Automatic Exchange of Financial Account Information in Tax Matters in Hong Kong
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 |
|
|
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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 19th Floor, Three Exchange
Square, 8 Connaught Place, Central, Hong Kong |
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.