News Flash
Hong Kong Tax
Hong Kong is NOT a noncooperative tax jurisdiction
June 2015
Issue 7
In brief
On 17 June 2015, the European Commission (EC) published a list of third country (i.e. non-EU) noncooperative tax jurisdictions (the pan-EU blacklist) together with its Action Plan1 as part of its 2015
Work Programme2 to fundamentally reform the corporate taxation in the European Union (EU). The
pan-EU blacklist consists of 30 jurisdictions, including Hong Kong. However, it is not absolutely clear as
to the criteria upon which Hong Kong is included in the pan-EU blacklist and what the consequences are
for being included in the list.
Indeed, there are various grounds to support that Hong Kong is not a non-cooperative jurisdiction or a
harmful tax regime. The Organisation for Economic Co-operation and Development (OECD) has
regarded Hong Kong as a largely compliant jurisdiction in the Peer Reviews conducted by the Global
Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) and
acknowledged Hong Kong’s commitment to implement the automatic exchange of information (AEOI).
In addition, many of the factors identified by the previous work of the OECD on harmful preferential tax
regime are not present in the Hong Kong tax regime.
The above, together with Hong Kong’s continuous effort in expanding its networks of tax treaty or tax
information exchange agreement (TIEA) and maintaining an ongoing communication with the
international community to keep them abreast of Hong Kong’s commitments and efforts on tax cooperation, should help defending Hong Kong as a tax cooperative jurisdiction.
International investors/multinational companies using Hong Kong as an investment holding/
financing/licensing location should review and assess their current structures/arrangements and be
prepared to demonstrate that the Hong Kong company is set up with commercially justifiable reasons,
there is sufficient substance in the Hong Kong company, and adequate supporting documentation is in
place to substantiate the proper transfer pricing policies for the related party transactions conducted by
the Hong Kong company.
In detail
The EC’s Action Plan and
pan-EU blacklist
As part of the EC’s 2015 Work
Programme to drive changes to
deliver jobs, growth and
investment within the EU and
further to the Tax Transparency
Package3 released by the EC in
March 2015, the EC presented
its Action plan to combat tax
evasion and tax fraud and move
to a fairer approach to taxation
on 17 June 2015. Published
together with the Action Plan
was a pan-EU blacklist
consisting of 30 noncooperative tax jurisdictions, all
of which are non-EU members.
Hong Kong is one of the
jurisdictions on the list.
The EC’s Action Plan covers five
key actions, one of which is to
further boost tax transparency
within the EU as well as among
other non-EU countries. The
pan-EU blacklist was published
as one of the measures under
this action to increase
transparency. The aim of the
pan-EU blacklist is to build a
common approach to
identifying and dealing with
non-cooperative tax
jurisdictions, which would
create a strong EU stance
against these jurisdictions.
The pan-EU blacklist was
compiled from the EU Member
States' independent national
blacklists. The jurisdictions
included on the list were
identified by at least 10
Member States as noncooperative jurisdiction in their
national blacklists. A variety of
criteria were used by the
Member States to identify the
non-cooperative jurisdictions,
including (1) lack of
www.pwchk.com
News Flash — Hong Kong Tax
transparency and exchange of
information, (2) the presence of
harmful tax measures and (3) the use
of a low or no tax rate.
Hong Kong is included in the pan-EU
blacklist because it is currently on the
blacklists of Bulgaria, Croatia, Estonia,
Greece, Italy, Latvia, Lithuania,
Poland, Portugal and Spain. Among
these countries, Hong Kong has signed
tax treaties with Italy, Portugal and
Spain. The tax treaties with Portugal
and Spain have been effective since
2013 whereas the one with Italy is still
in the process of ratification. All three
tax treaties adopt the exchange of
information article of 2004 OECD
version.
Going forward, the EC will amend the
pan-EU blacklist periodically to reflect
changes to the Member States' own
national blacklists.
Possible consequences and
follow-up actions
The EC’s Action Plan does not
mention any concrete countermeasures that will be taken against
those non-cooperative jurisdictions in
the pan-EU blacklist. However, the
following follow-up actions are stated
in the Action Plan:
1. Further work in screening third
countries for compliance with tax
good governance standards should
be performed on the basis of the
list. The screening should start
with the jurisdictions that appear
most frequently on Member States'
blacklists, with a view to assisting
them in improving their good
governance standards. The EC is
ready to support Member States in
this work, which should be
completed within 24 months.
2. As a second step, the EC is willing
to coordinate possible countermeasures towards non-cooperative
tax jurisdictions to address
situations of non-compliance with
good governance principle in tax
matters.
Response of the HKSAR
Government
The HKSAR Government promptly
issued a press release on 18 June
20154 as a response to the inclusion of
Hong Kong in the pan-EU blacklist by
the EC.
The HKSAR Government expressed its
regret over the inclusion. It mentioned
that it was puzzled and very
disappointed to note that the EC has
2
regarded Hong Kong as non-tax
cooperative. The press release also
stated that Hong Kong has been
denied any opportunity to comment
on or clarify its position before EC's
proposed blacklisting. The listing was
therefore unilateral and procedurally
unfair.
The HKSAR Government strongly
urged the EC to review the pan-EU
blacklist with the Member States in
order to reflect the latest development
of Hong Kong's tax co-operation with
those Member States. The HKSAR
Government would also continue the
dialogue with the EU and its Member
States so that they are kept abreast of
Hong Kong's commitments and efforts
on tax co-operation.
Response of the OECD
The OECD has also expressed its
concerns about the pan-EU blacklist.
An open letter was jointly issued by
the Director of the OECD Centre for
Tax Policy and Administration and the
Head of the Global Forum Secretariat
to 126 members of the OECD Global
Forum in relation to the pan-EU
blacklist5.
