• Marco Zawar MBA/LLM (Tax)

Hong Kong - AEoI/CRS Due diligence and reporting obligations for 2020 and beyond

Updated: Dec 3, 2019

Abstract


The OECD in 2017 conducted an assessment on non-reportable financial institutions (NRFIs) in Hong Kong and concluded that

  • Mandatory Provident Fund Schemes (MPF),

  • Occupational Retirement Schemes (ORSO),

  • ORSO pooling agreements and

  • ORSO approved pooled investment funds

should not be treated as NRFIs.


The Inland Revenue Department (IRD) on 01 March 2019 gazetted the “Inland Revenue (Amendment) (No. 2) Ordinance 2019 (Amendment Ordinance)” to introduce the term "2020-covered institutions" and to revoke

  • Mandatory Provident Fund Schemes,

  • Occupational Retirement Schemes registered under the Occupational Retirement Schemes Ordinance (Cap. 426),

  • pooling agreements, approved pooled investment funds and

  • credit unions

to be treated as NRFs.


"2020-covered institutions" are required to establish by not later than 31 December 2019 CRS conform Client due diligence procedure to

  • identify pre-existing account holder tax resident in a jurisdiction outside of Hong Kong

  • collect the required documentary evidence to validate the pre-existing account holders tax residency

  • obtain for accounts opened on or after on or after 01 January 2020 (new accounts) upon account opening sufficient information to verify the account holders tax residents;

"2020-covered institutions" are obliged by not later than 31 May 2021 to have functionalities in place allowing

  • to generate, validate and transmit demographic and financial information about account holder having a tax resident in at least one reportable jurisdiction.

CRS non-compliance might lead to

  • a punitive fine of up to HKD$ 50,000 (US$6,400) on Financial Institution level

  • up to 3 years imprisonment for employees involved in CRS non-compliant activities

Introduction


As an international financial centre, Hong Kong has been committed enhancing tax transparency and combating cross-border tax evasion by actively implementing the Automatic Exchange of Information (AEOI).


AEoI is the collective term for the two regimes

  • OECD Common Reporting Standard (CRS) and

  • U.S Foreign Account Tax Compliance Act (FATCA)

to facilitate the exchange of information with other jurisdictions.


In December 2017, the OECD conducted an assessment of non-reporting financial institutions (“NRFIs”) in Hong Kong for CRS purposes. In particular, one of its conclusions was that certain Hong Kong specific retirement schemes like Mandatory Provident Fund (MPF), Occupational Retirement Schemes registered under the Occupational Retirement Schemes Ordinance (Cap. 426) (ORSO), ORSO pooling agreements and ORSO approved pooled investment funds should not be treated as NRFIs .


To comply with the OECD’s requirements and to strengthen Hong Kong’s efforts in combating tax evasion, the Inland Revenue Department (IRD) on 01 March 2019 gazetted the


Inland Revenue (Amendment) (No. 2) Ordinance 2019 (Amendment Ordinance).


With the (Amendment Ordinance) the legislative framework for Automatic Exchange of Financial Account Information in Tax Matters (AEOI) under the Inland Revenue Ordinance (Cap. 112) (IRO) will be refined with effect from January 1, 2020 for better aligning the relevant provisions with the requirements promulgated by the Organisation for Economic Co-operation and Development (OECD)


The Amendment Ordinance introduces the term 2020-covered Institutions and includes under this umbrella

  • Mandatory Provident Fund Schemes,

  • Occupational Retirement Schemes registered under the Occupational Retirement Schemes Ordinance (Cap. 426),

  • ORSO pooling agreements,

  • ORSO approved pooled investment funds, and

  • Credit unions

to be treated as reportable financial institutions.


As a consequence, such institutions has to

  • establish CRS client due diligence procedures under consideration of Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to identify the tax residency status for tax purposes for pre-existing and new account holders;

  • enhance existing KYC rules to collect self-certificates and potential additional documentary evidence to proof the account holder tax residency status for new and pre-existing accounts;

  • built processes and procedures generate and transmit CRS relevant account information to the IRD with a first reporting deadline May 2021;

  • develop and maintain compliance guidelines and trainings material;

  • monitor regulatory changes to reporting requirements.

