EU blacklists Hong Kong as ‘non-cooperative tax jurisdiction’

Kenneth Leung (PC,F-Accountancy) explains what he – and the government – are doing to get Hong Kong off the EU’s undeserved blacklisting as a “non-cooperative tax jurisdiction”.

Why has Hong Kong been placed on this list?

There are ten European countries that have named Hong Kong as a tax haven. This list is not based on any objective criteria, it’s just a kind of perception as a result of a survey conducted by the European Union on its member countries. These “non-cooperative jurisdictions” include 30 countries. These countries such as Mauritius, Liberia, Seychelles, Brunei are all truly offshore [tax havens]. The fact that Hong Kong is named along with these countries is a very peculiar thing.

THIS LIST IS NOT BASED ON ANY OBJECTIVE CRITERIA.

Other than Greece and Spain, the rest of the ten European countries are mostly relatively small European countries. [The list includes: Bulgaria, Croatia, Estonia, Greece, Latvia, Lithuania, Poland, Portugal, Spain, and Italy]

For Spain, Portugal and Greece, I believe it could be really because Hong Kong’s tax rates are so low, they believe we might have taken business opportunities from them. The others are really second or third tier European countries, and for those it is simply an issue of perception. They might believe Hong Kong is a tax-less place.

Also our territorial based taxation (the fact that we don’t tax overseas income), gives us a comparatively large advantage over other European countries. These factors are very attractive to investors.

So they think, “Hong Kong is taking away their business, their profits, their income.” It may not be a rational perception but I believe this is what they think.

These are not deliberate tax policies we put out to artificially create an opportunity for tax evasion. It’s instead this is a model we have implemented for more than 40 years.

In fact the Hong Kong government has very severe punishments for tax evasion. It’s a criminal offence and there are prosecutions each year.

What impact has this had on Hong Kong?

It is detrimental to our reputation, but practically we haven’t seen any adverse tax consequences. But for some companies looking to invest in Hong Kong, especially for those in the EU, this makes it more difficult.

IT IS DETRIMENTAL TO OUR REPUTATION, BUT PRACTICALLY WE HAVEN’T SEEN ANY ADVERSE TAX CONSEQUENCES.

For a multinational who must go through internal approval procedures, under due diligence [requirements], there would be a need to justify why they might come to Hong Kong to invest. Questions might arise to whether it may be part of a tax avoidance scheme given Hong Kong is on the blacklist. This could ultimately affect the rate of investment from the EU. It’s not a matter of paperwork or bureaucracy.

Companies that have strict risk management policies may have reservations about investing into Hong Kong, Because they don’t want to be involved or accused of being part of a tax avoidance scheme, so internally they might not approve the investment plan, despite it being a good investment and is not part of a tax avoidance scheme. So this becomes a problem.

I haven’t seen a direct impact such as a penalty imposed on Hong Kong by the EU.

I’ve spoken to the EU commissioner in Hong Kong as a legislator, and he explained that this is not a very objective list with clear criteria, but the results merely came from suggestions by member countries. It’s not that we haven’t had enough Double Tax agreements or that there are any law deficiencies in Hong Kong. It is merely based on perception of the individual country.

So after I asked him he showed me these correspondences, I’ve also spoken to Professor Chan [Secretary for Financial Services and the Treasury] on the phone, and they will liaise with our staff in the Brussels office, who will be responsible for speaking with the EU member states.

BETWEEN 2016 AND 2018 WE ONLY HAVE A VERY SHORT TIME. WE MIGHT NOT BE ABLE TO FULFILL THE PROMISE WE’VE MADE AS A MEMBER OF THE INTERNATIONAL COMMUNITY.

Our staff in Brussels will have to speak to each finance minister and tell them we would like to be removed from the list. Those countries who have Double Tax Agreements with Hong Kong will be easier to speak to. If you’ve fulfilled those transparency requirements and fulfill other operation provisions, then it should be enough. But with other countries such as Croatia, or Poland, whom we don’t have double tax agreements with, this becomes much more complicated. It’s not because we aren’t transparent enough, or we haven’t been cooperating.

Another thing that is related, is the automatic exchange of information (AEOI) regime, which is a piece of legislation Hong Kong needs to pass and implement before 2018. That is a promise we made to the international community. The Government is pushing myself and LegCo, and in January next year they will table the drafted bill. The crucial question is whether we are able to complete the deliberation process before mid July. If we can’t do it before mid-July, then the whole process would have to restart in October next year when it will be a new session of the LegCo [after elections].

Between 2016 and 2018 we only have a very short time. We might not be able to fulfill the promise we’ve made as a member of the international community.

If we failed to fulfill this agreement, we would appear to be even more of a non-cooperative jurisdiction.

What is the timetable for this to be implemented?

This first action of exchange needs to take place before the end of 2018, after the legislation passes in 2016, there will still be many changes to systems that need to be installed to enable financial institutions to automatically exchange information.

IF WE DON’T FULFILL OUR PROMISE, THERE COULD BE SOME VERY DIRE CONSEQUENCES.

The software is a very crucial mechanism, and they need to test and approve this software. Every financial institution will need to do so, and Inland Revenue will collect this information from the financial institutions and transfer them to the overseas tax authority. So both financial institutions and Inland Revenue will need time to test the software and the platform. This could take from a few months to a full year.

So the time is fairly tight. If we don’t fulfill our promise, there could be some very dire consequences.

Will there be any push-back in LegCo?

My pan-dem colleagues are not very interested in this. The business community have a lot of reservations towards this system. Even though they might understand the stakes. This is ultimately against their interests, so they might be skeptical about why they might need to send all this information to a foreign country.

How soon can Hong Kong be taken off the list?

If some countries are willing to say they don’t want to include Hong Kong [in the black list] they could inform the Commission to do it immediately. But how long will it take the individual countries to make a decision, we don’t know. It could be a few months, or even a year.

Which Government departments are involved in this?

It’s basically just the Financial Services and the Treasury Bureau (FSTB) and our office in Brussels. Local diplomats don’t have influence on the Finance ministry.

What more can the Government do?

Lobbying. It is absolutely a diplomatic matter.

We can’t change our tax rate. We can’t change our intrinsic tax system either. Our territorial system is part of our character.

Ultimately, whether the implementation of the AEOI change those countries perception of Hong Kong, I don’t think that’s the most important.

MOST OF ALL THE HONG KONG GOVERNMENT HAS TO CONTINUE TO LOBBY THE RELEVANT COUNTRIES.

For second tier countries, our low tax rate and territorial taxing system may be perceived as a threat. So we feel that, of course the AEOI must be completed in a timely manner, but most of all the Hong Kong government has to continue to lobby the relevant countries. and of course, Hong Kong Inland Revenue, and other related authorities must continue to maintain strict implementation of systems in place such as anti-money laundering, tax evasion prosecutions, etc.

Another possibility, we might need to rely on the Central government to influence these countries to swiftly review their lists.

In 2008, Hong Kong avoided being placed on a watchlist thanks to influence from the Central Government.

I don’t know why they haven’t done so this time. Perhaps they’ve chosen to ignore us after the political reform saga. But that’s just speculation.

PERHAPS THEY’VE CHOSEN TO IGNORE US AFTER THE POLITICAL REFORM SAGA. BUT THAT’S JUST SPECULATION.

Although, it doesn’t appear like Hong Kong has asked them to either. Perhaps Hong Kong was taken by surprise, because we didn’t expect to be on the list.

What does the Accounting industry think of this?

Of course I must also cater to my constituency. Many of them are tax practitioners, and they are worried about Hong Kong being labelled and end up being treated unfairly when investors need to invest in Hong Kong, or when Chinese companies want to invest into Europe through Hong Kong. We want to be taken off the list and given a fair treatment; that is the least we want.

The full list of the blacklistees is: Andorra, Liechtenstein, Guernsey, Monaco, Mauritius, Liberia, Seychelles, Brunei, Hong Kong, Maldives, Cook Islands, Nauru, Niue, Marshall Islands, Vanuatu, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Montserrat, Panama, St Vincent and the Grenadines, St Kitts and Nevis, Turks and Caicos, US Virgin Islands.