The Common Reporting Standard (CRS) introduced by the Organization of Economic Cooperation and Development (OECD) for inter-governmental automatic exchange of information (AEOI) is a significant initiative that could be a paradigm shift in the financial industry.
CRS will soon be implemented in Hong Kong, following the Inland Revenue (Amendment) (No.3) Ordinance 2016, published in the Gazette and became effective on 30 June 2016. Financial institutions and intermediaries in Hong Kong will be under legal obligation to report to the Inland Revenue Department (IRD) on financial accounts for reportable persons, starting 2017, with first reporting to be made to IRD by 31 May the following year, ie. 31 May 2018. Hong Kong IRD will conduct the first automatic information exchange with relevant jurisdictions on a reciprocal basis by the end of 2018.
According to the IRD: “Under the AEOI standard, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions in accordance with due diligence procedures. FIs are required to collect the reportable information of these accounts and furnish such information to the Department. The Department will exchange the information with the tax authorities of the AEOI partner jurisdictions on an annual basis.”
The AEOI requirement will cover individuals who are tax residents of “reportable jurisdictions”, being jurisdictions with which Hong Kong has entered into an AEOI arrangement. Financial institutions are not required to report information on accounts where the account holder is not tax resident in a jurisdiction with AEOI agreement with Hong Kong.
As stated, in general, whether or not an individual is a tax resident of a jurisdiction is determined by having regard to the person’s physical presence or stay in a place (e.g. whether over 183 days within a tax year) or, in the case of a company, the place of incorporation or where the central management and control of the entity lies.[1] FIs may request account holders to provide self-certifications on tax residency in order to determine whether the accounts fall within scope of reporting under AEOI.
On 9 September 2016, the IRD issued the “Guidance for Financial Institutions” (Guidance), with further detailed guidelines on the relevant reporting requirements and due diligence procedures, and includes clarifications with respect to collective investment schemes, and the treatment of trusts. A summary of the Guidance is set out in this update:
[1] OECD has established a portal which provides information on tax residency rules in jurisdictions which have committed to implementing AEOI: http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/#d.en.347760
