In order to improve tax transparency and cope with cross-border tax evasion, Hong Kong has to date signed bilateral Competent Authority Agreements (“CAA”) with 11 jurisdictions ( Belgium, Canada, Guernsey, Italy, Japan, Korea, Mexico, the Netherlands, Portugal, South Africa and the United Kingdom) since 2016 when it enacted the Inland Revenue (Amendment) (No. 3) Ordinance 2016 which provided a legislative framework for the conduct of automatic exchange of financial account information in tax matters (“AEOI”) in Hong Kong. The AEOI is intended to be implemented in 2018.
Multilateral Convention to Implement Tax Treaty Related Measures to prevent Base Erosion and Profit Shifting
As an on-going effort to expand Hong Kong’s AEOI network, Hong Kong government (“the Government”) continues to conduct bilateral CAA negotiations with over 30 jurisdictions. On the 7 June 2017, the People’s Republic of China signed the Multilateral Convention to Implement Tax Treaty Related Measures to prevent Base Erosion and Profit Shifting (the “Multilateral Convention”).
Hong Kong is not covered by the Multilateral Convention but instead adopts a bilateral approach in the implementation of the AEOI. The Government is considering the possibility of extending the application of the Multilateral Convention to Hong Kong. The signing of the CAA will help to move in spirit with the Organisation for Economic Co-operation and Development (“OECD”) multilateral agreement for the automatic exchange of common reporting standard (“CRS”) information.
The adoption of the multilateral approach will assist Hong Kong in not being categorized as a “non-cooperative “tax jurisdiction by the Organisation for Economic Co-operation and Development (“OECD”) and European Union , thereby allowing it to continue being an attractive place for investment and business on an international platform.
Hong Kong is working to maintain its simple and low tax region whilst putting in the necessary domestic legislation in place to facilitate implementation of the Base Erosion and Profit Shifting (“BEPS”) package established by the OECD, to counter tax planning strategies of multinational enterprises that exploit the gaps and mismatch in tax rules to artificially shift profits to low or no-tax locations. The BEPS package aims to tackle BEPS, promote coherence of tax laws and a transparent tax environment and facilitate 4 key priorities of the OECD, as follows:-
1) countering harmful tax practices,
2) preventing treaty abuse,
3) imposing country-by-country reporting requirement and
4) improving the cross-border dispute resolution regime.
In line with the above, the Government introduced the Inland Revenue (Amendment) (No. 3) Bill 2017 to the Legislative Council in March this year and passed on 7 June 2017, seeking to expand the list of "reportable jurisdictions" (from the existing 2 jurisdictions to 75 jurisdictions), so that the AEOI arrangement can have increased effective implementation.
With this new amendment in place, a financial institution in Hong Kong must conduct due diligence procedures and collect the required information from account holders who are tax residents of both prospective and confirmed AEOI partners of Hong Kong, and shall furnish the Inland Revenue Department (“IRD”) with the relevant information collected, so that the IRD can exchange the financial account information with other jurisdictions in the future.
An AEOI Portal was also launched on the IRD website on 3 July 2017 to facilitate financial institutions to furnish notifications and file returns regarding the reporting of financial account information for the AEOI purposes. By 3 October 2017, financial institutions must register the accounts under this portal if they have maintained reportable accounts before 3 July 2017, and they must submit a notification of commencement of maintaining reportable accounts.
Consultation Report on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong
The Hong Kong Government has also recently published a conclusion report (“the report”) regarding the Consultations on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (the “Consultation”).
In the Consultation, the Government proposed, inter alia, to amend the Companies Ordinance (Cap. 622) to require Hong Kong incorporated companies to maintain beneficial ownership information to enhance anti-money laundering regulation so as to satisfy the international obligations under the Financial Action Task Force (“FATF”). This comes as the next change to the Companies Ordinance following its significant revamp in 2014. Majority of the respondents to the Consultation indicated that a balanced approach should be adopted so as to minimize regulatory burden and compliance cost on affected business.
Taking into account the concerns from individual respondents, the Government has resolved to require all companies incorporated in Hong Kong to keep a register of people with significant control over the company. The register will be made available for inspection by the competent authorities only and not general members of the public, to curb privacy concerns.
