Hong Kong – International Automatic Exchange of Information comes into effect
Monday 25 July 2016
What is the issue?
On 22 June 2016, the Inland Revenue (Amendment) (No.3) Ordinance 2016 was passed, with a view to implementing Automatic Exchange of Information ('AEOI') under the Common Reporting Standard ('CRS').
In short, CRS is an international reporting regime initiated by the OECD that aims to help tax authorities tackle tax evasion, which happens when people do not declare their income or gains arising from assets/investments held overseas. Like the US Foreign Account Tax Compliance Act ('FATCA'), CRS is the OECD’s equivalent regulation. It imposes obligations on financial institutions ('FIs') to collect and report detailed information on their clients’ offshore financial accounts to their local tax authorities, which, in turn, will exchange the intelligence with tax authorities in the jurisdiction(s) where the respective account-holders are tax residents.
To date, more than 100 countries (including the traditional 'tax haven' jurisdictions such as the British Virgin Islands and the Cayman Islands) have either adopted, or have announced that they will adopt, CRS in respect of which information will be exchanged on a formal bilateral basis. As such, most banks, custodial institutions, specified insurance companies and trustees globally are in the process of complying with CRS.
In the event of non-co-operation, each jurisdiction has the right to enforce its own penalties (to be clarified in local legislation). The FI may also consider the entity’s account as 'undocumented' (i.e., the tax residency cannot be determined), which could potentially lead to information being disclosed by the relevant tax authorities to all CRS-participating countries around the world.
The reportable jurisdictions will be the countries with which Hong Kong has entered into (1) a comprehensive double tax agreement ('DTA') and a tax information exchange agreement ('TIEA') and (2) a competent authority agreement for AEOI.
Information of tax residents to be furnished and exchanged under AEOI return
CRS is based upon tax residence as opposed to citizenship under FATCA and, unlike FATCA, CRS does not provide for exemptions to certain low-risk financial institutions, and does not provide the option of electing a de minimis threshold for individual account-holders. Therefore, all of a reporting FI’s individual accounts are subject to review and potential reporting under CRS. In this regard, all of the FIs involved will have their own specific reporting obligations, based on the local rules that the governments have put in place in implementing CRS in their own respective jurisdictions.
The information to be furnished by reporting FIs in respect of a reportable account will generally include the following:
- the name, address, jurisdiction of residence, tax identification number and the date and place of birth (for individuals) of the account-holder
- the account number(s)
- the account balance or value as at the end of the relevant information period
- income (e.g., interest, dividends, proceeds from the sale of financial assets) paid to the account during the relevant information period
Hong Kong will apply CRS from 1 January 2017. More specifically, FIs in Hong Kong will be required to identify and report the information of financial accounts held by tax residents of reportable jurisdictions to the Hong Kong Inland Revenue Department (“IRD”) on an annual basis. FIs are expected to register with the IRD by September 2017, and to file the first AEOI returns with the IRD by May 2018. The first exchange of information with Hong Kong’s relevant treaty partners is expected to occur by the end of 2018.
This provides a window of opportunity to prepare for the implementation of CRS. Our tax team can assist you in this matter by conducting a tax 'health check' to identify the reportable accounts and ensure that the relevant overseas-held assets and/or holding structures are tax-compliant. Where needed, we can help you to regularise historical tax issues (e.g., where errors may have been made, for example if you have any undeclared overseas assets or undeclared income that was previously received, transferred or deposited). In addition to CRS related work, we can also advise you on how to restructure your cross border investments or businesses, or to revisit your residency status, with a view to optimizing the efficiency of the current structure(s).
Appendix one: Reportable jurisdictions which have signed comprehensive double tax agreements ('CDTAs') with Hong Kong
Austria, Belgium, Brunei. Canada, Czech Republic, France, Guernsey, Hungary, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Luxembourg, Mainland China, Malaysia, Malta, Mexico, Netherlands, New Zealand, Portugal, Qatar, Romania, Russia, South Africa, Spain, Switzerland, Thailand, UAE, United Kingdom, Vietnam.
Appendix two: Reportable jurisdictions which have signed tax information exchange agreements ('TIEAs') with Hong Kong
Denmark, Faroe Islands, Greenland, Iceland, Norway, Sweden, United States.