4 May 2015 2015 Issue No. 8 Hong Kong Tax alert Views of stakeholders sought on proposed automatic exchange of financial account information As a responsible member of the international community, the HKSAR Government has committed itself to obtaining detailed financial information on from financial institutions (FIs) in Hong Kong and thereafter automatically transmitting the same on an annual and reciprocal basis to the overseas residence jurisdictions of the account holders. In preparation for the implementation of this automatic exchange of information (AEOI), the HKSAR Government issued a public consultation paper on 24 April 2015 1, the consultation exercise ending on 30 June 2015. In particular, the views of FIs are being sought on the reporting and due diligence requirements to be imposed on them in terms of identifying, and providing detailed information concerning, reportable under the AEOI. The term FIs will be widely defined to include banks, brokers, custodians, insurance companies, certain persons licensed under the Securities and Futures Ordinance and investment entities such as collective investment vehicles and pension schemes. Clients who have any specific comments and views on the subject are welcome to share them with their tax executive. We can then relay the same to the relevant authorities in an appropriate manner. This alert explains the mechanism of the AEOI and the reporting and due diligence requirements to be imposed on FIs under the AEOI. 1. The consultation paper is downloadable from http://www.fstb.gov.hk/tb/en/doc s/aeoi-consultationpaper-e.pdf
Background To enhance tax transparency and combat tax evasion, tax authorities in different jurisdictions exchange information in respect of taxpayers on a reciprocal basis. At present, Hong Kong is undertaking this exchange of information (EoI) with our treaty partners on a limited on request basis under the framework of either a comprehensive avoidance of double taxation agreement (CDTA) or a standalone tax information exchange agreement (TIEA). However, the international landscape on tax co-operation has been evolving rapidly. In July 2014, the Organization for Economic Cooperation and Development (OECD) released its Standard for Automatic Exchange of Financial Account Information in Tax Matters. Based on this new global standard, the OECD called on governments of various jurisdictions (source jurisdictions) to obtain detailed financial information on from their financial institutions and automatically exchange that information with the jurisdictions of residence of the relevant account holders on an annual basis. As a responsible member of the international community, and in order to avoid being labelled as an uncooperative jurisdiction with the possible consequences of being sanctioned, the HKSAR Government indicated to the Global Forum 2 in September 2014 Hong Kong s support for implementing the new global standard on AEOI. In this regard, the HKSAR Government is committed to commencing its first AEOI exchanges by the end of 2018 (i.e., the latest time allowable by the Global Forum) on the condition that Hong Kong can put in place the necessary domestic legislation by 2017. Overview of AEOI The global standard promulgated by the OECD consists of two components: (1) Model Competent Authority Agreement (CAA) which provides for the modalities of EoI between two jurisdictions (such as the scope of information to be exchanged, as well as the time and manner to provide such information to the AEOI partner); and (2) Common Reporting Standard (CRS) which sets out the due diligence procedures to be undertaken by FIs to identify reportable. The CAA is an overarching agreement linking the CRS with bilateral agreements such as CDTAs or TIEAs or other multilateral agreements that serve as the legal basis for EoI, i.e., without the CAA no AEOI can be undertaken. Under the CRS, FIs are defined to include banks, brokers, custodians, insurance companies, and certain investment entities such as collective investment vehicles and pension schemes; and reportable include held by non-resident individuals and entities (including trusts and foundations). In respect of entity, FIs are also required to look through passive entities (referred to in the CRS as Passive Non-Financial Institution Entities (Passive NFEs)) and report on the controlling persons of the Passive NFEs, who are tax residents of the reportable jurisdictions. This is the case regardless of whether the Passive NFE concerned is itself a reportable person or not. However, the CRS allows a source jurisdiction to identify and exempt from reporting those FIs and financial which present a low risk of being used for tax evasion, referred to in the CRS as non-reporting FIs 3 and excluded 4 respectively. 2. The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), established under the auspices of the OECD for the pursuance of tax transparency, consists of some 120 member jurisdictions including Hong Kong. 3. The HKSAR Government intends to include the following as nonreporting FIs : (a) government entities (including statutory bodies and entities which are wholly owned by the Government), international organizations, and the Hong Kong Monetary Authority; (b) pension funds of a government entity, international organizations or the Hong Kong Monetary Authority; (c) Grant Schools Provident Fund and Subsidized Schools Provident Fund; and (d) any FIs meeting the requirements defined as Broad Participation Retirement Fund, Narrow Participation Retirement Fund, qualified credit card issuer, exempt collective investment vehicle or trustee documented trust under the CRS. 4. The HKSAR Government intends to include the following as excluded with reference to the CRS: (a) retirement or pension account satisfying certain requirements; (b) non-retirement tax-favored ; (c) term life insurance contracts; (d) estate ; (e) escrow ; and (f) depository due to non-returned overpayments as defined under the CRS. 2
