CRS (common reporting standards) was adopted in 2014 by OECD members at the Convention on Mutual Administrative Assistance in Tax Matters. The prior system information Upon Request proved highly ineffective in deterring tax evasion. In particular, CRS provides a framework for exchanging information on tax matters based on the provided schedule. When Hong Kong ratified the CRS agreement in 2014, it opened doors to a new system that makes it more difficult for those interested in evading taxes. Under the CRS Hong Kong, all financial organizations must identify and give detailed reports to IRD (Internal revenue department) of accounts owned by foreigners from countries of reportable jurisdictions.
Setting the right legal framework for CRS Hong Kong
Hong Kong supported and committed to implementing CRS on condition that it installs an appropriate legislation by 2017. An amendment bill was introduced to the Legislative Council early in 2016 and was passed into law in June the same year. This sets a clear framework for implementation of Automatic Exchange of Financial Information (AEOI).
Hong Kong only conducts AEOI on a strictly reciprocal basis with jurisdictions (states) that are committed to CRS. Besides, the states must have signed a CDTA (comprehensive avoidance of double taxation agreement) with Hong Kong. It is these bilateral CDTAs that Hong Kong uses as a basement for legal implementation of AEOI.
Hong Kong, together with CDTA partners are also required to enter and sign a CAA (competent authority agreement) that defines and sets out modalities for transferring information collected under the CRS standards.
Tax substance and resident certificate under CRS Hong Kong
Tax residents refer to entities that are liable to taxation because they reside in a specific state. Individuals and corporations are required to provide tax residence certificates in order to get cushioned from double taxation. Hong Kong insists that for any party to enjoy tax residence status, it must demonstrate sufficient tax substance to the economy.
To get the tax resident certificate, the IRD carries a comprehensive evaluation of an entity’s operations to establish the following;
- Whether the business operates from Hong Kong.
- The nature of the business in terms of its jurisdiction especially taxes and employment.
- Directors of the company should be based and hold regular meetings in Hong Kong.
- Physical offices with all the required warehouse and operations.
- Assets held by the entity, bank accounts, and process of managing money.
If you find it hard to get a resident certificate, IRD requires entities to apply to them with all their operational details. In particular, you should provide details of all the benefits to anticipate under various CDTAs. If unsure of how to get tax substance and resident certificate or has applied but never succeeded, it is advisable to seek expert assistance.
Is your account reportable according to the new CRS Hong Kong ordinance?
Under the CRS regulation, an automated system for sharing financial information for a reportable jurisdiction is provided. After Hong Kong passed the CRS ratification framework in 2016, financial institutions are now required to identify reportable accounts in their clients’ lists. You will, therefore, be required to provide self –certification documentation on personal information and tax residence certificate.
While Hong Kong expressed its support for CRS in 2014 and committed to its implementation, it passed the right legislation in 2016 that provided a legal framework for operationalization. Though there are 100 participating jurisdictions, Hong Kong can only automatically exchange financial account info with only Britain and Japan.
This is because they have signed appropriate CDTAs that define and guide the manner of information sharing. However, Hong Kong remains committed to sharing the financial information with other jurisdictions when they sign appropriate CDTAs as outlined in the CRS Hong Kong framework.