1. No category

4 November 2014
2014 Issue No. 21
Hong Kong
Tax alert
Hong Kong joins the drive for the
automatic exchange of information
In July 2014 the Organization for Economic Co-operation 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 to obtain
detailed financial account information from their financial institutions and automatically
exchange that information with the residence jurisdictions of the relevant account holders on
an annual basis.
The HKSAR Government has indicated Hong Kong’s support for the automatic exchange of
information (AEOI) under this new global standard, and is committed to commencing its first
AEOI exchanges by the end of 2018 (i.e., the latest time allowable) on the condition that Hong
Kong can put in place the necessary domestic legislation by 20171.
Whether by necessity or by persuasion, it appears that Hong Kong has decided to adopt the
current international norm and trend as regards AEOI. The HKSAR Government is now
conducting a consultation exercise as regards the detailed legislative proposals for the
implementation of the AEOI in Hong Kong. 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 scope and key components of the AEOI standard.
1.
The HKSAR Government issued a press release on 15 September 2014 indicating Hong Kong’s commitment to the
implementation of the AEOI standard. The announcement is downloadable from
http://www.fstb.gov.hk/tb/en/docs/pr20140915_e.pdf
Automatic exchange of information
Key components of the AEOI standard
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).
AEOI involves the systematic and annual transmission of
financial account information by the source jurisdiction to
the jurisdiction of residence of account holders
concerning all types of investment income, account
balances or values, and sales proceeds from financial
assets. The scope of financial account information to be
exchanged is prescribed and unified in accordance with
the international standard. The information which is
exchanged is collected in the source jurisdiction on a
routine basis from reports by relevant financial
institutions.
However, members of the international community have
recently been advocating AEOI as a more efficient mode for
ensuring international tax co-operation and have made it a
new global standard. In this regard, in July 2014 the OECD
released its Standard for Automatic Exchange of Financial
Account Information in Tax Matters. The standard consists
of two components: (1) the Common Reporting Standard
(CRS) which specifies reporting and due diligence rules; and
(2) the Model Competent Authority Agreement (CAA). The
CAA is an overarching agreement linking the CRS with legal
instruments such as CDTAs or TIEAs or other multilateral
instruments for the AEOI. Further to this new global
standard, the OECD called on governments of various
jurisdictions to obtain detailed financial account information
from their financial institutions and to automatically
exchange that information with the residence jurisdictions of
the relevant account holders on an annual basis.
Given that many jurisdictions and major financial centers
including China, Singapore and Switzerland have already
indicated their support for the implementation of AEOI, Hong
Kong could not afford to be sidelined2. Otherwise, Hong
Kong may risk being perceived to be an uncooperative
jurisdiction thereby impairing its international reputation and
competitiveness as an international financial and business
center.
Based on these concerns, in September of this year the
HKSAR Government indicated Hong Kong’s support for
implementing the new global standard on AEOI to the Global
Forum3. 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.
The HKSAR Government also indicated that 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 with that jurisdiction and, as a
result, there would be no AEOI with that jurisdiction.
Key aspects of the AEOI standard are as follows:
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The financial institutions covered include banks,
custodians, insurance companies, brokers and
investment entities (such as certain collective
investment vehicles), unless they present a low-risk of
being used for evading tax and are excluded from
reporting (such as prescribed retirement schemes).
The scope of information to be reported covers a
financial account holder’s personal data (i.e., name,
address, tax residence and the taxpayer identification
number of the account holder) and financial data (i.e.,
interest, dividends, account balance or value, income
from certain insurance products, sales proceeds from
financial assets and other income generated with
respect to assets held in the account or payment
made with respect to the account).
Reportable accounts include accounts held by
individuals and entities (which include foundations and
trusts) and the standard includes a requirement to
look through passive entities to report on the relevant
controlling persons (i.e., the beneficial owners).
The due diligence procedures specify procedures to be
performed by financial institutions to identify
reportable accounts. These procedures distinguish
between individual and entity accounts and also draw
a distinction between pre-existing and new accounts.
2.
By the end of August 2014, over 65 jurisdictions had already publicly
committed to the implementation of the new global standard.
3.
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.
Hong Kong Tax Alert
2
Similarities and differences between the AEOI standard and
FATCA
The AEOI standard has been developed by drawing
extensively on the United States’ Foreign Account Tax
Compliance Act (FATCA)4. As a result, financial institutions
are expected to be able to leverage and build upon their
institutional arrangements already instigated for compliance
with FATCA in order to cater for the reporting requirements
of implementing AEOI.
