In September 2014, Hong Kong indicated its support to implement the OECD Common Reporting Standard (CRS) and to exchange financial account information implementing automatic exchange of financial account information (AEOI) commencing the first exchanges in 2018.
Under the AEOI standard, financial institutions are required to identify financial accounts held by tax residents of reportable jurisdictions or held by passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions in accordance with due diligence procedures.
The first combined CRS & FATCA reporting year 2018 is finally closed, but it does not mean that the financial institutions in Hong Kong can now relax in relation to the CRS tax compliance procedures.
Dion’s understanding about the current CRS status and future developments as well as a high-level impact analysis of the financial industry in Hong Kong can be summarised as follows:
Financial Institutions are required to finalise the due diligence on pre-existing lower value accounts and legal entity accounts no later than 31 December 2018. This might increase the number of reportable accounts to be prepared and transmitted to the Internal Revenue Department in 2019.
Increased complexity and the need to collate the volume of required data in aggressive timeframes, financial institutions need to comply with CRS reporting requirements using a strategic long-term reporting solution.
Dion’s Tax Reporting and Compliance Solution’s (TRAC) CRS reporting module enables financial institutions to generate on-time reporting based on a sophisticated reporting lifecycle using the most recent FATCA & CRS reporting schema.
• Key measurements introduced by the Hong Kong administration
With the “Inland Revenue (amendment) Ordinance Bill” gazette on 2 February 2018, additional requirements to strengthen the CRS due diligence procedures were introduced. The amendments will come into force on 01 January 2019 and requires financial Institutions to identify Management officials in case of a Trust Enforcer.
In 2017, Hong Kong made commitments to the OECD about participation ‘The Convention on Mutual Administrative Assistance in Tax Matters (the Convention)’.
"The Convention provides a multi-party platform for participating jurisdictions to mutually agree with each other on various forms of administrative co-operation in the assessment and collection of taxes, including the exchange of information” a governmental spokesman said.
The convention came into force in Hong Kong on 1st September 2018.
Currently, 125 Jurisdictions (with one additional jurisdiction signed but not ratified by the Convention) are participants of the Convention. This movement will increase the number of reportable jurisdictions from 75 to 126 (the number might increase in future years).
The measures introduced by the “Inland Revenue (amendment) Ordinance Bill” also increases the pressure for Financial Institutions to monitor financial accounts and to identify “Change in Circumstances” affecting the tax status of an account holder. These measures lead to an increased number of accounts to be reported for year 2019.
FIs need to act now to deploy a comprehensive, proven and readily implementable technology solution to effectively accommodate the regime.
Dion’s TRAC-CRS module’s due diligence functionalities are designed to identify the tax residency of each account holder. This can be done either based on a “residency address test” or Indicia search on intervals the financial institution decides (daily, weekly, bi-weekly, monthly, etc.). Our TRAC-CRS module is scalable and can easily include additional reporting jurisdictions to be considered in the due diligence and reporting processes.
• OECD Developments
Media leaks like the paradise paper, combined with more recent information collected through compliance activities of a number of tax administrations, demonstrate that financial institutions and professional advisors continue to design, market or assist in the implementation of offshore structures and arrangements to circumvent the goals of CRS. The results of the OECD’s disclosure initiative back this notion too.
As a result, the OECD has released disclosure rules requiring financial institutions and other service providers to identify such avoidance arrangements and report them within 30 days to the local tax authorities.
On 25 June 2018 the EU Commission updated the “European Union (EU) Directive on Administration Co-operation (the Directive)” introducing the new mandatory reporting regime in respect of certain “reportable cross-border arrangements”. Financial institutions in EU Member States are required to implement the procedures by end of 2019 with a first reporting deadline of July 2020.
Even though the Hong Kong Administration has not published their view, Financial Institutions should be alerted that the MDR requirements might be transformed into local law in a short period. In order to avoid being listed in EU ‘non-cooperative jurisdiction” list, the Hong Kong Administration might decide to implement the MDR requirements quickly and without due notice (analog to the increased number of reportable jurisdictions.
The underlying TRAC-CRS data structure allows alerts you to activities and events which might circumvent the CRS due diligence and reporting requirements.
More and more jurisdictions are offering “residence by investment” (RBI) or “citizenship by investment” (CBI) schemes. These are schemes that allow foreign individuals to obtain citizenship or temporary or permanent residence rights in exchange for local investments or against a flat fee.
CRS is unlike FATCA, not driven by Citizenship. CRS requires you to identify the ultimate tax residency of each account holder. RBI schemes can potentially be exploited to undermine the CRS procedures. This may lead to inaccurate reporting under the CRS, in particular when not all jurisdictions of tax residence are disclosed to the financial institution by the account holder(s).
The OECD has not provided final guidance regarding RBI schemes. Nevertheless, Financial Institutions should be aware that increased due diligence activities might be required in a short period to identify account holders trying to gain tax advantages from RBI Schemes by hiding the ultimate tax residency.
Dion’s TRAC-CRS Case Management system can be customised to generate specific cases on account holders providing a tax residency in a jurisdiction offering RBI Schemes.
For more information about our FATCA, CRS Solutions, please write to us at email@example.com.