As a step to establish a legal framework for Hong Kong to implement the new international standard for automatic exchange of financial account information in tax matters (AEOI) (as promulgated by the OECD), the Inland Revenue (Amendment) Bill 2016 was introduced to the Legislative Council in January 2016.
Briefly, under the AEOI standard, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions (i.e., tax residents who are liable to tax by reason of residence in the jurisdictions with which Hong Kong has entered into an AEOI arrangement). FIs are required to collect the reportable information of these financial accounts, and furnish such information to the Inland Revenue Department (IRD). The IRD will exchange these information with the tax authorities of AEOI partner jurisdictions on an annual basis.
The Bill covers the following four key aspects:
- Scope of reporting FIs and financial accounts to be reported:
FIs comprise, among other types of entities, specified insurance companies, and only FIs which are residents in Hong Kong will be subject to the reporting requirements. Under the Bill, "specified insurance company" generally means an entity that is an insurance company, or the holding company of an insurance company, that issues, or is obliged to make payments with respect to, a cash value insurance contract or an annuity contract. "Cash value" is defined in a very detailed manner under the Bill, and excludes amounts such as death benefits, sickness or injury benefits, etc.
The Bill provides for certain FIs and accounts to be exempt from reporting (known as "non-reporting FIs" and "excluded accounts" respectively), given that they present a low risk of being used for tax evasion. Among other entities, non-reporting FIs include MPF schemes and registered ORSO schemes. For "excluded accounts," it includes term life insurance contracts. "Term life insurance contracts" is defined in a very detailed manner under the Bill, and generally means a life insurance contract with a coverage period that will end before the insured individual attains age 90 provided that a number of conditions are met. In brief, these conditions are:
- periodic premiums (which do not decrease over time) are payable at least annually;
- the contract has no contract value that any person can access (e.g., by loan or withdrawal);
- the amount (other than a death benefit) payable on cancellation or termination of the contract cannot exceed the aggregate premiums less certain specified amounts; and
- the contract is not held by a transferee for value.
- Due diligence procedures for FIs to identify reportable accounts and collect information from account holders:
The Bill prescribes the due diligence procedures for FIs to identify whether a financial account is a "reportable account." To meet the AEOI requirements, FIs may adopt a "wider" approach of applying such procedures to identify accounts and collect information of account holders who are tax residents of any jurisdictions outside Hong Kong (as opposed to those of specified reportable jurisdictions only).
Under the proposed regime, account holders will be responsible for identifying their own tax residence, and a FI may rely on self-certification by account holders to fulfill its reporting and due diligence obligations (in particular to determine the tax residence of the account holders). The IRD will promulgate guidelines, which will include a sample self-certification form for FIs' reference.
- Scope of information to be furnished by FIs to the IRD:
The information to be exchanged includes name, address, jurisdiction of residence, taxpayer identification number, and the date and place of birth.
As for financial account data, it includes the account number, account balance or value (year-end), and the gross amount of interest, dividends and sale proceeds of financial assets as appropriate.
- Enforcement powers for the IRD and sanctions against non-compliance:
In order to ensure effective implementation of AEOI in Hong Kong, the Bill provides the IRD with necessary enforcement powers (e.g., requiring FIs to furnish information of reportable accounts in the specified format, having access to the business premises of FIs and inspecting their compliance systems and processes, and requiring FIs to rectify systems and processes if found to be non-complying).
The Bill also proposes various penalty provisions for FIs, service providers and account holders. For reporting FIs, sanctions will be imposed for (i) non-compliance with the due diligence and reporting obligations without reasonable excuse; and (ii) providing misleading, false or inaccurate information. The relevant sanctions would also apply to service providers engaged by reporting FIs to fulfill the latter's due diligence and reporting obligations.
The proposed time frame for Hong Kong to commence the first information exchanges by the end of 2018 is very tight. It will require proposed passage of the Bill by the end of the legislative year in July 2016, and the identification of (and successful negotiation with) at least one AEOI partner by the end of 2016. It remains to be seen whether the insurance and other financial industries will be able to put in place the due diligence procedures to collect the requisite information of the relevant financial accounts in 2017, and to commence furnishing information to the IRD in 2018.