The Proposed Automatic Exchange of Financial Information by the Inland Revenue Department with other Governments

The Hong Kong Government proposes to introduce draft legislation early this year in respect of a new information collecting regime from banks, custodians, insurance companies, brokers and investment entities.  The regime involves the collection of certain financial information of overseas tax resident account holders from such entities by the Inland Revenue Department ("IRD") and the automatic exchange of that information with other Governments.

This stems from the OECD Standard for Automatic Exchange of Financial Information in Tax Matters (the ''Standard'') approved on 15 July 2014, which requires governments on an annual basis to obtain financial account information (broadly concerning all types of investment income, account balances or values, and sales proceeds from financial assets) of overseas tax residents from their financial institutions and automatically exchange that information with the government of the relevant country in which the account holder is resident.

The Global Forum on Transparency and Exchange of Information for Tax Purposes, an international organisation pursuing tax transparency, invited all of its members, including Hong Kong, to commit to implementing the Standard, and is monitoring the progress of implementation amongst members.  The Hong Kong Financial Secretary in September 2014 committed Hong Kong to implementing the Standard in order to enhance tax transparency, combat cross-border tax evasion and avoid being labelled an ''uncooperative'' country on a reciprocal basis with appropriate partners with a view to commencing the first information exchanges by the end of 2018.  Financial institutions already have an obligation under the US Foreign Account Tax Compliance Act ("FATCA") to identify US account holders and report relevant account information directly to the US IRS, and the implementation of the Standard will build upon this obligation of financial institutions.

New legislation has yet to be introduced to put in place a reporting obligation by financial institutions for the purposes of the automatic exchange of financial information.   The Government aims to introduce an amendment Bill in early 2016 to put the legislation in place by 2017.  A consultation process took place between April and June 2015, in which the Hong Kong government sought the views of interested parties on the details of the proposed reporting regime.

The results of the consultation were announced in October 2015 and it is proposed that Automatic Exchange of Financial Information will only be carried out with comprehensive double tax treaty ("CDTA") or tax information exchange agreement ("TIEA") partners on a bilateral basis.   The reporting regime will broadly extend to banks, custodians, insurance companies, brokers and investment entities (such as certain collective investment vehicles), unless they present a low risk of being used for evading tax and are excluded from reporting (such as prescribed retirement schemes) (these entities being defined as ''financial institutions").

The proposed information which financial institutions will have to report to the IRD on each reportable financial account holder (broadly a tax resident of a country with a CDTA or TIEA with Hong Kong or passive entity controlled by such tax resident) comprises personal data (such as the name, address, date and place of birth, jurisdiction of residence and taxpayer identification number) and financial data (such as interest, dividends, account balance or value, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payment made to the account).  Financial institutions will have to conduct due diligence procedures to identify reportable accounts and ascertain the tax residence and other reportable account information of the account holders.  There will be the enforcement provisions for the IRD to ensure effective implementation.

One common view expressed in the consultation process was that financial institutions should be permitted to collect information of all non-Hong Kong tax resident account holders so that they do not have to perform additional due diligence procedures each time a new CDTA or TIEA is concluded.  The Government has agreed that financial institutions can chose to take this wider approach.

For further information, please contact Susan Leung, Consultant, or your usual Herbert Smith Freehills contact.