Common Reporting Standard Hong Kong update

Transcription

1 Common Reporting Standard Hong Kong update January 2018 The Hong Kong Inland Revenue Department (IRD) provides its views on certain issues around the Automatic Exchange of Information (AEOI) regime In January 2018, the Hong Kong Institute of Certified Public Accountants (HKICPA) published Tax Bulletin 2017 in respect of the 2017 annual meeting held between the Inland Revenue Department (IRD) and the HKICPA. Since the launch of the Common Reporting Standard (CRS) regime in Hong Kong on 1 January 2017, Hong Kong financial institutions (FIs) have raised various questions around implementation of the CRS at various forums. The HKICPA has taken this opportunity to go through some of these topics with the IRD, which has provided its latest views. The key topics covered include: Hong Kong tax residency and multiple tax residencies, and their impact on CRS Implications of identification of Chinese nationality and its impact on tax residency determination Penalty provisions for individual account holders Self-certification obtained in a format other than paper Reporting obligations of multi-resident reporting FIs Given that the first reporting due date for Hong Kong FIs is 2 June 2018, the HKICPA Tax Bulletin 2017 is very timely, and reporting FIs should pay attention to the IRD s latest views and take prompt action as appropriate to ensure that the first reporting is in line with the IRD s expectations. In this alert, we have summarized the key issues that have been raised by the HKICPA with the IRD and the responses provided by the IRD, and have highlighted our observations on the impact of these on FIs.

2 Main observations Tax residence For AEOI purposes, the Inland Revenue Ordinance (IRO) imposes obligations on reporting FIs to collect valid selfcertifications from account holders at various stages of a CRS life cycle, i.e., new account onboarding, preexisting account remediation when relevant curing procedures kick in and upon the occurrence of a change in circumstances. Upon receipt of a self-certification form from an account holder, reporting FIs are required to determine the account holder s tax residence(s), and confirm the reasonableness of the self-certification. The determination of an account holder s tax residence(s) is typically not straightforward as the tax residency rules of many jurisdictions, including Hong Kong, involve different degrees of qualitative factors to be taken into account. In light of this, the HKICPA asked the IRD for more guidance on certain issues regarding determination of tax residence of individuals: a) Ordinary resident in Hong Kong under AEOI The IRD generally considers an individual is a tax resident of Hong Kong for AEOI purposes if: He/she ordinarily resides in Hong Kong; Or He/she stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment one of which is the relevant year of assessment. For the determination of whether an individual is ordinarily residing in Hong Kong, one should consider whether such individual has a permanent home in Hong Kong where he/she or his/her family lives. The legal principles are: i. Ordinary residence connotes residence in Hong Kong with some degree of continuity and apart from accidental or temporary absence. ii. To be an ordinary resident of Hong Kong, the person must be habitually and normally resident in Hong Kong, apart from temporary or occasional absences of long or short duration. The concept of ordinary resident refers to a person s abode in Hong Kong which he/she has adopted voluntarily and for settled purposes, with a sufficient degree of continuity, as part of the regular order of his/her life for the time being, whether of short or of long duration. This has already been uploaded to the Organization for Economic Co-operation and Development s (OECD) website and can be found at: implementation-and-assistance/tax-residency/hong- Kong-Residency.pdf. The IRD, in response to the HKICPA s question, also stated that holding long-term employment in Hong Kong would be a relevant consideration. b) Multiple tax residences As far as multiple tax residencies are concerned, the IRD recognizes that an individual may be resident in more than one jurisdiction. The IRD also highlighted that, in the case of dual tax residency, the OECD has already confirmed that tie-breaker rules under double taxation avoidance agreements (DTAAs) may not be relevant for the purpose of AEOI. The IRD noted that it takes the same view and further elaborated that when reporting FIs are confirming the reasonableness of a self-certification or determining the tax residence of an account holder, the following points should also be noted: Tie-breaker rules under DTAAs are mainly for income tax purposes, while the scope of AEOI is broader. Taxing rights were sometimes shared and not exclusive. Reporting FIs should not be in a position to decide whether an account holder is tax resident in one of two reportable jurisdictions under a DTAA between those two reportable jurisdictions to which Hong Kong was not a party. A reporting FI is not expected to carry out independent legal analysis of the relevant tax laws in determining the account holder s tax residence for complying with the due diligence requirements in the context of AEOI. However, where reporting FIs currently take into account any analysis on the tie-breaker rules (either provided by the account holder or prepared internally), they may wish to revisit their position and update the due diligence procedures to determine the account holder s respective tax residencies. c) Chinese nationality and tax residency The HKICPA raised to the IRD the question of whether Chinese nationality should be taken into account when confirming the reasonableness of a self-certification or when determining the tax residence of the account holders. This topic has been extensively discussed within the industry and we understand that there is no consensus yet. The HKICPA specifically noted that if a reporting FI holds in its record the account holder s (i) Mainland passport, (ii) Mainland household register ( 中華人民共和國居民戶籍簿 ), (iii) Exit-Entry Permit for Travelling to and from Hong Kong and Macau ( 中華人民共和國往來港澳通行證 ), and/or (iv) any other documentation that indicates the account holder's Mainland nationality, it is very likely that the account holder is a Mainland tax resident for Mainland tax purposes and subject to Mainland taxation. The HKICPA asked, even though nationality is not an indicium for AEOI purposes, whether an FI is required to ask for additional information if the account holder does not indicate his/her Mainland tax residency on his/her selfcertification. 2

