Hong Kong: Introduction of Automatic Exchange of Information (AEOI) - what it will mean for employers and employees

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1 from Global Mobility Hong Kong: Introduction of Automatic Exchange of Information (AEOI) - what it will mean for employers and employees October 11, 2016 In brief The Legislative Council of Hong Kong passed Inland Revenue (amendment) (No.3) Ordinance (the Ordinance) in June 2016 to implement the Automatic Exchange of Information (AEOI). This legislation is in line with the Organisation for Economic Cooperation and Development s (OECD) global initiative to improve cross-border communication of financial account information and increase tax transparency. In September 2016, the Inland Revenue Department (IRD) released further details with respect to implementation. Under the Ordinance, financial institutions in Hong Kong need to start conducting due diligence processes to determine the tax residency of their account holders with effect from January 1, Globally mobile employees who have financial accounts with Hong Kong financial institutions will need to be aware of these changes as financial institutions may ask them to confirm a number of details including their tax residency status as part of the due diligence reviews. Employers may also expect to receive queries from their mobile employees if the individuals are unclear on their tax residency status as a result of their overseas travels. As such, companies should consider the impact of AEOI - how they manage these questions and implement corresponding strategies to ensure minimal disruption to both employees and employers. In detail General rules The AEOI is part of the wider Common Reporting Standard (CRS) which has been introduced to help align tax reporting and ensure that the tax authorities are aware of the overseas financial holdings of their tax residents. From January 1, 2017, financial institutions in Hong Kong will be required to conduct due diligence reviews on their existing and new accounts to determine the jurisdictions of tax residence of their account holders. If through these due diligence processes it is determined that an account holder is a resident for tax purposes in a reportable jurisdiction, the financial institution where the account is held has the obligation to report certain details of the account holder to the IRD. The IRD will then (if required) provide these details to the competent authority of that reportable jurisdiction. A reportable jurisdiction refers to a jurisdiction with which Hong Kong has entered into

2 (1) a comprehensive double tax agreement (CDTA) or tax information exchange agreement (TIEA) and (2) a competent authority agreement for AEOI. The list of reportable jurisdictions will be updated by the IRD from time to time. Who will be impacted Under the Ordinance, a reportable person is an individual or an entity that holds a reportable account with a financial institution resident in Hong Kong and is a tax resident in a reportable jurisdiction(s). For individuals, this definition is further broken down into the following categories: Individuals holding reportable accounts An individual who holds a reportable account and is a tax resident in a reportable jurisdiction is a reportable person. Controlling person of a passive non-financial entity (NFE) A passive NFE includes any nonfinancial entity where over 50% of the gross income is derived from passive sources (for example over 50% of the income is derived from interest/dividends/annuities). A controlling person is an individual who exercises control over a nonfinancial entity such as a trust. This would include beneficiaries, settlors, and trustees. (For a full definition of controlling persons please refer to section 50A of the IRO.) If the controlling individual is a tax resident in another jurisdiction they will be classified as a reportable person. Which accounts will be reportable The Ordinance has outlined the following five types of accounts which will be reviewed: depository accounts; custodial accounts; equity and debt interests; insurance contracts (cash value); and annuities. If any of these account types are held by a reportable person, they will become a reportable account. Excluded accounts Subject to required conditions being met, certain accounts within financial institutions will be excluded from the definition of a financial account. For example, retirement and pension accounts, term life insurance contracts, and dormant accounts with a balance of less than HK$7,800. Mandatory Provident Fund (MPF) schemes or occupational retirement schemes (ORSO) which are registered under the respective legislations in Hong Kong are treated as nonreporting financial institutions for AEOI reporting purposes. What information will be reportable If, through the due diligence processes, an individual or controlling person of a passive NFE is determined to be resident for tax purposes in a reportable jurisdiction, the details of the account should be reported to the IRD by the financial institution with which the account is held. The IRD will provide the data to the relevant competent authority as part of its wider CRS obligations. The specific data relating to the reportable account that must be provided to the IRD is as follows: 2 pwc

3 Details of the account holder Details of the account Name Address Taxpayer Identification Number * Jurisdiction of residence Date/place of birth Account number/balance * An identification number issued by a tax authority in the jurisdiction of residence should be included. For example, the UK Unique Taxpayer Reference number (UTR) The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) or, if the account was closed during the reporting period, the closure of the account. Transactions in the account For accounts other than custodial or depository accounts, the total gross amount paid or credited to the account holder relating to the account of which the reporting financial institution is the obligor or debtor. For custodial accounts, the gross interest / dividends / other income paid or credited to the account, or gross proceeds from the sale of financial assets credited to the account(s). For depository accounts, the total gross amount of interest paid or credited to the account. Joint account holders who are reportable persons will have the full values of their accounts reported. Amounts will not be prorated to reflect percentage holdings. Unlike a tax year in Hong Kong which ends on March 31 st, account values will be typically taken at the end of a calendar year (i.e., December 31 st ), with reporting financial institutions providing account details to the IRD by the following May 31 st. Under the Ordinance, there are no withholding requirements with respect to reportable accounts. Due diligence process and selfcertification As part of the AEOI procedures, Hong Kong financial institutions will undertake due diligence reviews on existing accounts held up to December 31, 2016 and all new accounts opened after January 1, Through these due diligence procedures, a financial institution will seek to determine if an account holder is resident in reportable jurisdiction(s) by reviewing its internal data. The immediate implication to individuals is the requirement to verify their tax residence status through completion of a self-certification form which will be issued by the financial institution. For existing accounts held up to December 31, 2016, if a financial institution cannot verify the tax residency status of an account holder upon completion of due diligence procedures, it will seek to obtain a self-certification from the account holder. For new accounts opened on or after January 1, 2017, selfcertification will be required to be obtained from the account holder when the account is opened. The self-certification form will require the account holder to confirm his/her personal particulars (such as names, HKID or passport numbers, residential addresses, etc). The account holder is also required to declare (1) the jurisdiction(s) (including Hong Kong) where he/she is resident for tax purposes and (2) his/her taxpayer identification number or equivalent in such jurisdiction(s). In the case of an individual who is a controlling person of a passive non-financial entity, he/she is also required to disclose the names of the entities, the nature of the entities and his/her relationships with these entities. If an account holder s situation changes, he/she is required to submit an additional self-certification form to the relevant financial institution. This form should outline the specifics of the new situation including any changes in tax residence. The completed self-certification should be returned to the financial institution 3 pwc

4 within 30 days from the date of the change. It is an offence for an individual who intentionally or recklessly provides misleading or incorrect data in relation to the self-certification form. The penalty for committing such an offence is HK$10,000. Implications to employers and employees Determination of tax residency status While most of the self-certification data is straightforward to provide, individuals (especially mobile employees) may find it hard to determine their jurisdiction of tax residence. Unlike nationalities, the concept of tax residency can be more complex and is determined based on various factors including, but not limited to, employment arrangement, the number of days an individual is present in a jurisdiction, personal ties to a jurisdiction, etc. The below example highlights the complexities in determining jurisdictions of tax residence: Example Ms. Jones, a UK national, moves from the UK to Hong Kong to undertake a two year secondment. Her family remains in the UK and continues to live in the family home which she owns. She spends 40 days working back in the UK each year and 20 additional days visiting family during which time she stays in her family home. As she is based in Hong Kong, she spends over 180 days per year in Hong Kong. Under this example she would be considered Hong Kong resident due to the amount of time that she spends in Hong Kong each tax year (i.e., over 180 days). In general, an individual is considered a tax resident of Hong Kong if (a) he/she ordinarily resides in Hong Kong; or (b) 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 year of assessment at issue. However, due to the connecting ties that she retains back in the UK (home, family, days spent working) it is likely that she will be considered tax resident in the UK. In this instance, Ms. Jones may need to declare Hong Kong and the UK as her jurisdictions of tax residence in her selfcertification. Employee policy review AEOI is a new concept in Hong Kong and it is likely that existing employee policies are silent on this issue. Employers may wish to consider whether they will provide any support to assist employees in meeting the new AEOI reporting requirements. For example, while some employers may provide tax support to mobile employees in preparing individual income tax returns, these employers may consider whether additional support will be provided to assist the employees in determining their tax residency status for the purpose of completing the self-certifications. It is important that employers review and update their policies accordingly in order to clearly outline the employers support and the employees obligations in relation to AEOI. Communication and on-boarding process If employers decide to provide support to their mobile employees in relation to AEOI reporting, they may consider issuing or conducting communications to their assignees to let them know the basics of AEOI and what this may mean for them. This would ensure that employees know the next steps to take in terms of selfcertification forms and who to contact if they have any questions. This proactive stance can help to reduce the negative sentiment that employees may have and minimise the number of queries that may be raised to employers. To assist new arrivals into Hong Kong, employers should consider updating their on-boarding processes to ensure that individuals are fully aware not only of the AEOI processes but also what information they will need to provide to the bank in order to open an account in Hong Kong. The takeaway The AEOI regulations have been introduced in Hong Kong and it is expected that onerous due diligence and review procedures will be carried out by Hong Kong financial institutions soon, if this has not yet begun. As part of the procedures, it is anticipated that the financial institutions will raise queries with account holders through the selfcertification process in order to verify their jurisdiction of residence. While the majority of the AEOI selfcertification questions are straightforward, an individual may find it difficult to confirm the jurisdiction(s) where he/she is deemed to be resident for tax purposes. The new rules will encourage employees to review their tax affairs and file tax returns to report any previously undeclared personal income in their jurisdictions of residence. However, the AEOI changes could also create some additional considerations for employers. If an existing human resource policy is silent on covering taxes on personal income, there may be a risk an employee would look to claim these tax costs from the employer especially in a scenario of dual (or multiple) AEOI residences 4 pwc

5 arising as a result of having been moved overseas by an employer. Employers should also consider the scenario whereby employees are subject to penalties if they provide incorrect information on their selfcertification forms. If the penalties are related to the determination of tax residency status in respect of overseas assignments, there may be disputes between employers and mobile employees on the cause of the penalties and who is responsible. To mitigate these risks, employers may wish to conduct health checks of their human resources policies to check whether there are clear positions with respect to issues that AEOI may create. In addition to considering the exposures to companies, employers who take a proactive stance in communicating these changes to their mobile populations will help show their support for such employees. Effective upfront communications and clear policy updates are more likely to improve the employees overall mobility experience and help ensure that existing and new employees have the correct information relating to AEOI obligations. Let s talk For a deeper discussion of how this issue might affect your business, please contact your regular Global Mobility Services engagement team or one of the following team members: Global Mobility Services Hong Kong James Clemence, Asia Leader james.clemence@hk.pwc.com Theresa Chan theresa.ky.chan@hk.pwc.com Steven Lim steven.lim@hk.pwc.com Mandy Kwok mandy.kwok@hk.pwc.com Berin Chan berin.db.chan@hk.pwc.com Bruce Lee bruce.ch.lee@hk.pwc.com Robert B Keys robert.b.keys@hk.pwc.com Louis Lam louis.cs.lam@hk.pwc.com Global Mobility Services United States Peter Clarke, Global leader peter.clarke@pwc.com 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. SOLICITATION This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC United States helps organisations and individuals create the value they re looking for. We re a member of the PwC network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at 5 pwc