Hong Kong Backs Heightened Tax Transparency and Fight Against Tax Evasion: An Article Authored by Paul Oliveira, CPA from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island

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Hong Kong Backs Heightened Tax Transparency and Fight Against Tax Evasion

posted Dec 4, 2014 by Paul Oliveira, CPA

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Hong Kong indicated it will support the new automatic exchange of tax information to improve tax transparency and fight cross-border tax evasion, overseen by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

Under the common reporting standard, governments obtain detailed account information from financial institutions in their jurisdictions and then annually exchange that data with the account holders’ residence jurisdictions.

The Hong Kong Secretary for Financial Services and the Treasury, Professor K C Chan, said, “It is crucial for Hong Kong to adopt the latest global standard on tax transparency in order to maintain our international reputation and competitiveness as an international financial and business centre.”

Hong Kong says it is committed to implementing the new global standard with partners that can meet relevant requirements on protection of privacy and confidentiality of information and ensure proper use of the data.

Previous Hong Kong moves toward the standard

Over the past years, Hong Kong has moved toward meeting the evolving international standard on exchange of information by:

  • Removing the domestic tax interest requirement in conducting exchange of information under comprehensive double taxation avoidance (DTA) agreements, and
  • Putting in place the legal framework to enter into tax information exchange agreements (TIEAs) with other jurisdictions. Hong Kong’s existing legal framework allows for such exchanges only under either DTAs or TIEAs.

Looking ahead

Professor Chan added, “Our international obligations aside, it remains the government’s policy priority to expand our network of DTAs with Hong Kong’s major trading and investment partners.”

Hong Kong has so far concluded 30 DTAs, 11 of which are signed with its top 20 trading partners. DTA discussions with other jurisdictions are in the pipeline, including Germany, Russia, India, Saudi Arabia, South Africa, Finland and Latvia.

According to the latest timeline, the first automatic information exchanges are to start by the end of 2018.

The standard is overseen by the Global Forum, the multilateral framework within which economies inside and outside the Organisation of Economic Cooperation and Development conduct their work in the area of transparency and information exchange.

Sidebar: Switzerland plans major corporate tax reforms

The Swiss federal government introduced draft tax legislation that would abolish ring fencing in favor of measures that are in line with international standards.

The main objective of the reforms, which likely will become effective January 1, 2019, is to enhance Switzerland’s attractiveness as a location for multinational companies.

Switzerland allows its cantons, or states, to compete for multinationals’ business by taxing their foreign profits at a lower rate than domestic earnings, a practice known as “ring fencing.” Under the newly announced proposals, these cantonal tax privileges would be abolished.

The reform would phase out all special corporate tax regimes and include other measures such as:

  • Introducing a patent box regime that would apply to all income arising from the exploitation and use of patents,
  • Implementing a notional interest deduction on equity,
  • Allowing a step-up (including self-created goodwill) for direct federal and cantonal/communal tax purposes upon the migration of a company to Switzerland and for companies transitioning out of tax privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation, 
  • Permitting a step-up (including self-created goodwill) for cantonal/communal tax extending the seven-year loss carryforward period to an indefinite period, with 20% of the profit as the minimum tax base, and
  • Allowing parent companies to assume losses from Swiss and foreign subsidiaries that cannot be used at the subsidiary level.

To learn more contact our International Tax Services Group.