3 The IRD stated that the IRO contains the standard of knowledge applicable to a self-certification or documentary evidence and states a reporting FI may not rely on a self-certification or documentary evidence if it knows or has reason to know that it was incorrect or unreliable. This establishes that a reporting FI has reason to know that a self-certification provided by a person was unreliable or incorrect if it was incomplete with respect to any item that was relevant to the claims made by the account holder. The IRD takes the view that a reporting FI should not rely on a self-certification in which the account holder failed to provide his/her jurisdiction of residence for tax purposes. Such self-certification is not valid for due diligence purposes. The IRD mentioned that other documentation that indicated the account holder s nationality could assist reporting FIs in performing the reasonableness test. The IRD expressed the view that where an account holder is a resident in Hong Kong but his/her other records, such as Mainland household register ( 中華人民共和國居民戶籍簿 ), indicate Chinese nationality because of his/her domicile in the Mainland, there is an expectation that this would be a dual resident case where the account holder is also a Mainland tax resident. Reporting FIs should take away from this that the IRD currently considers Mainland nationality of the account holders as a possible indicator of Mainland tax residency. Penalty provisions for individual account holders Under the IRO, an offence is committed if the account holder, in making a self-certification, made a statement that was misleading, false or incorrect in a material particular; and knew that, or was reckless as to whether, the statement was misleading, false or incorrect in a material particular. However, a taxpayer may often find it difficult to determine his/her tax residency and may not have the financial resources to obtain professional advice, so can only complete his/her self-certification on a "to the best of his/her knowledge" basis. The HKICPA asked if the IRD would then seek to impose a penalty for an inaccurate self-certification form completed by a layman taxpayer who only has limited information with regard to determination of his tax residency. In these cases, the IRD pointed out that the need to prove mens rea of knowingly or recklessly sets a considerably high threshold for prosecution. The IRD further indicated that it would have to conduct an investigation before being in a position to establish whether there were sufficient grounds to take prosecution action. Self-certification in a format other than paper In the case where an account is opened by telephone or internet, the self-certification must be positively affirmed. The IRD commented that if a self-certification is provided electronically, the reporting FI has to have systems in place to ensure that the information provided was that of the account holder, and it has to be able to provide a hard copy of all such self-certifications to the IRD on request. The IRD also suggested that for verbal self-certifications, FIs should also collect an electronic or a paper selfcertification in order to have a hard copy on file. While the IRD's position may not be in line with the OECD, Hong Kong reporting FIs that accept voicerecorded self-certifications may need to change their policies going forward to also collect paper or electronic self-certifications, and revisit accounts where just a voice recording is currently held on file. Multi-resident reporting FIs The HKICPA noted that if an FI is a resident in Hong Kong and also another jurisdiction, they will need to undertake the appropriate due diligence procedures and report any reportable accounts maintained in Hong Kong. The HKICPA asked whether the IRD would consider the location of books and records of the account holders (e.g., the investor register for an investment fund) to be the relevant location where the FI maintains the accounts for the purpose of satisfying the relevant AEOI reporting obligations in Hong Kong. The IRD pointed out that the place where accounts were maintained did not merely refer to the location of books and records of the account holders. If an entity is a reporting FI in Hong Kong, it would be required to fulfil the due diligence and reporting obligations under the IRO, i.e., to review all financial accounts that it maintains and report the reportable accounts to the IRD as necessary. However, the following special rules under AEOI should be adhered to by reporting FIs that are resident in multiple jurisdictions: a) Where an FI, other than a trust, is resident in two or more participating jurisdictions, the FI is required to report the financial account(s) it maintains to the tax authorities in each of the jurisdiction(s) in which it maintains them. b) Where an FI is a trust, the FI is considered to be resident for reporting purposes in the participating jurisdiction where one or more of its trustees is tax resident, unless all the information required to be reported in relation to the trust was reported to another participating jurisdiction s tax authority because it was treated as resident for tax purposes there. 3