However, unlike the one-way flow of information to the US
tax authorities under FATCA, the AEOI standard consists of a
fully reciprocal system from which certain US specificities
have been removed. Furthermore, terms, concepts and
approaches have been standardized allowing jurisdictions to
use the system without having to negotiate individual terms,
the standard being universal and capable of being applied to
all jurisdictions. Unlike FATCA, reportable persons under the
AEOI standard are defined with reference to tax residence
rather than citizenship or nationality.
What actions must Hong Kong take in order to
implement AEOI?
The HKSAR Government indicated in a consultation paper
issued at the end of September 2014 that amendments to
the Inland Revenue Ordinance will be required in order to
make the following enabling provisions for the
implementation of AEOI in Hong Kong:
a.
prescribing obligations on financial institutions to
undertake due diligence procedures to identify
reportable accounts and to furnish annual returns to the
Inland Revenue Department (IRD) on the financial
information in respect of the accounts in the format as
prescribed by the CIR;
b.
introducing record-keeping and return requirements to
enable financial institutions to collect, keep and report
required information to CIR and to enable CIR to verify
their compliance;
c.
providing IRD with powers of gathering information on
reportable accounts from financial institutions in
prescribed format for the purpose of AEOI, while IRD’s
existing powers to gather information from identified
persons for the purpose of EOI on request would remain
unchanged;
d.
including necessary safeguards to protect data privacy
and confidentiality following international standards;
and
e.
introducing necessary sanctions to ensure compliance.
The consultation paper also indicates that the HKSAR
Government will consider whether there may be any
interfacing issues with other relevant ordinances. The
HKSAR Government will also examine the case for
allowing some “low-risk” entities or accounts to be
exempted from reporting, as well as considering a
mechanism to enable the financial account holders to
review the financial information to be transmitted.
The HKSAR Government will gauge initial views from local
stakeholders and the Legislative Council in the last
quarter of the year. After that, the HKSAR Government
plans to prepare detailed legislative proposals in 2015 for
further consultation with local stakeholders, and then
introduce the relevant bill to the Legislative Council for
enactment in 2016.
Commentary
Whether by necessity or by persuasion, it appears that
Hong Kong has decided to adopt the current international
norm and trend as regards AEOI. The HKSAR
Government is now conducting a consultation exercise as
regards the detailed legislative proposals for the
implementation of the AEOI in Hong Kong. Clients who
have 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.
When structuring their financial and tax affairs, taxpayers
should brace for a new environment with a heightened
level of tax transparency. At the same time, financial
institutions will have to ramp up their human and system
infrastructures in order to ensure their compliance with
the AEOI.
Clients who have any questions on any aspects of the
AEOI can discuss the same with their tax executives.
4.
Hong Kong Tax Alert
FATCA, which comes into effect from 1 July 2014, requires foreign
financial institutions (FFIs) [i.e., non-US FIs] to register with the US
Internal Revenue Service (IRS), conduct due diligence to identify
accounts held by US citizens or nationals (including accounts of
certain foreign entities with substantial US owners) and to report
relevant account information to the IRS. Non-compliant FFIs will face
a 30% withholding tax imposed on certain US-sourced payments.
3
Hong Kong office
Agnes Chan, Managing Partner, Hong Kong & Macau
22/F, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong
Tel: +852 2846 9888 / Fax: +852 2868 4432
Principal tax contact
Tracy Ho
+852 2846 9065
[email protected]
Hong Kong Tax partners
Agnes Chan
+852 2846 9921
[email protected]
May Leung
+852 2629 3089
[email protected]
Joe Chan
+852 2629 3092
[email protected]
Grace Tang
+852 2846 9889
[email protected]
Owen Chan
+852 2629 3388
[email protected]
Karina Wong
+852 2849 9175
[email protected]
Wilson Cheng
+852 2846 9066
[email protected]
Jo An Yee
+852 2846 9710
[email protected]
Chee Weng Lee
+852 2629 3803
[email protected]
Rex Young
+852 2629 3020
[email protected]
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© 2014 Ernst & Young Tax Services Limited.
All Rights Reserved.
APAC no. 03001250
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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.
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Hong Kong Tax Alert
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