Hong Kong changes its approach to CRS in order to avoid being labelled non-compliant by the OECD & the European Union

(photo credit: Chris Lusher)


Article originally published on LinkedIn by Hendrik Muehler (https://www.linkedin.com/pulse/hong-kong-changes-its-approach-crs-order-avoid-being-labelled) on 5 April 2017.

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Hendrik Muehler

Under increasing OECD and European Union (EU) pressure of being labelled as a non-compliant jurisdiction, Hong Kong is expediting and expanding its Automatic Exchange of Information (AEOI) implementation.

Hong Kong legislated the adoption of the OECD Common Reporting Standard (CRS) in June 2016 by amending the Inland Revenue Ordinance (IRO). In familiar fashion, Hong Kong’s minimalistic approach to conduct AEOI on a bilateral basis only with partners with which a signed comprehensive avoidance of double taxation agreement (CDTA) or tax information exchange agreement (TIEA) is in place, contrasts the intention of the OECD framework. Hong Kong’s targeted approach currently includes merely two reportable jurisdictions to exchange information with in 2018 – Japan and the United Kingdom (UK). Earlier in March, Hong Kong concluded six more Competent Authority Agreements (CAA) adding to the one signed with South Korea in January which have yet to enter into force. Account holders of other participating jurisdictions are excluded from the exchange of information until a CAA is signed and effected. In its implementation statement Hong Kong expressly excluded Multilateral Convention Agreements as a basis for the exchange of information. Currently, financial institutions may collect information from account holders of all participating jurisdictions (“wider approach”), however, only the information of account holders in reportable jurisdictions (Japan and UK) would need to be transmitted to the Hong Kong Inland Revenue Department (IRD) for the exchange with the tax authorities of these other jurisdictions. For the newly added jurisdictions the account information would likely be subject to reporting starting from 2019.

The “wider approach” favoured by Hong Kong, however, came under attack by the OECD and the European Union (EU). These are threatening Hong Kong of labelling Hong Kong as a non-compliant jurisdiction. This had the outcome that Hong Kong changed its approach and enacted a bill to “amend the Inland Revenue Ordinance to expand the list of reportable jurisdictions for the more effective implementation of the arrangement relating to automatic exchange of financial account information in tax matters.”

The OECD’s Global Forum is conducting peer reviews on the implementation of CRS among the 100 jurisdictions that committed to AEOI. The peer reviews focus on a jurisdiction’s ability to co-operate. In order to avoid a negative or non-compliant rating, Hong Kong Government has identified 72 prospective AEOI partners, comprising of:

  1. all Member States of the European Union (EU),
  2. Hong Kong’s tax treaty partners which have committed to AEOI, and
  3. other jurisdictions which have expressed interest to the OECD in exchanging information with Hong Kong and is proposing to include these in the list of reportable jurisdictions with effect of July 2017 as prospective AEOI partners.

 

(For a complete list of reportable jurisdictions of Hong Kong, please click here.)

Furthermore, Hong Kong has indicated a possible departure of its initial approach by considering joining the Multilateral Convention on the Mutual Administrative Assistance in Tax Matters.

This redefined approach will result in the IRD storing financial account information collected from financial institutions from July 2017 and exchanging them with these prospective countries once a CAA is in force. The AEOI partner would, regardless of the CAA signing date, then be able to receive the CRS data dating back to July 2017. The consequences of this change in approach might be enormous.

All financial data of reportable account holders is being collected by the IRD and will be provided to their home jurisdictions. The major difference is, that the start date should have been the “enter-into-force” date of a CDTA, TIEA or CAA between Hong Kong and the other jurisdiction. The new approach, however, sets the start date to July 2017. With this very tight timeframe affected persons should consult experts in order to examine their CRS situation.

Who is a reportable account holder?

A reportable account holder is an individual that is a tax resident of a reportable jurisdiction, as well as the controlling persons of a corporate entity account that is not an active entity. CRS refers to definition of controlling person to the interpretation of FATF which defines a controlling person as all natural persons that:

  1. Directly or indirectly holds more than 25% of the shares or voting rights of an entity;
  2. Directly or indirectly holds the right to appoint or remove a majority of the directors of the board;
  3. Otherwise has the right to exercise, or actually exercises, significant influence or control; or
  4. Has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the former conditions (in their capacity as such) in relation to the company, or would do so if they were individuals.

 

CRS therefore looks through successive layers of companies, trust arrangements and other arrangements.

For more information please contact the author directly. The author is Managing Director of Mühler McKay, a business advisory firm with worldwide reach and renders international tax, legal and corporate services to a diversified international client base from various industries and sizes.

 

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Contributing Authors

Hendrik Muehler

Mr Muehler is Attorney-at-law and International Tax and Structuring Specialist at Muehler McKay Hong Kong. He advises clients on cross-border transactions and the structuring of international businesses and group of companies with a focus on Intellectual Property Rights, Royalty routings and international taxation matters, such as transfer pricing, double taxation treaties, dividend flows and tax planning for corporate entities.