The CRS also specifies that FIs are required to report the following particulars in respect of each reportable account: Financial account holder s personal data (i.e., name, address, tax residence, taxpayer identification number (TIN) 5 and the date and place of birth 5 ); and Financial data (which varies as outlined below depending on the types of reportable account): For a cash value insurance contract or an annuity contract the cash value or surrender value of such contract. For Custodial Accounts the total gross interest, total gross dividends, the total gross amount of other income generated with respect to the assets held in the account, and the total gross proceeds from the sale or redemption of property paid or credited to the account For Depository Accounts the total gross amount of the interest paid or credited to the account For any other account the total gross amount paid or credited to the account holder including the aggregate amount of any redemption payments made to the account holder. Hong Kong s approach to AEOI The HKSAR Government indicated that it will adopt a pragmatic approach under which only the essential requirements of the AEOI standard will be incorporated in our domestic law. Under this approach it is hoped that the cost of compliance for affected FIs will be kept as low as possible without undermining the effectiveness of the AEOI standard. Accordingly, the statutory powers of the Inland Revenue Department (IRD) would only be expanded to the extent justified to ensure the effective implementation of the AEOI. Under this approach, Hong Kong would only pursue AEOI under the platform of a bilateral CDTA or a bilateral TIEA, rather than under other multilateral instruments such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The reason for preferring CDTAs or TIEAs over other multilateral instruments is that this would give Hong Kong more flexibility when choosing its AEOI partners. For example, if Hong Kong is not satisfied with the legal framework and practices of a jurisdiction as regards the protection of a taxpayer s privacy and the confidentiality of information exchanged, it would be acceptable for Hong Kong to decline to enter into a CDTA or TIEA and CAA with that jurisdiction and, as a result, there would be no AEOI with that jurisdiction. Proposed legislative framework Key provisions to be incorporated in the Inland Revenue Ordinance To enable the implementation of AEOI in Hong Kong, the following key provisions are proposed to be added to the Inland Revenue Ordinance (IRO): (a) definitions of FIs and reportable ; (b) scope of information to be furnished by FIs to the IRD and then to be exchanged by the IRD with our AEOI partners; (c) due diligence procedures to be undertaken by FIs to identify reportable ; and (d) enforcement provisions for the IRD to ensure effective implementation. The HKSAR Government indicated that it intends to introduce legislation which will require FIs to only identify reportable of holders who are residents of any one of our AEOI partner jurisdictions, i.e., those which have concluded a CAA with Hong Kong (rather than all jurisdictions outside Hong Kong). Nonetheless, FIs may adopt a wider approach to identify and keep information of all non-hong Kong resident-account holders, over and above the proposed legal requirements, subject to them being able to comply with Hong Kong s data privacy regime. 5. FIs are not required to report the TIN or date of birth in respect of preexisting if the information has not already been recorded by the FIs and there is otherwise no requirement for such information to be collected by the FIs concerned under domestic law. That said, FIs are required to use reasonable efforts to obtain the TIN and date of birth with respect to the pre-existing by the end of the second calendar year following the year in which such were identified as reportable. Regarding the TIN, FIs are not required to report a TIN if such a TIN is not issued by the AEOI partner or the domestic law of the AEOI partner does not require the collection of the TIN. For place of birth, FIs are not required to report such information for both preexisting and new unless the FIs are otherwise required to obtain and report it under domestic law and it is available in the electronically searchable data maintained by the FIs. 3
Proposed sanctions for non-compliance To guard against non-compliance, the HKSAR Government envisaged that certain penal provisions would be included in the IRO. The following table summarizes the proposed sanctions for various types of non-compliance: Type of offence Proposed sanction Committed by FIs 1. Failure to comply with the requirements for carrying out due diligence procedures, furnishing returns to the IRD, or any other obligations which facilitate the effective implementation of AEOI without reasonable excuse. 2. Furnishing incorrect returns due to failure to observe in full the due diligence requirements. Liable to a fine at level 3 (currently at HK$10,000). In the case of a continuing offence after conviction for failure to comply, the FI concerned is liable to a further fine not exceeding HK$500 for every day or part thereof during which the offence continues after conviction. 3. Wilfully making a return to mislead or deceive. I. on summary conviction: liable to a fine at level 3 and imprisonment for 6 months; II. on indictment: liable to a fine at level 5 (currently at HK$50,000) and imprisonment for 3 years. Committed by employees of FIs, persons employed to work for FIs or management of FIs 1. Without reasonable excuse, causing or permitting the FIs to fail to comply with the requirements imposed on FIs or to cause/permit the FIs to furnish incorrect returns. Liable to a fine at level 3 (currently at HK$10,000). In the case of a continuing offence after conviction for failure to comply, the employee concerned is liable to a further fine not exceeding $500 for every day or part thereof during which the offence continues after conviction. 