As of 01 January 2020, the Amendment Ordinance also increased the number of reportable jurisdictions under the IRO from the current 75 to 126 .

Actions to be taken by “2020-covered institutions”


The CRS introduction follows a 4-step-approach.


Step 1 - by not later than 31 December 2019


2020 covered institutions shall establish due diligence procedures to identify the CRS tax residency for

  • New individual and legal entity accounts; and

  • Pre-existing individual and legal entity accounts.

Step 2 - by not later than 31 December 2020

  • to finalise the due diligence on pre-existing individual high-value accounts;

  • to establish CRS due enhanced diligence procedures for pre-existing high-value accounts classified as non-reportable from previous periods;

Step-3 by not later than 15 May 2021

  • to launch CRS reporting procedures to meet the reporting deadline 31 May 2021.

Step 4 - by not later than 31 December 2021


• to finalise the due diligence on pre-existing lower value accounts; and

• to complete the due diligence on pre-existing legal entity accounts.

Measures introduced by the IRD to ensure compliance under IRO


Financial institutions are required to comply with the due diligence and reporting requirements in the Inland Revenue Ordinance (Cap. 112) (IRO)

The Internal Revenue Department introduced in a number of measures to ensure that Hong Kong’s financial industry is CRS compliant.


On-side reviews


The on-side reviews considers the following actions taken by the IRD

a. interviews with the responsible officer and staff

b. walk-through of the compliance system and process established and maintained to support CRS procedures;

c. examine the internal policy, procedural manual or handbook and staff training materials relating to the compliance of the standard for automatic exchange of financial account information;

d. conduct sample check of the evidence relied on and the record of the steps taken for carrying out the required procedures; and

e. review the correctness or completeness of the financial account information return.


Criminal Sanctions


There are punitive provisions in the IRO provides punitive provisions to sanction financial institutions, service providers and others for offences committed under the IRO .

The IRO considers financial penalties up to HKD$ 50,000 (US$ 6,400) on FI level and imprisonment up to 3 years on employees level for

a) CRS non-compliance,

b) submission of incorrect returns, and

c) defrauding with intent.


You are CRS compliant under IRO?


The chapter contains a questionnaire allowing reporting financial institutions on a high-level basis to assess their CRS compliance.


Client due diligence on new and pre-existing accounts

  • You have procedures in place allowing you unambiguous to identify the tax residency of individual account holder?

  • You have procedures in place allowing you unambiguous to identify the tax residency of account holder that are active NFE’s?

  • You have procedures in place allowing you unambiguous to identify the tax residency of account holder that passive NFE’s?

  • You have procedures in place allowing you unambiguous to identify controlling persons of a passive NFE tax resident in a reportable jurisdiction?

  • You have procedures in place identifying change in circumstances that affects the account holders tax residency status?

  • You have procedures in place to store all activities related on client due diligence activities to identify the account holders tax residency?

Compliance procedures

  • You have procedures in place to monitor and analyse regulatory changes related to AEoI?

  • You have procedures in place to automatically update compliance handbooks and compliance trainings manuals?

  • You have features in place to provide periodically CRS related compliance trainings to all relevant stakeholder (web-based/on-side)?

Could you all questions answer unambiguous with a "Yes"?


How I can support your needs to strengthen your CRS compliance procedures?


I provide 30+ years experience gained in the compliance, operations and international tax environment of leading private banking & wealth management organisations and financial service provider in Europe and the APAC Region.


I am focused on tax compliance and tax transparency initiatives combating international tax evasion including Automated Exchange of Financial Account Information (AEoI), OECD Common Reporting Standard (CRS), FATCA and U.S Qualified Intermediary (QI) Regime including IRC Section 871(m) for Australia, Canada, Hong Kong, Singapore & Switzerland.


Skilled in the analysis and interpretation of changes in local tax law and their potential impacts on existing tax policies and procedures.


Experienced in designing Client Due Diligence (CDD) and Know Your Customer (KYC) procedures with the understanding of local AML to support the identification, verification and documentation of beneficial owners and account holders tax residence(s) under CRS, RBI or U.S Taxpayer Status under FATCA.




©2019 by Marco Zawar