The OECD stated that the EU
representatives have confirmed that it
is not the EC’s intent to establish a
separate list of the so-called noncooperative tax jurisdictions. Rather,
the pan-EU blacklist is a product from
an exercise of compiling a pan-EU list
of non-cooperative tax jurisdictions
based on the existing independent
national lists of the Member States.
The letter also clarified that the EC
supports a clear link between
compliance with the Global Forum
standard and inclusion on a national
blacklist.
However, the OECD noticed that a
number of jurisdictions identified in
the pan-EU blacklist are either fully or
largely compliant with the Global
Forum standard and have committed
to AEOI, and even as early adopters in
some cases. The OECD therefore
confirmed that these jurisdictions are
cooperative and casted doubt on how a
jurisdiction’s compliance with the
Global Forum standard is factored
into either the national blacklists or
the pan-EU blacklist.
Implications of the pan-EU
blacklist for Hong Kong
Indeed, there are various grounds to
support that Hong Kong is not a noncooperative tax jurisdictions.
In terms of tax transparency, Hong
Kong underwent Phase 1 and Phase 2
Peer Reviews conducted by the OECD
Global Forum and has been given an
overall ranking of "largely compliant"6.
Hong Kong has also committed to
implement AEOI by the end of 2018.
As far as harmful tax practices are
concerned, Hong Kong only has
limited tax incentives and those
incentives are not "harmful" in the
sense that they do not possess many of
the factors identified by the previous
work of the OECD on harmful
preferential tax regime (e.g. those tax
incentives are not ring-fenced from
the domestic economy, do not lack
transparency in terms of their details
and application and do not encourage
operations or arrangements that are
purely tax-driven and involve no
substantial activities).
In addition, the current statutory
profits tax rate of Hong Kong (i.e.
16.5%) is not particularly low as
compared to the other jurisdictions in
the Asian region, especially when the
concessionary tax rates and/or special
tax incentives (if any) available in
some of these jurisdictions are taken
into account in coming up with the
effective tax rates in those
jurisdictions.
The above, together with Hong Kong’s
continuous effort in concluding more
tax treaties/TIEAs with other
countries and maintaining an ongoing
dialogue with the international
community (including the EU) to keep
them abreast of Hong Kong’s
commitments and efforts on tax cooperation, should help defending
Hong Kong as a tax cooperative
jurisdiction.
The takeaway
It is astonishing to see Hong Kong is
included in the pan-EU blacklist
despite of the efforts that the HKSAR
Government, in particular its fiscal
authorities, has put in international
tax co-operation.
On the positive side, it should serve as
a strong reminder that Hong Kong
needs to stay vigilant and take every
possible step to fend off any potential
labeling as a tax haven or an
uncooperative tax jurisdiction. That is
essential for Hong Kong to be a true
international financial center.
Through more thorough and timely
communication with the EC and its
Member States and with the solid
evidence of the work done, we believe
PwC
News Flash — Hong Kong Tax
Hong Kong should be able to be
removed from the pan-EU blacklist.
For international investors/
multinational companies using Hong
Kong as an investment holding/
financing/licensing location, they
should review and assess their current
structures/arrangements in light of
the following areas:



3
whether there is sufficient
substance of the company in Hong
Kong;
whether there is justifiable
commercial reason for setting up
the company in Hong Kong and
that tax avoidance/treaty shopping
is not the main purpose of
establishing the Hong Kong
company; and
whether adequate supporting
documentation is in place to
substantiate that the Hong Kong
company's related party
transactions are conducted on an
arm's length basis and that
adequate profits have been
attributed to the company in HK
from a transfer pricing perspective.
Such actions by international
investors/multinational companies are
also in line with the overall theme of
the OECD’s Base Erosion and Profit
Shifting project, namely tax should be
imposed in the place where economic
activities are performed and value is
created.
Endnotes
1. Please refer to the following links for
the EC’s press release on the Action
Plan and the EU blacklist issued on 17
June 2015:
http://europa.eu/rapid/pressrelease_IP-15-5188_en.htm
http://ec.europa.eu/taxation_customs
/taxation/gen_info/good_governance_
matters/lists_of_countries/index_en.h
tm
2. Please refer to the following link for
more details of the 2015 Work
Programme adopted by the EC:
http://europa.eu/rapid/pressrelease_IP-14-2703_en.htm
3. Please refer to the following link for
more details of the Tax Transparency
Package presented by the EC in March
2015: http://europa.eu/rapid/pressrelease_IP-15-4610_en.htm
4. Please refer to this link for the press
release issued by the HKSAR
Government on the EU blacklist:
http://www.info.gov.hk/gia/general/2
01506/18/P201506180929.htm
5. Please refer to this link for the open
letter issued by the OECD to the Global
Forum members in relation to the EU
blacklist:
http://www.oecd.org/tax/transparency
/eucommissionsannouncementonnoncooperativejurisdictionslettertoglobalfo
rummembers.htm
6. Please refer to our Hong Kong Tax
News Flash, January 2014, Issue 1 for
more details:
http://www.pwchk.com/home/eng/hk
tax_news_jan2014_1.html
PwC
News Flash — Hong Kong Tax
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact a member of PwC’s Hong Kong
Corporate Tax Team:
Reynold Hung
+852 2289 3604
[email protected]
Oscar Lau
+852 2289 5603
[email protected]
Jeremy Choi
+852 2289 3608
[email protected]
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specific to your circumstances from your usual PwC’s client service team or your other tax advisers. The materials contained in this publication were
assembled on 25 June 2015 and were based on the law enforceable and information available at that time.
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[email protected]
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