4 The HKICPA specifically illustrated an example of a collective investment scheme (CIS) set up in the Cayman Islands and authorized under the Hong Kong Securities and Futures Ordinance (SFO). This CIS should meet the FI definition of the IRO (by reason of investment entity as defined in the IRO) and may also be a dual-resident reporting FI in Hong Kong and the Cayman Islands. By adopting the special rules mentioned on the previous page, the IRD clarified that for a CIS that is a trust, if it is established that all the information required to be reported in relation to the CIS has been reported to another participating jurisdiction s tax authority, because it was treated as resident for tax purposes there, the CIS trust may be exempt from filing reportable accounts in Hong Kong. However, the IRD indicated that such relief is subject to an annual application. The IRD also added that if any trustee of a CIS trust is in Hong Kong, the FI trust will have to report all account information in Hong Kong unless it is established that all the information required to be reported in relation to the CIS is reported to another participating jurisdiction s tax authority because the CIS was treated as resident there for tax purposes. Other matters The IRD also clarified its views on other CRS questions raised by the HKICPA. A summary is provided below: a) First CRS reporting (the odd half-year reporting on the newly added 72 reportable jurisdictions) By way of background, the Inland Revenue (Amendment) (No. 2) Ordinance 2017 has been gazetted and passed into law on 16 June This formalized the addition of 72 reportable jurisdictions to the reportable jurisdiction list for reports required to be submitted during the year 2018, in addition to the existing 2 reportable jurisdictions (Japan and the United Kingdom) and Republic of Korea, which is only reportable in 2019 for information pertaining to the year The IRD explained to the HKICPA that for the first round of reporting in 2018, FIs will be asked to furnish (for the 72 newly-added reportable jurisdictions) data with respect to the period from 1 July to 31 December 2017, whereas for Japan and the United Kingdom, data with respect to the period from 1 January to 31 December 2017 shall be required to be submitted. In subsequent years, FIs will be expected to furnish the IRD with full-year data for all jurisdictions included as reportable jurisdictions. Reporting FIs should be aware that the special half-year reporting requirement is only for the 72 newly-added reportable jurisdictions and ensure their IT infrastructure is ready to produce accurate data for the first AEOI return, which is due on 2 June b) The excluded account definition The definition of financial accounts that are in-scope for AEOI purposes excludes certain types of accounts under the IRO (retirement and pension accounts, non-retirement tax-favored accounts, dormant accounts, etc.). The HKICPA questioned whether it was mandatory to exclude such accounts from reporting or whether an FI can choose to report on them. The IRD clarified that the IRO does not contain provisions for FIs to make an election to opt out of these exclusions. In other words, FIs must exclude the excluded accounts for AEOI reporting purposes on a mandatory basis. FIs should follow the rules under Part 3 of Schedule 17C of the IRO to exclude the accounts that met the definition of excluded accounts. It is imperative that FIs conduct a detailed product classification to ascertain whether any products constitute an excluded account from a CRS standpoint and are therefore not reportable. Needless to say, there are penalties attached to misreporting of CRS information. c) Type 9 SFC license holder The IRD reaffirmed that under the IRO definitions of a reporting FI and an investment entity, a corporation that holds a Type 9 license obtained from the Securities and Futures Commission to carry out asset management activities should be regarded as a reporting FI. However, the IRD stated that while due diligence and reporting obligations under the IRO applied to a reporting FI, the reporting FI would have to fulfil the obligations only if it maintained financial accounts. The IRD also pointed out that a Type 9 license holder that does not hold any client assets is not considered as maintaining custodial accounts. In addition, the definition of financial account excludes equity or debt interests in respect of an advising manager where it is an investment entity solely because it (i) renders investment advice to, and acted on behalf of, or (ii) manages portfolios for, and acted on behalf of, a customer for the purpose of investing, administering, or managing financial assets deposited in the name of the customer with an FI other than the advising manager. As such, an advising manager who only provides investment advice and does not maintain any financial account on its own, will not normally have any reporting obligations. Type 9 license holders, in particular, asset managers who do not maintain any financial accounts, should consider whether they still have any AEOI obligations in light of the relevant definitions set out above. d) Allowed language for reporting The IRD pointed out that the extensible mark-up language (XML) to be used in the AEOI return data schema does not include any specific requirement to use a particular language when inputting data. The IRD added that it is defined in the schema that name and address data elements should be filled with generic characters. All languages are acceptable, provided that the characters are encoded in 8-bit Unicode Transformation Format (UTF-8). These will include Chinese, Japanese and Korean, etc. 4

