Under the CRS framework, financial institutions in Hong Kong are required to identify and report to the IRD the financial accounts held by tax residents of overseas reportable jurisdictions (including individuals, entities and controlling persons of certain entity accounts) on an annual basis. CRS reporting will commence from 2018 with respect to 2017 account information.
Because Hong Kong is not a sovereign jurisdiction, it cannot be a direct signatory to the OECD multilateral agreement for the automatic exchange of CRS information. Hong Kong therefore originally planned to collect and report CRS information to other countries based on bilateral agreements. Hong Kong has signed bilateral Competent Authority Agreements (BCAA) with Japan and the UK for the exchange of CRS information from 2018 (with respect to 2017 data), and with Korea for the exchange of CRS information from 2019 (with respect to 2018 data). In view of the targeted approach adopted by Hong Kong, financial institutions are only required to report to the IRD for the first CRS reporting period (due in May 2018) the financial accounts held by tax residents of Japan and the UK.
However, Hong Kong is under pressure to accelerate this process. In particular, the European Union (EU) has announced that it will prepare a blacklist of “noncooperative tax jurisdictions”. One of the listing criteria relates to the implementation of CRS. Specifically, the EU requires arrangements to be in place for the exchange of CRS information with all member states of the EU by the end of 2017.
As a result, the Hong Kong government plans to add 72 jurisdictions (in addition to Japan and the UK) to Hong Kong’s list of reportable jurisdictions for CRS purposes. The additions include all EU member states, all of Hong Kong’s tax treaty partners which have committed to CRS, and other jurisdictions which have expressed an interest to the OECD in exchanging CRS information with Hong Kong. The new jurisdictions include Australia, Canada, China, France, Germany, India, Korea, Malaysia, Russia and Switzerland.
The Hong Kong government plans to commence the relevant legislative procedures shortly to ensure that these changes are effective from 1 July 2017. For the 72 new jurisdictions, CRS information needs to be provided to the IRD with effect from1 July 2017 (compared with I January 2017 for Japan and the UK), but the IRD will provide this information to the relevant country only after it has signed a Competent Authority agreement with that country.
This proposed change will have a significant impact on financial institutions which so far have relied on the original targeted approach to identify and collect information. Other financial institutions which adopted a wider approach should evaluate whether they are able to extract financial data for only a six month period for the second half of 2017. It is worth noting that the due diligence deadline for high value individual accounts remains 31 December 2017, regardless of whether the account holders are tax residents of the confirmed or prospective reportable jurisdictions.
The IRD indicated that, notwithstanding it will collect all financial data with respect to residents of these 72 new reportable jurisdictions, it will only exchange CRS information with jurisdictions which have a legal basis that allows for the automatic exchange of financial account information. This would include either updating or the signing of Comprehensive Double Taxation Agreements or Tax Information Exchange Agreements and concluding a BCAA with the relevant jurisdiction. This could still be a lengthy process. The Hong Kong government is currently exploring an alternative legal basis for CRS information exchange, such as requesting Mainland China to extend its accession to various multilateral tax agreements to cover Hong Kong.
The proposed expansion of the list of CRS reportable jurisdictions is expected to be effective in less than 4 months’ time. Financial institutions should be planning for the required operational and system enhancements. It is also important for financial institutions to provide up-to-date training for front-line staff and continuous customer communication, to ensure compliance with the latest requirements. Our previous tax alerts on the CRS developments in Hong Kong are accessible below: