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Automatic Exchange of Financial Account Information in Tax Matters in Hong Kong

2015-07-31

Exchange of Tax Information at Global Level

In September 2013, the Group of Twenty Finance Ministers and Central Bank Governors fully endorsed the proposal by the Organisation for Economic Cooperation and Development (“OECD”) for a global model of automatic exchange of tax information. In July 2014, the OECD Council released the Standard for Automatic Exchange of Financial Information in Tax Matters (the “AEOI Standard”) calling on governments to obtain non-resident financial account information from their financial institutions (“FIs”) and exchange such information with jurisdictions of the account holders’ country of residence on annual basis. 

In September 2014, the Hong Kong Government (the “Government”) indicated to the Global Forum on Transparency and Exchange of Information for Tax Purposes[1] (the “Global Forum”) its commitment to implement the new global standard of automatic exchange of financial account information (“AEOI”).

The AEOI Standard

The gist of the AEOI Standard is that financial account information is collected in a systematic and periodic manner in the source jurisdiction through reporting by their FIs and such information is automatically transmitted by the source jurisdiction to the jurisdiction of residence of account holders on an annual basis. 

Key components of the AEOI Standard

The AEOI Standard is divided into two parts, namely:

1.       the Model Competent Authority Agreement (“Model CAA”) which is an agreement between competent authorities (typically the tax authorities) in different jurisdictions and provides legal basis for exchanging information automatically among the competent authorities; and

2.       the common reporting standard which contains the reporting and due diligence rules imposed on the FIs of participating jurisdictions (“CRS”).  

Competent authorities in participating jurisdictions can enter into Model CAAs under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or a bilateral tax treaty whereas the CRS needs to be translated into domestic law by participating jurisdictions.

The CRS sets out:

1.       categories of FIs that need to report account information held by non-resident customers to their tax authorities;

2.       types of accounts that are reportable;

3.       scope of information to be reported by FIs; and

4.       due diligence procedures to be observed by FIs in identifying reportable accounts.

Hong Kong’s Policy on Exchange of Tax Information

The Government of Hong Kong has pledged its support to the invitation from the Global Forum to implement the new global standard. The Government has also indicated that Hong Kong will launch the first AEOI by the end of 2018 on the condition that Hong Kong can put in place domestic legislation by 2017.  The existing legal framework allows the Inland Revenue Department (“IRD”) as Hong Kong’s competent authority to enter into comprehensive agreements for avoidance of double taxation (“CDTAs”) and tax information exchange agreements (“TIEAs”) with other jurisdictions and exchange tax information with partner jurisdictions only upon their request. Legislative amendments are therefore required for the implementation of AEOI in tax matters. 

Consultation Paper on AEOI in Tax Matters in Hong Kong

The Government brought up the issue of AEOI in tax matters for discussion in the meeting of Panel of Financial Affairs in the Legislative Council in November 2014.  The Government also launched a consultation paper on AEOI in tax matters in Hong Kong on 24 April 2015 (“Consultation Paper”) for obtaining public feedback on the proposed model for AEOI in Hong Kong.  The initial proposal by the Government in the Consultation Paper is to make necessary amendments to the Inland Revenue Ordinance (Cap. 112) (“IRO”) for the implementation of AEOI in tax matters. Also, the Government is inclined to use the CDTAs and TIEAs as the legal basis for implementing AEOI in tax matters and exchanges financial account information automatically with jurisdictions which enter into CDTAs or TIEAs with Hong Kong.

The definitions of FIs that need to report account information and type of accounts that are reportable, the scope of information to be furnished by FIs to IRD and then to be exchanged by IRD with AEOI partners and the enforcement provisions for IRD will be contained in the principal provisions of the IRO. The due diligence procedures to be undertaken by FIs to identify reportable accounts will be set out in a schedule to the IRO. 

Below is a summary of the proposed key provisions to be included in IRO for implementation of AEOI in tax matters under the Consultation Paper:

The AEOI partner jurisdictions

The names of jurisdictions with which Hong Kong have signed a CAA will be included in a schedule to the IRO.

