The Common Reporting Standards of 2014 were passed by OECD members during the Convention on Mutual Administrative Assistance in Tax Matters. The previous frameworks had failed, and the impacts of tax evasion were becoming too apparent. Even non-OECD members such as Hong Kong expressed their support and committed to it. In Hong Kong, implementation had to await an appropriate legislation to operationalize CRS and guide the entire process.
A brief history of AEOI
The efforts to facilitate the exchange of tax information can be traced from several decades ago. In particular, the impact of tax evasion came to fore during the 2008 financial crisis that prompted the passing of FATCA (Foreign Tax Compliance Act in the US).
Under this regulation, the global banks are required to give info on the US persons to facilitate enforcement of US tax regulations. This was a crucial pillar for OECD and G20 nations to set up CRS (common reporting standards) known as Automatic Exchange of Financial Accounting Information that paved the path for AEOI.
In June 2016, The Legislative Council of Hong Kong passed the legal framework to guide implementation of CRS. What does AEOI mean to the banking clients under the Hong Kong Framework?
The Hong Kong AEOI legal framework
The Hong Kong AEOI legal framework is built on the premise of reciprocity. This means that while Hong Kong agrees fully to AEOI passed by OECD, the jurisdictions that it can share financial info with are only those that pass additional agreements. In particular, Hong Kong requires other jurisdictions to pass Tax Information Exchange Agreement (TIEA) or Comprehensive Double Tax Agreement (CTDA) that form the legal platform for implementation of AEOI. In addition to these, Hong Kong required that an additional authority (Competent Authority Agreement) must be signed to draw specific modalities for transferring the information outlined in AEOI.
Under the Hong Kong AEOI framework, financial institutions must identify financial accounts by people (tax residents) of reportable jurisdiction. This is after conducting appropriate due diligence procedures. Tax residents from reportable jurisdictions mean people who are liable to tax in another country that has entered into an agreement with Hong Kong by signing the agreements outlined in Hong Kong AEOI legal framework.
Though there are more than 100 jurisdictions, it is only a few jurisdictions that have signed various CDTAs including Britain, China, Japan, Australia, Singapore, and Switzerland. This means that even if you are from a non-reportable jurisdiction, it could sign the required agreements with Hong Kong to demand your financial information. With this framework, it is important to know what to anticipate as a bank client.
What to expect from Banks under the Hong Kong AEOI framework
When the legal framework to operationalize AEOI was passed in June 2016, all Banks were required to start collecting financial information of their clients from reportable jurisdictions starting from January 2017 to Dec 2017 and submit a report to Internal Revenue Department in 2018.
If a bank client comes from a reportable jurisdiction that Hong Kong has entered into an appropriate CTDA, the information will be shared with the Internal Revenue Department. Then, the IRD will share it with the tax authorities with the other countries every year.
Foreigners intending to open new bank accounts
As a banking client, what should you anticipate? If you intend to open a new bank account in Hong Kong, the financial institutions have to verify your tax residence status.
This means that additional information on top of your postal address will be required for you to have an account. More banks will want you to provide date and place of birth and other certifying information to demonstrate that is actually your tax residence.
Unlike in the past when you were only required to provide proof of residence to secure a bank account, more applications are likely to get rejected. You need to be prepared with more information such as a copy of your tax reporting number when applying for an offshore account.
People with Hong Kong bank accounts
The banks and other financial institutions are required to carry due diligence on their clients. Therefore, if you already have an account, the chances are that the bank will ask for additional details to verify your tax residence. This means that you have to demonstrate where exactly you pay taxes. This will allow them to establish whether your account is reportable under the AEOI Hong Kong framework.
Hong Kong tax residents
For a Hong Kong Tax resident, the expectation would be that no other jurisdiction would come seeking your tax info. Therefore, you would not expect that banks would come to you seeking additional details. Well, that is right in an ideal situation. But the task of collecting clients’ information is monumental.
On section 17D of the IRD, there is the appreciation of the difficulty that banks might incur when gathering the details of various clients. Therefore, banks have been asked to gather information from most of their clients and store it with them to make work easy, verifiable, and fast.
This means that you can still be required to provide additional details so that the bank can have a reliable database of all the records. However, such details will not be shared with IRD because you are not from another reportable jurisdiction.
Corporate bank account clients
For companies operating bank accounts in Hong Kong, the requirements might be a little different. Because banks want to know your tax residence status, it does not come easy. You must be ready to work for it and demonstrate that the company has economic significance in Hong Kong. To get the tax residence certificate, you need to do the following;
- Ensure that the business operates from Hong Kong: You should particularly ensure that most transactions happen in the city so that all revenues qualify for tax payment.
- Carefully follow the tax requirements to ensure that tax returns are filed on time, and you employ a significant number of people.
- Try to have the directors of the company to hold more meetings in Hong Kong.
- Ensure that the office is operational with all the requirements including staff and hardware.
- Ensure that the company has assets, bank accounts, and manages money from Hong Kong.
Note that you must apply for tax residence certificate to the Inland Revenue Department. This should detail all the benefits expected under various CDTAs. We know that this can be a challenge for many businesses. To raise the chances of getting the residence certificate, make sure to contact us for assistance.
The financial institutions are the bedrock of CRS success
Under the CRS and Hong Kong AEOI framework, the financial institutions are the bedrock of the new financial and tax information sharing. This means that you will not just be asked for additional information by banks alone, but other institutions as well.
Under the Hong Kong AEOI framework, financial institutions include investment entities, insurance firms, investment entities, and custodial institutions. Therefore, you will be required to provide additional information to these institutions that you are a member or client to.
Remember that the details required do not just pertain to what is happening in 2017, the banks can look at transactions that took a little earlier. This implies you might have to proof previous business transaction, sources of cash into the account, and other details.
Hong Kong is only playing its role
With the impact of tax evasion becoming too clear, every country and entity want to be part of the preventive strategy. During the recent financial recession of 2008, the impacts of the depression were felt all over the world. Worse still, it took a lot of time before full recovery could be realized. It is because of this focus that Hong Kong has decided to play its part by operationalizing the AEOI.
As a noble course, the best thing is ensuring you have updated personal account details with the respective bank. You can reach the institution and find out more information on what is expected of you so that all details can be availed on time. Besides, it is also important to visit the Inland Revenue Department for additional information.
Make sure to also play your role! If you have a personal or corporate bank account, it is common to feel overwhelmed. You might be worried about the process of achieving tax residence certificate. The best thing is seeking assistance from a tax expert and or other legal professionals. They will not just demonstrate to you the importance of the process but will help you to get ready when the banks make additional requirements.
We have been helping corporates to get their tax residence certificate for many years. We can also help you acquire this important document. You simply contact us so that we can demonstrate how we do it and guarantee you the certificate that will enable you to enjoy all bilateral agreements between Hong Kong and other countries. Insist on getting the best.