5 This provides clarification to reporting FIs on how to handle a situation where an account holder provides a name or address in Chinese only as a Chinese selfcertification form is available, or in other languages. This also addresses the situation where an account holder has no English name (e.g., some Chinese entities do not have an English name under the registration documents). e) Due diligence and reporting requirements in respect of account holders that are overseas FIs An FI is required to identify reportable accounts in accordance with the due diligence procedures set out in the IRO. This includes account holders that may themselves be FIs. The IRD confirmed that if it is established through due diligence procedures that an account holder is an overseas FI (i.e., using a self-certification form or publicly available information), the Hong Kong reporting FI is not required to report on that overseas FI, as an FI is specifically excluded from the definition of a reportable person under the IRO. f) Leveraged foreign exchange trading company An FI (e.g., a leveraged foreign exchange trading company licensed under the SFO, i.e., a reporting FI for Hong Kong CRS purposes) may enter a foreign currency swap, option or forward contract with a customer directly (i.e., the FI does not hold the foreign currency contract on behalf of the customer) and may accept some margins or collateral (in terms of cash only) under the contractual arrangement. It is the view of the IRD that such an arrangement would not constitute a custodial account for CRS purposes. The IRD stated that, at present, it follows the view of the United Kingdom that cash is not a financial asset. We note that the issue concerning whether cash margin accounts would constitute depository accounts (hence, financial accounts for CRS purposes) was not discussed in the meeting. g) Cash value of an insurance contract Under the IRO, the term cash value insurance contract is defined to mean an insurance contract (other than an indemnity reinsurance contract between two insurance companies) that has a cash value. A cash value is defined as the greater of: (1) the amount that the policyholder of an insurance contract is entitled to receive on surrender or termination of the contract; or (2) the amount that the policyholder can borrow under or with regard to the contract. The term cash value makes reference to an insurance contract, which should cover medical insurance or a general insurance policy. However, this term excludes, among others, any return of an advance premium or premium deposit for an insurance contract for which the premium is payable at least annually, if the returned amount does not exceed the next annual premium that will be payable under the contract. While a medical insurance or general insurance policy generally has no cash value and therefore is not in scope for CRS purposes, the HKICPA asked if where the policyholder has paid an advance premium that exceeds the following year's annual premium payable (e.g., made a payment covering five years), the insurance contract would be treated as a cash value insurance contract, which then becomes in scope for CRS purposes. For this example, the IRD pointed out that, as per the above, the advance premium should be treated as having a cash value and therefore be subject to CRS reporting. We understand that this issue is still being discussed with the OECD by the IRD. This update would have a huge impact on non-life insurance companies. Conclusion Overall, the IRD endeavored to address the HKICPA s Hong Kong CRS questions in the 2017 meeting and, in particular, shared its views on various key issues that the financial services industry has been struggling to get clarity on. Reporting FIs may now have to take prompt action on updating their current policies and practices to comply with the CRS in line with the IRD positions. Having said this, as discussed in this alert, we note that some of the positions currently taken by the IRD may not be entirely consistent with the OECD or the practices of other participating jurisdictions. Multinational FI groups may wish to consider whether, for certain issues, their Hong Kong entities need to adopt the IRD s views while the group entities in the other participating jurisdictions take a different position. This shall require revisiting global policy and procedures, and making suitable edits to meet the local Hong Kong requirements. Having said this, internal communication and training of impacted staff, such as front line teams and compliance teams, on the updates is critical to ensure robust CRS compliance. Where FIs have automated due diligence processes or straight-through processing, technological changes may also be required. With the ever-changing CRS rules, it is pertinent for FIs to have robust legislation monitoring processes in place and appropriate governance structure such that none of the changes are missed. To help you understand what these changes mean to your organization and assist you in coping with these changes as seamlessly as possible, please contact the EY CRS Team or your local EY contact. 5

6 EY Hong Kong CRS contacts Ian McNeill Paul Ho Anish Benara Lissie Spencer Annie Cheng Domitille Franchon Francis KS Tang Cora Yuen EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Services Limited. All Rights Reserved. APAC No ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/china Follow us on WeChat Scan the QR code and stay up to date with the latest EY news. ey.com/china ey wechat