11 Oct 2016
An Update on Hong Kong’s Commitment to Automatic Exchange of Information in Tax Matters
Amendment to the Inland Revenue Ordinance (2016)
The Inland Revenue (Amendment) (No. 3) Ordinance became effective on 30th June 2016, with the objective to the implementation of Automatic Exchange of Information ('AEOI') that is in compliance with the Common Reporting Standard ('CRS'). The 2016 amendment covers three aspects: the required tax information is available, the HK Inland Revenue Department (the IRD) has access to the tax information, and the tax information can be exchanged with jurisdictions with which Hong Kong has concluded a competent authority agreement.
Common reporting standards
The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The Standard consists of the following four key parts: (i) a model Competent Authority Agreement (CAA), providing the international legal framework for the automatic exchange of CRS information; (ii) the Common Reporting Standard; (iii) the Commentaries on the CAA and the CRS; and (iv) the CRS XML Schema User Guide.
1. Availability of tax information
Sections 50B(1), and 50B(2) of the IRO provide that a reporting financial institution (FI) must establish, maintain and apply due diligence procedure to identify reportable accounts, identify and collect the required information, and secure that the evidence that relies on and the record of steps taken for carrying out the procedure in relation to a financial account are kept for a period of 6 years commencing from the date on which the due diligence procedures are completed. The due diligence procedure as mentioned above shall be designed to identify the tax resident of (a) the account holder of a financial account maintained with the reporting FI, and (b) the controlling person of the passive non-financial entity (NFE) if the account holder is a passive NFE.
1.1 Reporting financial institution
A reporting FI means (a) a financial institution that is resident in Hong Kong (excluding any branch of the FI located outside HK); or (b) a branch located in Hong Kong of an FI that is not resident in Hong Kong, but does not include a non-reporting financial institution.
In respect of a financial institution that is a company, the FI is resident in Hong Kong if it is incorporated in Hong Kong, or if incorporated outside Hong Kong, is normally managed or controlled in Hong Kong. In respect of a financial institution that is a trust, it is a resident in Hong Kong if (i) it is constituted under the Hong Kong law; (ii) if constituted outside Hong Kong, it is normally managed or controlled in Hong Kong; or (iii) if both of the descriptions in (i) and (ii) are not met, one or more of the trustees are resident in Hong Kong.
1.2 Due diligence procedure
Due diligence requirement means the procedures as laid down in Schedule 17D.
1.3 Reportable account
A reportable account means a financial account (i) that has been identified as such under the due diligence requirement in Schedule 17D, and (ii) that is held by (A) at least one reportable person; or (B) a passive NFE with at least one controlling person being a reportable person.
A reportable person means an individual or entity that is a resident for tax purposes of a reportable jurisdiction or an estate of a decedent who was a resident for tax purposes of a reportable jurisdiction; but does not include (i) a corporation the stock of which is regularly traded on an established securities markets; (ii) a corporation that is a related entity of a corporation mentioned in (i); (iii) a government entity; (iv) an international organization; (v) a central bank; or (vi) a financial institution.
1.4 Required information
If the account holder is an individual who is a reportable person, the name, address, date and place of birth, tax residence, the tax identification number (TIN) of the individual, the account number and account balance or value at the end of the reporting period of the individual account holder.
If the account holder is an entity that is a reportable person, the name, address, residence, the tax identification number (TIN) of the entity, the account number and account balance or value at the end of the reporting period of the account holder.
If the account holder is an entity and at least one controlling person of the entity is a reportable person, the name, address, tax residence, the tax identification number (TIN) of the entity; and the name, address, date and place of birth, tax residence, the tax identification number (TIN) of each reportable person, the account number and account balance or value at the end of the reporting period of the account holder.
In respect of a depository account, the total gross amount of interest paid to it during the reporting period.
1.5 Controlling person
The term controlling person effectively means the beneficiary of the entity that is the account holder.