As stated in the report, a beneficial owner in relation to a company is an individual who meets one or more of the following specified conditions:
(a) directly or indirectly holds more than 25% of the shares;
(b) directly or indirectly holds more than 25% of the voting rights;
(c) directly or indirectly holds the right to appoint or remove a majority of directors;
(d) otherwise has the right to exercise, or actually exercise, significant influence or control; or
(e) has the right to exercise, or actually exercise, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions (in their capacity as such) in relation to the company, or would do so if they were individuals.
There will be no exemption to specific classes of companies, such as dormant companies, companies listed elsewhere in the world, SMEs, shell companies, and non-profit organisations. However, exemptions would be available to Hong Kong listed companies.
To ensure effectiveness of the regime, the Government proposes to impose criminal liability on a company and its responsible persons for non-compliance with the disclosure requirements. The maximum penalty for non-compliance would be HK$25,000 and a further daily fine of HK$700.
Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017
Furthermore, in accordance with the FATF’s requirements, the Government proposes to amend the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (“AMLO”) by way of an Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017. This amendment is intended to prescribe statutory customer due diligence (“CDD”) and record-keeping requirements unto solicitors, accountants, real estate agents and Trust or Company Service Providers (“TCSPs”) when these professionals engage in specified transactions.
At present, financial institutions are required to maintain identification data, account files, business correspondence and records of transactions for a period of six years under the AMLO. For consistency, the Government proposes that designated non-financial businesses and professions (“DNFBPs”) be subject to the same requirement when they come under the regulation of the AMLO.
Designation of Regulatory Authority
Solicitors, accountants and real estate agents are currently subject to professional self- regulation by the respective regulatory bodies, which have promulgated guidelines on CDD and record-keeping procedures for voluntary or mandatory compliance by members.
To minimize the compliance burden on solicitors, accountants and real estate agents, and respecting the principle of professional autonomy, the Government proposes using the respective existing regulatory regimes of the three sectors under, inter alia, the Legal Practitioners Ordinance (Cap. 159) (“LPO”), the Professional Accountants Ordinance (Cap. 50) (“PAO”) and the Estate Agents Ordinance (Cap. 511) (“EAO”), to enforce the statutory CDD and record-keeping requirements.
The Law Society of Hong Kong (“LSHK”), the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Estate Agents Authority (“EAA”) will take on statutory oversight for monitoring and ensuring compliance of the AMLO requirements with their respective professions. Non-compliance will be dealt with in accordance with the existing statutory professional misconduct investigatory, disciplinary and appeal mechanisms of the respective sectors.
For firms or body corporates providing trust or company formation services in Hong Kong, the Government wishes to introduce a licensing regime to enforce CDD and record-keeping requirements for TCSPs. The intended legislation will make it an offence for a person/entity to provide such services without a licence. Under the Government’s proposal, the Registrar of Companies will act as the licensing authority.
The LPO, the PAO and the EAO have an existing set of disciplinary measures for deterrence in place, which may include reprimands, remedial actions orders, civil fines, and suspension or revocation of licences. The Government proposes to rely on these sanctions, taking into account the relative lesser risks on money laundering and terrorist financing concerning these DNFBP sectors as compared to financial institutions. Accordingly, the proposal will not include new criminal sanctions for non-compliance by DNFBPs.
Licensing Regime for TCSPs
For the purpose of enforcing CDD and record-keeping requirements for TCSPs, the Government proposes to set up a licensing regime whereby any person providing trust or company services as a business will be required to obtain a licence from the Companies Registry with the condition that the applicant and its directors/partners/ultimate 30 owners (where applicable) meet a fit-and-proper test. Like other DNFBPs, TCSPs will be subject to the CDD and record-keeping requirements stipulated in Schedule 2 to the AMLO.
Furthermore, the Government proposes that it would be a criminal offence for any person or corporation to provide trust or company services as a business without a license. On conviction, the person may be liable to a fine of up to HK$100,000 and to six months’ imprisonment.
In relation to solicitors and accountants who engage in the TCSP business, the Government proposes considering their cases along the same principle of avoiding regulatory overlap. This may mean that a licence is not required for accountants and solicitors providing TCSP services, to the extent that they are covered by the regulatory reach of the HKICPA and the LSHK.
The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 was gazetted on 23 June 2017. It is expected that the relevant stakeholders will provide further comments on the more draconian regulations and procedures for the CDD. Subject to the passage of this Bill by the Legislative Council, the Government proposes to implement the amendments on 1 March 2018.