Hong Kong pledged in September 2014 its support for the new standard on the Automatic Exchange of Financial Account Information in Tax Matters (AEOI), with a view to commencing the first information exchanges with appropriate partners by the end of 2018. The commitment was premised on the condition that Hong Kong could put in place the necessary domestic legislation by 2017. On April 24, 2015 the Hong Kong Government launched a public consultation on the AEOI (for further information see our article from April 25, 2015).
On October 12, 2015 on the website of the Inland Revenue Department of Hong Kong a press release was published stating that in the light of stakeholders' views collected during a consultation regarding AEOI, the Hong Kong Government will refine the legislative proposals for implementing in Hong Kong the new international standard on AEOI.
The press release states that the major changes in three areas are as follows:
(a) The definitions of financial institutions (FIs), non-reporting FIs and exempted accounts will remain more or less intact. In the light of feedback, we will ensure that certain trust companies beyond the coverage of the OECD's Common Reporting Standard (CRS) will not be unnecessarily caught in our domestic legislation. We will also state explicitly in the proposed legislation that Mandatory Provident Fund Schemes, Occupational Retirement Schemes and Credit Unions registered under the relevant statutes will be "non-reporting FIs" and that dormant accounts will be excluded.
(b) It remains our proposal to impose a mandatory requirement for FIs to carry out the due diligence procedures set out in the CRS to identify and collect information on reportable accounts with account holder's tax residence corresponding to Hong Kong's AEOI partners (so-called "targeted approach"). However, in the light of feedback, we are inclined to provide a clear legal basis which at the same time allows FIs to pursue a "wider approach" to cover account holders with other tax residences.
(c) On the proposed penalties for FIs and employees, it is essential to put in place appropriate penalty provisions to provide for sufficient deterrent effect to ensure effective implementation of the AEOI regime in Hong Kong. We will keep the sanctions for FIs, and will also make it clear that the relevant sanctions will apply to service providers engaged by FIs to fulfill their due diligence and reporting obligations. As regards employees, in the light of feedback, we will refine the proposed sanctions by confining them to employees who have caused or permitted the FIs to provide incorrect return in a willful manner.
In the press release it is furthermore stated that the Hong Kong Government is working on the draft amendment bill, which will incorporate the latest features as set out in the consolidated response. It is also stated that the Hong Kong Government presses ahead to introduce the bill into the Legislative Council in early 2016, so as to meet the implementation plan.
A document titled “Consultation on Automatic Exchange of Financial Account Information,in Tax Matters (“AEOI”) - Consolidated Response of the Government” was attached to the press release. In paragraph “Overview” under 3 of the document the following is stated:
“In response to the seven key questions flagged up in our consultation paper, the major views received and our general position are summarised as follows –
(a) Financial institutions (FIs), non-reporting FIs and excluded accounts – 29 parties have commented on the proposed definitions of FIs or requested exemptions as non-reporting FIs and/or excluded accounts. In considering possible exemptions for FIs or financial accounts, we would follow the overriding criteria as set out in the Common Reporting Standard (“CRS”) promulgated by OECD that any FIs or financial accounts to be exempted from reporting should be those which bear low risks of being used for tax evasion, have substantially similar characteristics to certain exemption categories specified in the CRS, subject to regulation, and that the exemption would not frustrate the objective of CRS. In the light of feedback, we will state explicitly in the proposed legislation that Mandatory Provident Fund schemes, Occupational Retirement Schemes and credit unions registered under the relevant statutes will be “non reporting FIs” and that dormant accounts will be excluded.
(b) Reporting requirements – 24 submissions have covered this aspect. In gist, their views were that information to be reported should be kept to the minimum necessary in accordance with the CRS requirements with flexibility allowed if possible and that the legislation should clearly define which should be the reporting FIs and their responsibilities. We are in agreement with the advice.
(c) Due diligence procedures – 26 submissions have flagged up these issues, mainly on how to ascertain tax residence and administer the self-certification arrangement, how to ride on the due diligence procedures for anti-money laundering (“AML”) for AEOI purpose, whether or not de minimis rules can be provided to reduce compliance costs, and whether alternative options for reporting as provided for under CRS would be allowed in Hong Kong. We acknowledge stakeholders’ concerns and would be prepared to incorporate in the legislation alternative options under CRS and to allow FIs to leverage on the due diligence procedures under AML such as those in ascertaining the permanent residence address, so long as such arrangements are permitted under CRS.
(d) Requirements for FIs to identify and keep information of accounts concerning reportable jurisdictions – Amongst the 22 submissions which covered this aspect, the majority consider that a wider approach should be allowed to reduce FIs’ compliance costs, i.e. the proposed legislation should provide for the legal basis for FIs to collect information of all non-Hong Kong tax resident account holders if they wish and so long as they can comply with the requirements of the Personal Data (Privacy) Ordinance (“PDPO”) (Cap. 486). A few others however considered that a targeted approach may better cater for the circumstances of the small-to-medium sized FIs and hence causing less burden on them. In line with the feedback received, we will impose requirements on FIs based on a “targeted approach” and allow FIs the option of adopting a wider approach under specified conditions.
(e) Proposed sanctions – 26 submissions have flagged up concerns in this regard, mainly questioning the need for sanctioning employees of an FI. While not disputing the need to sanction FIs, they consider that the level of penalties on FIs should not be too heavy and that sanctions should also be imposed on account holders for providing false self-certification. In formulating the proposed sanctions, we need to provide for sufficient deterrent effect to ensure effective implementation of AEOI in Hong Kong on the one hand, while not imposing disproportionately high level of sanctions on FIs and individuals on the other. In the light of feedback, we will drop one of the proposed offences for employees of FIs - causing or permitting, without reasonable excuse, the FIs to provide incorrect return. Where the non-compliance was wilful, however, the employees of FIs will still be held liable.
(f) Confidentiality and notification – 24 submissions have expressed views on this aspect. Most do not object to the Government’s proposal for FIs to notify account holders for the purpose of AEOI in a generic manner. Some suggest legislating for such a requirement and providing avenue for account holders to appeal, similar to that under the current Exchange of Information (EOI) on request mechanism. Some have expressed concerns on whether AEOI meets the standard of “foreseeable relevance” and whether the proposal would comply with the right to privacy. The Government attaches great importance to protecting the data privacy of taxpayers and the confidentiality of information to be exchanged. All existing confidentiality safeguards for EOI under international standard will continue to apply to AEOI. Notification for account holders is not a requirement under CRS for AEOI implementation. However, in order to comply with PDPO requirements, we will remind FIs that they should inform the account holders of the possible use of the information collected for AEOI purpose.
(g) IT system –15 submissions have covered this aspect. Smaller-sized FIs prefer to use the software to be developed by the Inland Revenue Department (“IRD”); bigger ones state that they can develop their own software for AEOI purpose but need more detailed specifications from IRD. The Government will continue to engage stakeholders in developing the IT system so as to ensure smooth implementation of AEOI.”
Click here to be forwarded to the document titled “Consultation on Automatic Exchange of Financial Account Information in Tax Matters (“AEOI”) - Consolidated Response of the Government” as available on the website of the Financial Services and the Treasury Bureau.
Click here to be forwarded to the press release as published on October 12, 2015 on the website of the Inland Revenue Department of Hong Kong.
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