need for me to translate his comments. Leung is, quite literally, the Member from the Compliance-Industrial Complex (for the Canadians in the audience, imagine if H&R Block had the power to make appointments to your Senate), and unsurprisingly, he is in favour of passing all sorts of ever-more-complex information-exchange requirements which will result in enhanced consulting profits for his once-and-future employers at the expense of workers, employers, and consumers in other sectors.
In contrast, legislators like Lee who were actually elected by popular suffrage are far more reserved. Leung may claim affiliation with the opposition pro-democracy camp, but he holds his seat in our seventy-person legislature thanks to the decidedly undemocratic functional constituency system, and (as the glowing auto-hagiography on Wikipedia fails to make clear) the voters who supported him amount to about 0.1% of Hong Kong’s population. Starry Lee, in contrast, received 277,143 votes, a bit shy of four percent of the population. (Some of those alleged voters were probably victims of identity theft, emigrants pretending they still lived in Hong Kong, or illiterate seniors bribed with lunchboxes, but Lee still has far more supporters than Leung.)
We can see the basic pattern repeating itself: the FATCA fanatics do not have democracy on their side anywhere in the world. This of course is why they bypassed democracy in the United States by inserting FATCA as an 11th-hour amendment into a giant bill no one read (after repeatedly witnessing its failure as a standalone bill), why they had to follow that up with their unconstitutional claims that Intergovernmental Agreements don’t require the advice & consent of the Senate, and why their chief bulldog in the Hong Kong Legislative Council is not any one of the numerous popularly-elected trade unionists in the pro-government camp or social democrats in the opposition camp who are concerned about income inequality, but rather a technocrat who could never have been returned under universal suffrage.
But in either case, both Lee and Leung’s speeches agree on one point: the purpose of the Inland Revenue (Amendment) (No. 2) Ordinance is to fulfill the requirements of the OECD Global Forum’s Phase 2 review, not to comply with FATCA. The consensus in Hong Kong is to meet international standards, not to surrender to unilateral and self-interested demands from the United States to impose costs on non-U.S. financial institutions with one hand while striving with the other hand to exempt U.S. financial institutions from those same costs.