BrianGarst.com

Earlier this year Hong Kong’s Inland Revenue rules were amended to allow for stand-alone Tax Information Exchange Agreements (TIEAs) with other jurisdictions even in the absence of a bilateral treaty. The change was made at the behest of the Organization for Economic Cooperation and Development, whose Global Forum on Transparency and Exchange of Tax Information is the self-appointed judge, jury and executioner for global tax policy. The OECD’s “recommendation” for Hong Kong came with the threat of being labeled an “uncooperative jurisdiction” for failure to comply, and so the Legislative Council dutifully amended the rules in hopes of salvaging Hong Kong’s fiscal sovereignty. But the joke’s on them, as the OECD is already returning with a new list of demands.

In a letter addressing concerns about the new TIEA rules, Hong Kong’s Financial Services and the Treasury Bureau made assurances to the Legislative Council regarding the protection of taxpayer privacy. The letter noted that Hong Kong would “only exchange information upon receipt of requests and no information will be exchanged on an automatic or spontaneous basis,” and that there would be “no fishing expeditions.” The letter, in other words, recognized that the automatic and routine transmission of bulk taxpayer data, potentially even to the world’s most vile governments, is a threat to basic financial privacy and human rights.

Unfortunately, if Hong Kong wishes to continue meeting OECD demands, it will have to eliminate privacy protections and violate these very assurances almost immediately after having made them.

There was ample reason to question the decision to placate the OECD at the time. Even though it was not yet being demanded directly, the automatic exchange of all taxpayer information between nations, and without the need for any suspicion of wrong doing, was already receiving more than just lip-service from international bureaucracies. The April Communiqué from the G20 Finance Ministers and Central Bank Governors welcomed “progress made towards automatic exchange of information,” noting further that it “is expected to be the standard.” This means that Hong Kong will be expected to routinely report all the information of foreign nationals to their home governments, including information that Hong Kong does not typically collect because it is not otherwise taxed. Hong Kong and other nations will be expected to bear the burden of collecting information they don’t need in order to help high-tax nations with bloated budgets track down every last potential taxpayer to squeeze.

Just as the G20 warned, automatic exchange is indeed now being asserted as the new standard. The group claims that it will be presenting “a new single global standard for automatic exchange of information by February 2014 and to finalizing technical modalities of effective automatic exchange by mid- 2014.” Following suit, the OECD’s Global Forum recently met in Jakarta, Indonesia, where a new “Automatic Exchange of Information (AEOI) Group” was established to “prepare the move towards AEOI implementation.”

Like the OECD’s prior standards, demands to implement automatic exchange are likely to come with the threat of blacklisting, sanctions, and other coercive tactics. Hong Kong established itself as an economic powerhouse in part by attracting investment through smart fiscal policy. The Fraser Institute’s 2013 Economic Freedom of the World Report gave Hong Kong its top rating, as did the Heritage Foundation in its Index of Economic Freedom. In fact, Hong Kong has sat atop the Heritage ranking for 19 straight years, an impressive feat that explains why it persistently performs as one of the world’s fastest growing and most competitive economies.

The major welfare states of the OECD, on the other hand, have seen their economies stagnate. High taxes combined with aggressive, overbearing enforcement efforts have resulted in poor economic performance. But rather than improve their own policies, politicians from these nations have abused the power of the OECD to pressure competitive nations into adopting uncompetitive policies.

Facing Hong Kong politicians is a familiar predicament. The global tax bureaucracy is determined to implement policies that benefit the global political class at the expense of taxpayers   and domestic economies, and are further prepared to punish jurisdictions that choose not to comply with their demands. But the policies demanded by the OECD conflict with the sovereign interests of Hong Kong and its citizens.

The OECD has relied upon the coerced cooperation of targeted jurisdictions to achieve their goals, but this appeasement has so far produced nothing but new demands and continued threats of punishment. There is indeed a risk for standing up to the OECD and asserting the sovereign right to defend financial privacy and maintain pro-growth policies, but the alternative approach of constantly bending over backwards to accommodate the global bullies in hopes that they will go away has proven ineffective.

Perhaps it is time for a new approach, and for Hong Kong and similarly targeted jurisdictions to band together to tell the OECD that the interests of a select group of statist tax collectors will no longer be allowed to override those of taxpayers throughout the world.

Hong Kong OECD tax competition