Automatic Exchange of Financial Account Information Update - Hong Kong lives up to its CRS promise

The G20 is fast losing patience with jurisdictions that are dragging their heels on implementing the agreed international standards on tax transparency.

Date published

05/05/2017

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The G20 is fast losing patience with jurisdictions that are dragging their heels on implementing the agreed international standards on tax transparency.

They have asked the Organisation for Economic Co-operation and Development (“OECD”) for a list of jurisdictions that have not progressed sufficiently toward a satisfactory level of implementation of these standards (“Non-cooperative Jurisdictions”). At their September 2016 Summit in Hangzhou, the G20 Leaders endorsed the three objective criteria by which the OECD may identify a Non-cooperative Jurisdiction:

1) implementation of the Exchange of Information on Request (“EOIR”) standard with a “Largely Compliant” rating from the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes;

2) implementation of the Automatic Exchange of Financial Account Information in Tax Matters (“AEOI”) standard so that the first exchange takes place no later than 2018 (for information relating to 2017); and

3) participation in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”) or some other “sufficiently broad exchange network” that allows for the exchange of tax information in compliance with both EOIR and AEOI standards.

A jurisdiction that fails to meet at least two of these three criteria is considered to be a Non-cooperative Jurisdiction. The OECD has no power to impose sanctions on Non-cooperative Jurisdictions but the G20 has said they stand ready to impose counter-measures, to make any Non-cooperative Jurisdiction a less attractive place for investment and business.

One of the ways in which a jurisdiction may implement the AEOI standard is by adopting the Common Reporting Standard developed and published by the OECD in July 2014 (“CRS”). For more on how the CRS works, please see our “About the CRS” summary below.

Hong Kong fulfilled its OECD pledge to adopt the CRS by enacting the Inland Revenue (Amendment) (No. 3) Ordinance 2016, which came into effect on 30 June 2016. Reporting financial institutions (“FIs”) in Hong Kong have since been legally required to conduct CRS due diligence on their “financial accounts” (“FAs”), collect the required information and – to the extent that it relates to a “reportable jurisdiction” outside Hong Kong (“RJ”) – furnish it in a regular return to the Inland Revenue Department (“IRD”).

In order to qualify as an RJ, a jurisdiction must currently be party to a ‘comprehensive avoidance of double taxation agreement’ requiring the disclosure of tax information (“CDTA”) or some other tax information exchange agreement (“TIEA”) with Hong Kong. It must also be listed in Part 1 of Schedule 17E to the Inland Revenue Ordinance (“IRO”). This then gives the IRD the power to require an FI to furnish the relevant information.

An AEOI exchange by the IRD with an RJ’s competent tax authority of CRS information rela1ting to that RJ must be based on an international legal instrument that guarantees confidentiality and proper data safeguards. Hong Kong is not a signatory to the Convention (which would serve this purpose), so the Government has been busy negotiating and signing bilateral CRS competent authority agreements (“CAAs”) with a series of its CDTA/TIEA counterparties.

CAAs with Japan and the U.K. commit the IRD to begin AEOI with these jurisdictions in 2018. So far, only these two countries have been designated as RJs for Hong Kong FIs – despite the fact that Hong Kong has also entered into CAAs with Belgium, Canada, Guernsey, Italy, Mexico, the Netherlands, Portugal, South Africa and South Korea.

The Hong Kong Government has indicated that it will continue to finalise CDTAs/TIEAs and CAAs with more jurisdictions in the coming months, but has also expressed concern that the time pressure and other difficulties in this respect should not put Hong Kong at risk of being identified as a Non-cooperative Jurisdiction.

The Inland Revenue (Amendment) (No. 3) Bill 2017 (the “Bill”) was introduced on 24 March 2017 to address this concern. Once the Bill becomes law, it will have the following effects:

1) A jurisdiction need not be party to a CDTA or TIEA with Hong Kong in order to qualify as an RJ.

2) In respect of Japan and the U.K., the IRD will require Hong Kong FIs to furnish a return of CRS information for the whole of 2017.

3) 72 other jurisdictions (including Belgium, Canada, Guernsey, Italy, Mexico, the Netherlands, Portugal, South Africa and South Korea) are designated as RJs. The CRS information which a Hong Kong FI will have to furnish in respect of these other RJs must cover the period from 1 July to 31 December 2017.

Hong Kong FIs need to ensure that their due diligence captures all the required information in respect of all 74 of these jurisdictions (see http://www.ird.gov.hk/eng/tax/aeoi/rpt_jur.htm) and puts them in a position to furnish a correct and complete information return to the IRD on time. The IRD currently plans to trigger the requirement for the first CRS information returns in January 2008, with a filing deadline in May. Meanwhile, FIs can now participate in a trial run of the ‘AEOI Portal’ which the IRD has designated for CRS filing purposes (see 404).

About the CRS

The CRS is generally designed to require a broad spectrum of financial institutions (“FIs”) to review the “Financial Accounts” (“FAs”) they maintain, identify their “Account Holders” (and the “Controlling Persons” of a “Passive NFE” Account Holder) and carry out certain due diligence exercises to ascertain where these persons are resident for tax purposes. In the ‘narrow approach’ to CRS compliance, an FI only proceeds to collect certain information about these FAs and persons once the relevant due diligence shows them to be tax resident in a “Reportable Jurisdiction” (“RJ”). A jurisdiction may, however, also enable an FI to take the ‘wider approach’ of collecting this information regardless of whether tax residence in an RJ is shown. Either way, the required information is furnished in a return to the jurisdiction’s competent tax authority on a regular basis and then exchanged by that authority with the relevant AEOI counterparty.

Important Disclaimer

The information and opinions contained in this publication are for general information purposes, are not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.