When Hong Kong committed to implementing CRS by 2018, it indicated that a legal framework would be required to guide the entire process of sharing account information for foreigners. In June 2016, this law was put in place, and it outlines the guidance for CRS implementation in Hong Kong. The guidance provided by the IRD under the new law provides a clear outline on how to identify the reportable accounts, information to gather, and how to report it.
Hong Kong only implements CRS on a reciprocity basis with other countries that are equally committed. To establish this, every country that Hong Kong exchanges financial information with must sign a comprehensive avoidance of double taxation agreement (CTDA) with it.
Besides, such jurisdictions must also enter into a competent authority agreement (CAA) that sets the stage for actual information sharing. The two agreements act as the main pillars for the realization of CRS objectives. The guidance for CRS in Hong Kong can be broken into the following progressive stages.
Only reporting financial institutions are required by Hong Kong authorities under CRS standards to collect and submit account finance information for foreigners. For a financial institution to qualify as a reporting entity, it must be based in Hong Kong or be a branch of a non-resident financial organization operating from Hong Kong. The financial institutions include the custodial institution, investment entity, depository entity, and insurance firms.
The guidance for CRS includes all the financial accounts that should be subjected to assessment and included in the report submitted to IRD for the year 2017. They include the depository accounts, custodial accounts, and equity and debt interest in investment entities.
Others include cash value insurance contracts and annuity contracts. The guidance does not include shareholding on various share register or loan stock holding. However, debenture stock and shareholding by a financial organization could fall into the category of financial contracts which are reportable when held in a custodial account.
When these accounts are held by a reportable person/ entity, guidance for CRS indicates that they become reportable accounts. However, when an account is considered to be of low risk of being used to evade task, the reporting financial institution is allowed to exclude it from the review. Note that an account ceases to be reportable immediately if it shifts permanently to Hong Kong or gets closed.
The due diligence is one of the most crucial components for CRS Hong Kong implementation. The process for due diligence as established in section 17D of IRD helps to distinguish between the entity and individual accounts while appreciating the difficulty of getting information from existing account holders compared to when opening accounts.
Financial institutions are required to apply the wider approach of identifying, maintaining and reporting info on tax residence of account owners irrespective of whether they are tax resident in a reportable jurisdiction. The financial institutions must also carry due diligence to establish whether the person holding a reportable account is from a country that has entered into an agreement for financial account information sharing.
For pre-existing accounts, the reporting financial institution is required to review accounts without focusing on the de minimis threshold. However, new individual accounts will be assessed based on self-certification without considering de minimis threshold. Though due diligence procedures target helping to identify reportable accounts, casting the net wider to all pre-existing accounts for individuals in the country that has entered into necessary agreements with Hong Kong could keep the cost low.
After passing of the Inland Revenue Amendment No 3 bill into law on 30th June, the reporting financial institutions are required to carry due diligence on all new and pre-existing accounts. The reporting financial institutions are required to gather appropriate info such as tax resident status, account balances, and account holders names among others for the period starting from 1st January to 31st December 2017. Then, a report is expected to be submitted to IRD by May 2017.