Definitions of Financial Institutions and Reportable Accounts

Financial Institutions” will include banks, deposit taking companies, custodians that (as a substantial portion of its business) hold financial assets for the account of others, investment entities that primarily conducts investment activities for or on behalf of a customer or which gross income is primarily attributable to investing in financial assets (e.g. brokers, collective investment schemes, asset managers under the Securities and Futures Ordinance (Cap. 571)) and specified insurance companies.  Certain FIs such as government entities, Hong Kong Monetary Authority, prescribed retirement funds and pension schemes will be exempted from reporting if they present low risk of being used for tax evasion.

Reportable accounts” are (1) accounts held by persons (no matter individuals, corporations, partnerships, trusts or foundations) who are tax residents of the AEOI partner jurisdictions and (2) accounts held by a Passive Non-Financial Institution Entity (“NFE”) with controlling persons (e.g. ultimate beneficial owners of the entity) who are tax residents of the AEOI partner jurisdictions.

Information to be furnished by FIs to IRD and exchanged with AEOI partners

With respect to each reportable account, FIs must report:

1.       personal data of the account holders i.e. name, address, jurisdiction(s) of residence, tax identification number (“TIN”), (in case of an individual) date and place of birth; and

2.       financial data of the account holders i.e. account number, account balance or value, interest, dividends, sales proceeds from financial assets and other income generated with respect of assets held in the account and all types of investment income paid to the account holder. 

Certain qualified exceptions on reporting requirements for TIN and date and place of birth of the account holders are provided for in the Consultation Paper.

Enforcement provisions for IRD

The IRD will be empowered to perform the following actions:

1.       gather information on reportable accounts from FIs;

2.       gain access to the business premises and computer systems of FIs;

3.       obtain search warrant where FIs fail to comply with the court order directing them to comply with the return filing requirement;

4.       direct FIs to verify compliance with the reporting and due diligence procedures;

5.       direct FIs to rectify their AEOI system if found defective;

6.       use the information obtained from FIs for the administration of IRO; and

7.       sanction FIs for non-compliance with IRO.

Criminal liabilities for FIs and their employees

The below table illustrates the proposed criminal liabilities for FIs and their employees shall they fail to observe the AEOI requirements under IRO.

Offences for FIs

First time contravention

Continuing contravention after conviction


Without reasonable excuse, failure in complying with requirements for carrying out due diligence procedures, furnishing returns to IRD, or complying with any other obligations which facilitate effective implementation of AEOI

 

Liable on conviction to a fine at level 3, currently from HKD5,001 to HKD10,000

Further fine not exceeding HKD500 for everyday

Furnishing incorrect returns due to failure to observe the due diligence requirements in full [2]

Liable on conviction to a fine at level 3

Further fine not exceeding HKD500 for everyday

 

Wilfully making a return to mislead or deceive

Liable on summary conviction to a fine at level 3 and 6 months imprisonment; or on indictment to a fine at level 5, currently from HKD50,001 to HKD100,000, and 3 years imprisonment

 

 

 

Offences for Employees of FIs

First time contravention

Continuing contravention after conviction


Without reasonable excuse, causing or permitting FI to fail to comply with requirements imposed on FIs OR causing or permitting FI to furnish incorrect returns

 

Liable on conviction to a fine at level 3

Further fine not exceeding HKD500 for everyday

Wilfully to defraud, causing or permitting FI to fail to comply with requirements imposed on FIs OR causing or permitting FI to furnish incorrect returns

 

Liable on summary conviction to a fine at level 3 and 6 months imprisonment; or on indictment to a fine at level 5 and 3 years imprisonment

 

 

Due diligence procedures by financial institutions to identify reportable accounts

The due diligence procedures for the identification of reportable accounts to be performed by FIs are different for individual accounts and entity accounts. The procedures also draw a distinction between pre-existing and new accounts.

1.       Pre-existing individual accounts: For lower value[3] accounts, FIs are required to review the permanent residence address of the account holder based on documentary evidence (e.g. identification documents of the account holder) or an indicia search.  FIs shall ask the account holder for a self-certification in case of conflicting indicia.  For higher value accounts[4], FIs must conduct enhanced review procedures including a paper record search and treat such account as a reportable account if the relationship manager has actual knowledge that the account holder is a reportable person. 