2. Wilfully to defraud, causing or permitting the FIs to fail to comply with the requirements imposed on FIs or to make incorrect return. I. on summary conviction: liable to a fine at level 3 and imprisonment for 6 months; II. on indictment: liable to a fine at level 5 (currently at HK$50,000) and imprisonment for 3 years. Account holders are responsible for identifying their own tax residence when opening financial (i.e., self-certification). In this regard, they need to provide detailed personal data and a self-certification to FIs when opening. FIs are only expected to perform reasonableness tests on a self-certification, without necessarily carrying out an independent legal analysis of the relevant tax laws to determine the residence of an account holder. The HKSAR Government indicated that at present, it does not intend to impose any new sanctions on non-hong Kong tax resident account holders for any false self-certification. Nonetheless, such account holders may still commit an offence under the current provisions of the IRO if they, without reasonable excuse, give any incorrect information to the IRD concerning an exchange of information in relation to any matter affecting the person s own liability to any tax of a territory outside Hong Kong. The HKSAR Government also stated that in the light of the experience of other jurisdictions and with a view to enhancing the reliability of the self-certification process, it may consider expanding the existing sanctions in the IRO or imposing new specific sanctions to cover false self-certification by account holders. Safeguards to protect data privacy and confidentiality of information exchanged Given that Hong Kong would implement an AEOI under an existing CDTA or TIEA framework, any information exchanged under the AEOI would be subject to the same safeguards in respect of the privacy and confidentiality of information of taxpayers provided for in the relevant CDTA or TIEA. In addition, the Model CAA provides safeguards similar to those under CDTAs or TIEAs. Currently, pursuant to the domestic tax law of Hong Kong, additional safeguards in the form of a notification and review system are afforded to taxpayers for EoI on the on request basis. Under this system, the person who is the subject of an EoI request would be notified and accorded the right to review and amend the information to be exchanged before the same is passed by the IRD to the relevant overseas tax authority. However, this notification and review system would not be applicable to the AEOI. This is the case as the mode of operation of AEOI is very different from that of EoI on the on request basis. Large number of account holders will be involved under the AEOI regime, and it would be extremely difficult, if not impossible, for the IRD to notify each and every account holder as and when information is exchanged. The HKSAR Government also noted that it is not aware of any jurisdiction that intends to put in place a separate notification or review mechanism for the purposes of AEOI. 4
Proposed operational framework Reporting and due diligence requirements FIs have to report to the IRD the necessary information with reference to the requirements specified in the CRS. The below diagrams summarize the proposed due diligence procedures that FIs are required to perform in order to identify reportable and collect and report the required information. Diagram 1 - Due diligence procedures for individual Filing requirements The IRD would issue electronic notices annually through a secure platform to all registered FIs in January for filing AEOI returns. FIs would be required to file AEOI returns even if there were no reportable for a particular year. The consultation document proposed that FIs should lodge the AEOI returns within 5 months after the calendar year to which the information relates. Proposed implementation timeline Individual Pre-existing New Lower value (<USD1 million): permanent residence test based on documentary evidence or electronic indicia search; self-certification required in case of conflicting indicia. Higher value (>USD1 million): enhanced due diligence procedures (including paper record indicia search and an actual knowledge test by the relationship manager). The HKSAR Government envisaged the following timeline for the implementation of the AEOI in Hong Kong: Actions FIs to commence due diligence procedures for new and pre-existing in order to identify reportable and keep relevant information Planned timeline January 2017 FIs to register with the IRD September 2017 FIs to submit test data files of selfdeveloped software to the IRD for validation Q4 of 2017 Self-certification by account holders (without de minimis threshold); FIs confirm reasonableness of the selfcertification. IRD to issue AEOI Returns to FIs January 2018 FIs to file AEOI Returns to IRD May 2018 Diagram 2 - Due diligence procedures for entity including identifying whether the entity concerned is a Passive NFE and, if so, the residence of the controlling persons Entity Pre-existing New Lower value (<USD 250,000): no review required unless FIs elect otherwise. Higher value (>USD 250,000): based on available information collected pursuant to the anti-money laundering or know-your-customer procedures; self-certification may also be required. Views sought Given that the implementation of the AEOI would pose significant challenges to FIs, the HKSAR Government is particularly interested in seeking the views of FIs on the reporting and due diligence requirements to be imposed on them under the AEOI, including who should be exempted as non-reporting FIs and what should qualify as excluded. Clients who have any specific comments and views on the subject are welcome to share them with their tax executive. We can then relay the same to the relevant authorities in an appropriate manner. Self-certification by account holders (without de minimis threshold); FIs confirm reasonableness of the selfcertification. 5
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