Under increasing international pressure, the Hong Kong government is considering expanding its Automatic Exchange of Information (AEOI) implementation by imposing broader information collection obligations, entering into more bilateral AEOI agreements at a faster pace, and possibly joining the multilateral AEOI agreement.
Hong Kong legislated to adopt the OECD Common Reporting Standard (CRS) in June 2016. Yet, in the following six months, Hong Kong included just two nations in its list of reportable jurisdictions for the first automatic information exchange scheduled for 2018 - Japan and the United Kingdom. Hong Kong recently agreed to start conducting AEOI with a third partner, Korea, from 2019.
This approach reflects the Hong Kong government's stated policy position that:
"We intend to conduct AEOI only with our partners with which we have signed comprehensive avoidance of double taxation agreement (CDTA) or tax information exchange agreement (TIEA) on a bilateral basis . We have no plan to enter into a multilateral treaty with other jurisdictions. Under such an approach, Hong Kong will rely on the bilateral CDTAs or TIEAs signed and having effect… as the basis for implementing AEOI. IRD would still have to sign a new Competent Authority Agreement (CAA), which sets out the modalities of transfer of information collected pursuant to the AEOI standard, with the tax authority of CDTA/ TIEA partners concerned."1
This slower, more selective approach stands in contrast to the approach taken by most other jurisdictions that implement AEOI, who already include dozens of other jurisdictions in their lists of reportable jurisdictions.
Hong Kong financial institutions (HK FIs) are required to identify and collect the information of reportable accounts held by persons resident in its 2 or 3 reportable jurisdictions (this is known as the "targeted approach" for AEOI implementation). Although it is not mandatory, HK FIs can choose to identify and collect the information of accounts held by residents of all jurisdictions (this is the "wider approach").
International monitoring and pressure
The OECD has been monitoring jurisdictions' progress in implementing AEOI, requiring participating jurisdictions to develop a wide network of partners to ensure a level-playing field.
In addition, both the OECD and the EU are currently in the process of identifying "non-cooperative tax jurisdictions". One of the criteria being assessed is the status of AEOI implementation. To avoid being named and shamed on this blacklist, Hong Kong would need to show that it has an arrangement in place by the end of 2017 to conduct AEOI with all Member States of the EU.
Being labeled a non-cooperative jurisdiction would likely have serious ramifications. In addition to reputational damage, non-cooperative jurisdictions will likely be subject to counter-measures by the OECD/EU, making the jurisdiction less attractive for investment and business.
The response of the Hong Kong government
In response to these developments, the Hong Kong government has concluded that it needs to move quickly to expand both its AEOI network and its information collection requirements.2
Accordingly, the Hong Kong government has recently identified 72 prospective AEOI partners, including: a) all Member States of the EU; b) Hong Kong's tax treaty partners which have committed to AEOI; and c) jurisdictions which have expressed interest to the OECD in conducting AEOI with Hong Kong. If more jurisdictions express such interest in the future, this list may continue to grow.
The Hong Kong government has recently proposed including these prospective AEOI partners in its list of reportable jurisdictions, with effect from 1 July 2017. This means that HK FIs will be required to furnish the Inland Revenue Department (IRD) with information about accounts held by residents of these jurisdictions, even though there are currently no AEOI agreements with these jurisdictions. The reporting period will start on 1 July 2017. This information will be kept by the IRD and exchanged with the relevant jurisdiction after an AEOI agreement has been concluded with that jurisdiction. Therefore, when an AEOI agreement is entered into with one of the prospective AEOI partners, the relevant AEOI partner will receive information from the IRD dating back to 1 July 2017. If this proposal is approved, the "targeted approach" for AEOI implementation will cease to be narrow. The Hong Kong government aims to introduce an amendment bill into the Legislative Council by April 2017 to effect this proposal, with an effective date of 1 July 2017.
The Hong Kong government has indicated that it will conclude AEOI agreements with more jurisdictions on a bilateral basis. More importantly, the Hong Kong government is now considering the possibility of joining the Multilateral Convention on the Mutual Administrative Assistance in Tax Matters (i.e. the multilateral AEOI agreement) for the conduct of AEOI. If this happens, this would signal a major change in the implementation policy taken by Hong Kong.