2.       New individual accounts: FIs shall obtain a self-certification from the customer upon account opening to determine the customer’s tax residency and confirm the reasonableness of such self-certification by reference to documentation collected during the Anti-Money Laundering (“AML”) and Know-Your-Client (“KYC”) procedures.

3.       Pre-existing entity accounts: In determining whether a pre-existing entity account is reportable or not, FIs shall review information in its possession including those collected and maintained pursuant to AML/KYC procedures. FIs shall also determine whether a Passive NFE has one or more controlling persons who are reportable persons.  In this regard, FIs shall obtain self-certification from the entity account holder.  If the controlling person of such account is a reportable person, then the entity account must be also treated as a reportable account.  Pre-existing entity accounts with a balance not exceeding USD250,000 are not required to be reviewed, identified or reported by the financial institutions. 

4.       New entity accounts: The due diligence procedures for new entity accounts and pre-existing entity accounts are the same except that the USD250,000 threshold for pre-existing entity accounts does not apply and all new entity accounts are subject to review, identification and reporting (if necessary) by FIs.

Proposed Implementation Model and Timetable

The Consultation Paper set out the operational model for FIs to file returns to the IRD under the AEOI regime.  The IRD will develop an electronic portal for FIs to submit notifications and AEOI returns annually.   Data files to be submitted by FIs shall follow the format required by CRS and FIs can download the software developed by the IRD for preparing data files.  Alternatively, FIs may develop their own software for creating data files but prior approval from IRD for the self-developed software is required before usage.

If the amendment bill to IRO can be submitted to the Legislative Council by mid-2016, the implementation timetable for AEOI in Hong Kong will be as follows:

1.       FIs to commence due diligence procedures for identifying reportable accounts and keep relevant information by January 2017;

2.       FIs to register with IRD by September 2017;

3.       IRD to issue AEOI Returns to FIs by January 2018;

4.       FIs to file AEOI Returns to IRD by May 2018; and

5.       IRD to pass information to AEOI partner jurisdictions by the end of 2018. 

The consultation period for members of the public to submit views and comments on the proposed model for AEOI in Hong Kong pursuant to the Consultation Paper has come to an end on 30 June 2015.

Implications for FIs

As mentioned in the Consultation Paper, FIs will need to commence due diligence procedures for identifying reportable accounts with tax residence in the AEOI partner jurisdictions starting from 2017.   For FIs which have experience in compliance with the Foreign Account Tax Compliance Act of the U.S. (“FATCA”), they may be inclined to consider that the new AEOI regime is imposing heavier burden on the FIs because FIs are required to review every pre-existing individual accounts to check the account holder’s tax residence without any de minimis threshold on the account balance of individual account holders.  Pre-existing individual accounts with a balance not exceeding USD50,000 are exempt from review by the financial institutions under the FATCA regime.  Bearing in mind that the earliest date for local legislation on AEOI to come in force is January 2017, it is perhaps the suitable timing now for FIs to conduct a thorough planning of how their existing systems and policies can accommodate the AEOI regime.

 


For enquiries, please contact our Corporate & Commercial Department:

E: cc@onc.hk                                                 T: (852) 2810 1212
W:
www.onc.hk                                              F: (852) 2804 6311

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

 



[1]     The Global Forum on Transparency and Exchange of Information for Tax Purposes is a body with members consisting of OECD countries and jurisdictions that had agreed to implement transparency and exchange of information for tax purposes.

[2]     The Consultation Paper suggested that compliance with the due diligence procedures and absence of knowledge about the inaccuracy may be a defence.

[3]     The Consultation Paper did not define “lower value account”. Section VIII (Defined Terms) of Annex B (Common Reporting Standard) in the Consultation Paper contains a definition of “Lower Value Account” meaning a Pre-existing Individual Account with an aggregate balance or value as of 31 December [xxxx] not exceeding USD1,000,000.

[4]     The Consultation Paper did not define “higher value account”. Section VIII (Defined Terms) of Annex B (Common Reporting Standard) in the Consultation Paper contains a definition of “Higher Value Account” meaning a Pre-existing Individual Account with an aggregate balance or value that exceeds USD 1,000,000 as of 31 December [xxxx] or 31 December of any subsequent year.


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