The Hong Kong Government gazetted the Inland Revenue (Amendment) (No. 5) Bill 2017 on 6 October 2017. The Bill will give effect to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCAA) in Hong Kong, and amend the Inland Revenue Ordinance (IRO) to comply with the OECD’s requirements under the Common Reporting Standard (CRS).
 

CRS provides for the automatic exchange of information (AEOI) between tax authorities in participating jurisdictions concerning financial accounts held by residents of one jurisdiction in the other jurisdiction.

Unlike most jurisdictions that have committed to CRS, Hong Kong initially did not plan to enter into any multilateral instrument to implement CRS. Instead, implementation was to be negotiated with other jurisdictions on a bilateral basis, and only with those jurisdictions with which Hong Kong already has a tax treaty or a Tax Information Exchange Agreement.

However, the signing of the necessary bilateral Competent Authority Agreements for AEOI with each jurisdiction was found to be a time consuming process. This led to criticism by the OECD and the EU of Hong Kong’s tardiness. This poses a risk of Hong Kong being labelled as “non-cooperative” with respect to tax transparency.

To preserve its reputation and protect Hong Kong’s image as an international financial centre, the Hong Kong Government introduced the new Bill.

The Bill will amend the IRO to empower the Chief Executive in Council to give effect to any tax arrangement made by Hong Kong with more than one government of any territory outside Hong Kong, or made by Mainland China and applied to Hong Kong. (The latter includes the MCAA signed by China which deals with AEOI.) This will accelerate the pace of AEOI between Hong Kong and other CRS jurisdictions.

The Bill also seeks to remove inconsistencies between the IRO and the OECD’s CRS framework. In particular, the threshold for determining who is a controlling person in the case of a passive non-financial entity (passive NFE) will be updated from “not less than” 25% to “more than” 25%. As a result, financial institutions and account holders in Hong Kong might need to revisit their self-certification forms and/or due diligence results.

The Bill also proposes to clarify the criteria for defining an exempt collective investment vehicle which may be treated as a non-reporting financial institution. In particular, if any of the interests in the investment entity is held by (or through an entity that is) a passive NFE, and any one of the controlling persons of the passive NFE is a reportable person, the investment entity will no longer qualify for exemption.

Other proposed changes under the Bill include:

• clarifying the definitions of annuity contract, cash value, depository account, financial account, pre-existing account and specified insurance company;
• aligning the record keeping requirements with the CRS;
• clarifying the criteria for a qualified credit card issuer to be treated as a non-reporting financial institution; and
• clarifying the due diligence procedures for dormant accounts and determining the residence of controlling persons of a passive NFE

Separately, the Bill seeks to amend the tax treaty between Hong Kong and New Zealand so that AEOI can be implemented on a bilateral basis between these two jurisdictions even before the MCAA comes into effect in Hong Kong.

The full Bill may be found here.

Our previous tax alerts on the CRS developments in Hong Kong are accessible below:

2017

Issue 12: CRS: Bill passed for the Expansion of the List of Reportable Jurisdictions

Issue 6: CRS: Proposed Expansion of the List of Reportable Jurisdictions

2016

Issue 11: CRS: Hong Kong guidance published

Issue 6: CRS/AEOI Hong Kong legislation gazetted

Issue 1: CRS/ AEOI: Hong Kong bill gazetted

2015

Issue 10: CRS/AEOI: Hong Kong responds to consultation

Issue 7: Hong Kong launches the Consultation on Automatic Exchange of Information