Where an entity is a corporation, an individual exercises control over the entity if (i) the individual (a) owns or controls, directly or indirectly including through a trust or bearer share holding not less than 25% of the issued share capital of the entity; (b) is directly or indirectly entitled to exercise or control the exercise of not less than 25% of the voting rights at general meetings of the entity; or (c) exercises ultimate control over the management of the entity. (ii) the entity is acting on behalf of another person, over whom the individual exercises control.
Where an entity is a trust, an individual exercises control over the entity if the individual (i) is entitled to a vested interest in not less than 25% of the capital of the property of the entity, whether the interest is in possession or in remainder or reversion and whether it is defeasible or not; (ii) is the settlor of the entity; (iii) is the protector of the entity; or (iv) exercises ultimate control over the management of the entity.
1.6 Passive NFE
A passive NFE here means either a non-financial institution earning more than 50% of income from the following sources directly: (a) interest, (b) dividends, (c) royalties, (d) rents, (e) annuities, (f) the excess of gains over loss from the sale of financial assets that give rise to passive income as mentioned in (a) to (e) above, (g) the excess of gain over loss from transactions (including futures, forwards, options and similar transactions) in any financial assets, (h) the excess of foreign currency gain over loss, (i) net income from swaps, or (j) amounts received under cash value insurance contracts, or a non-financial institution holding more than 50% of the assets that produce passive income as mentioned above.
2 Access to tax information
Sections 50C(1) 50C(2) and 50C(3) of the IRO require that a reporting financial institution must file a return in accordance with a notice given by an assessor, containing the required information under section 50F, to the Hong Kong tax authorities on an annual basis. Also an assessor may give a notice in writing to a reporting FI, requiring it to furnish a return reporting the required information in relation to reportable accounts with respect to any reportable jurisdiction kept by the FI at any time during the period specified in that notice.
Section 51B provides that the Commissioner or the authorized officer holding a position of the Chief assessors or above, has grounds to suspect that a reportable financial institution has failed to discharge its obligation under section 50B(1) and S50B(2) or to comply with a court order directing the reporting FI to submit a tax return issued under S50C(1), the Commissioner or the authorized officer, after satisfying the Magistrate by taking statement of oath and obtained a warrant, has the power, without the requirement of giving advance notice, to enter and have free access to the office premises of the FI’s, at any reasonable time during the day, to examine whether the reporting FI has set up and implement the CDD procedures to identify reportable accounts, collect and keep the required information, and report the same to the Hong Kong Inland Revenue Department, as provided under section 50B(1), 50B(2) and 50C(1).
Section 52BA also provides that after receiving advance notice, the reporting FI must allow the tax assessor to enter the office premises to inspect and check whether the reporting FI has properly discharged the obligations under section 50B(1), 50B(2) and 50C(1), as mentioned above.
3 Penalties for non-compliance
Section 80B provides that if a reportable FI fails to file a tax return as required, it commits an offence, and upon conviction will be subject to a fine at level 3 (HK10,000), if the FI fails to perform acts as per the count order, it will be fined at level 4 (HK$25,000). Where the non-compliance continues after conviction, the FI will be subject to a daily fine of HK$500 until the deficiency has been rectified.
In contrast to the mandatory requirements under sections 50B(1) and 50B(2), section 50B(3) provides that a reporting FI has the option to collect and keep the information of bank accounts even if (i) the account holder is a tax resident of a jurisdiction with which Hong Kong has not concluded any double tax agreement (DTA); (ii) if the account holder is a passive NFE, any controlling person of account holder is a tax resident of a jurisdiction with which no DTA is in place.
The 2016 amendment means that in the first place, Hong Kong now stands ready for the third round of peer review by the Global Forum under the 2016 terms of reference on exchange of information on request (EOIR), which requires the examination on the information relating to beneficial ownership in terms of its availability, accessibility and exchangeability. In the second place, it has in place the legal framework for AEIO in compliance with the CRS, and thus stands ready for entering competent authority agreement (CAA), which is expected to be released by government gazettes in Schedule 17E of the IRO before the end of 2017.
China Tax & Investment Consultants Ltd