The Hong Kong Inland Revenue Department (IRD) published on its website in September 2016 new materials on automatic exchange of information (AEOI) in Hong Kong.

The new materials include the following:

  1. Sample Self-Certification Forms.
  2. Updated Frequently Asked Questions.
  3. AEOI Pamphlets.
  4. Financial Account Information Return XML Schema and User Guide.
  5. Guidance for Hong Kong Financial Institutions (HK FIs).

These materials follow the new Hong Kong legislation that adopted the OECD Common Reporting Standard (CRS), an amendment to the Inland Revenue Ordinance which was gazetted on 30 June 2016 (the HK AEOI legislation). Starting 1 January 2017, all HK FIs will be required to comply with the due diligence and reporting obligations under the HK AEOI legislation.

The new materials published by the IRD will help HK FIs prepare for the implementation of AEOI as they provide more detailed guidance on various questions and issues not covered by the HK AEOI legislation. In addition, the sample self-certification forms, although not mandatory, are likely to be adopted by many HK FIs.

This client alert highlights certain important aspects of the new materials.

1. Sample self-certification forms

The HK AEOI legislation and the new Guidance do not prescribe a particular format for a self-certification. Nonetheless, the IRD has provided a set of sample forms “for reference and adoption” by HK FIs. The forms include self-certification form for individuals, entities, and controlling persons of Passive Non-Financial Entities (Passive NFEs). The IRD also provided a link that includes the meaning of terms and expressions used in the self-certification forms.

The forms are largely similar to sample forms that the OECD featured on its website a few months ago, although there are some differences.

Overall, the new forms are customized by the IRD to follow the HK AEOI legislation in a concise manner and by using non-technical terms as far as possible. We expect that many HK FIs will adopt the sample forms and use them with no or minimal change.

The webpage that includes the definitions of the terms and expressions used in the forms is also very helpful. The new Guidance notes that it is possible for HK FIs to refer account holders and controlling persons to the IRD website. Although the IRD’s attempt to provide concise definitions in layman terms is generally helpful, users of these definitions should be wary of the risks of relying on oversimplified terms. For example, the definition of “Controlling Person(s)” appears to be lacking the important rules that the HK AEOI legislation provides with respect to a controlling person of a corporation or a partnership.

2. Updated Frequently Asked Questions

The updated Frequently Asked Questions (FAQs) include 31 items, divided into five categories: a) Hong Kong’s Commitment to AEOI; b) Person Affected by AEOI; c) AEOI Requirements on Financial Institutions; d) Data Transmission and Safeguards; and e) Effective Implementation.

Most of the FAQs provide an overview of AEOI which would be useful for the general public, account holders, and people with limited or no knowledge of the AEOI reporting regime.

A few of the FAQs address specific questions of HK FIs. Importantly, the IRD notes that the IRD’s AEOI Portal is expected to be ready for FIs to sign up by July 2017 after successful test runs. A HK FI with reportable accounts can then open its AEOI account via the AEOI Portal starting from July 2017. The IRD noted that it will provide sufficient guidance for account registration in due course.

3. AEOI Pamphlets

The IRD has prepared five AEOI pamphlets that highlight the key features of AEOI by using layman terms. FIs may choose to distribute these AEOI pamphlets to account holders.

4. Financial Account Information Return XML Schema and User Guide

As FIs are required furnish information on reportable financial accounts to the IRD in a specified format, the IRD has developed a data schema specifying the data structure and format for reporting these information. The data schema is based on the CRS XML Schema issued by the OECD, and together with a User Guide, it is now available for downloading.

5. Guidance for HK FIs

The Guidance is intended to provide HK FIs with an understanding of the requirements that must be fulfilled to comply with the obligations under the HK AEOI legislation.

Importantly, the Guidance notes that "[i]t is also intended as a reference source for Hong Kong Financial Institutions, tax, compliance and legal professionals for use alongside the Commentaries to the CRS, CRS-related Frequently Asked Questions or CRS Implementation Handbook published by the OECD." Therefore, we understand that the IRD’s view is that the Guidance should be read alongside with the OECD’s detailed guidance on CRS. The Guidance is not a standalone piece, and HK FIs may and should use the OECD materials together with this Guidance as reference sources when implementing the obligations under the HK AEOI legislation.

In general, similar to the way the HK AEOI legislation mirrors the CRS, the Guidance mirrors the CRS Implementation Handbook. The Guidance also draws on certain parts of the OECD CRS Commentaries (for example, the parts discussing the "limits on reason to know" and what constitutes reasonable efforts).

The Guidance discusses and provides new instructions on matters that would be of interest to many HK FIs, such as matters relating to the fund industry (including issues concerning collective investment schemes, fund nominees, fund distributors, financial advisers, and intermediaries), the trust services and wealth management industry, and listed Hong Kong companies (including companies with equity interests held by HKSCC Nominees). The Guidance provides a practical approach to problems that HK FIs might encounter, including matters not covered in the OECD materials. For example, the Guidance addresses situations in which it might be impossible or impractical for an FI to obtain a self-certification on "day one” of the account opening process.

Interestingly, the Guidance encourages HK FIs to collect account holders’ place of birth information. The Guidance notes that "from the experience of our treaty partners, the collection of such information is necessary and proportionate for the purpose of enabling tax administrations to correctly and unequivocally identify the taxpayers concerned." It should be noted that under the HK AEOI legislation, place of birth is not required to be reported unless the HK FI is otherwise required to obtain and report it under the laws of Hong Kong. In other words, the HK AEOI legislation does not impose a new obligation to obtain and report the place of birth information. Therefore, it is unclear what the legal basis for collecting this information by an HK FI is. Nonetheless, the Guidance reflects the Hong Kong Government’s view that collecting the place of birth information is permissible - and encouraged - even if there is no legal obligation to collect this information. In any event, the self-certification form for individuals includes the field “Place of Birth (Not compulsory)", so account holders can choose not to provide this information.

It should be noted that the Guidance does not cover all matters addressed by the HK AEOI legislation. For example, the Guidance does not include the full definition of the term “Controlling Person” as it appears in the HK AEOI legislation. Therefore, it is recommended that HK FIs, tax, compliance and legal professionals should read this helpful Guidance together with the HK AEOI legislation and the OECD materials.