The answer is yes, they should be worried because the tax legislation on implementing the CRS in Hong Kong was gazetted and became effective de facto on 30th June 2016. As a second participating jurisdiction, Hong Kong financial institutions will collect information starting in 2017 and report such information to the Hong Kong Inland Revenue Department in 2018, in order to facilitate the commencement of information exchange by the end of the same year.
Financial institutions which are required to report under CRS:
1) Deposit taking institutions;
2) Investment taking entities;
3) Custodial institutions;
4) Specified insurance companies.
Accordingly, all banks (retail banks, investment banks and private banks), securities firms, insurance companies (mainly policy with dividend), trust companies and mutual funds are all covered. Account holder under the name of individual and corporate accounts will all be targeted.
As a result, the information collected by Hong Kong Inland Revenue Department will be transmitted or make available to the relevant national tax authorities of the foreign businessmen.
It should be noted that among the 100+ countries that have declared to commit to the CRS implementation China, Canada, Japan, Singapore, New Zealand, France, Germany, Switzerland & United Kingdom etc. are notably expected to exchange information in either 2017 or 2018. In other words, a businessman holding a passport from any of these jurisdictions will likely have the information of his Hong Kong bank account and/or financial investment activities in Hong Kong shared with the tax authorities of his own country.
So far, little information is available from banks regarding the steps to be taken concerning the disclosure requirements of the system. HSBC in Hong Kong has issued a circular in this respect to their clients. To quote:
“To help fight against tax evasion and protect the integrity of tax systems, governments around the world are introducing a new information-gathering and reporting requirement for financial institutions. This is known as the Common Reporting Standard (“the CRS”) and we’d like to help you understand what it means for you.
Under the CRS, we are required to determine where you are “tax resident” (this will usually be where you are liable to pay income or corporate taxes). We will base this on information we have already or we may ask you for additional details.
If you are tax resident outside the country where you bank then we may be required to provide details, including information relating to your accounts, to the national tax authority in the country where the account is held. They may then share that information with the tax authority of the country (or countries) where you are tax resident.
Whether you are an individual customer or you have a business relationship with us, the CRS may affect you. The impact will depend on factors such as:
- The type of account or product you hold with us
- Where you bank with us
- Where you live or operate as a business.”
It must be emphasized that the system has a deeper and far-reaching implications than one cares to envisage. The fact that well-known tax haven jurisdictions such as Bermuda, British Virgin Islands, Cayman Islands are participating in the CRS means that people holding passports from countries which impose worldwide income taxation will likely find their investments in these off-shores countries blown wide open.
It has been a common practice for years that businessmen around the world operate businesses via offshore companies with corporate bank accounts in Hong Kong. Under the CRS, financial institutions in Hong Kong will actually report back to the countries where their clients are the tax residents. Note that profits generated from these offshore companies will be questioned by tax bureau in most countries – especially if such profits have not been taxed. It is true that if profits are aroused or derived outside of Hong Kong and the business has no operations in Hong Kong, such profits should be exempted from Hong Kong tax. However, it becomes a problem in a lot of countries, where either the tax concept of territorial does not apply or simply all residents’ income are taxed globally.
Another issue which arises (although not directly related to CRS) is that, if the business owner retires and seeks to relocate back to their home countries, profits from untaxed income will undoubtedly become the target of the tax bureau in their home country. This applies to income even if official tax exemption status was granted by the Hong Kong Inland Revenue Department – this indeed, contradicts the general belief that “income must be taxed somewhere.”
One last point for the CRS system is, ironically, the United States of America is currently not committed to the CRS. Instead, the country has been implementing its own reporting standard known as Foreign Account Tax Compliance Act (FATCA) for the past few years. Would this lead to a new trend of international entrepreneurs parking their funds in the US? As for now it is still unclear; however whether parking funds in US may trigger any US tax concern must be considered – do not try to jump into one rabbit hole in order to avoid another rabbit hole!
There has been different tactics and schemes on market in trying to tackle the CRS. My personal observation is that CRS is an evolving scheme that there is no one single solution that “cures all”. In addition, with the implementation of new technologies and increased co-operation of tax bureaus among different jurisdictions, the landscape of international tax planning is greatly reshaped. In other words, the CRS implementation has triggered a paradigm shift.
Fung, Yu & Co. CPA Limited / Harris Corporate Solutions
About the author: Philip YU heads his family practice Fung, Yu & Co CPA Ltd and Harris Corporate Solutions that established in 1973. Philip and his team caters more than 2,000 entrepreneurship companies, mid-size private companies and listed companies for their in-bound investment structuring, compliance and profit repatriation in Hong Kong and China through their offices in Hong Kong, Shanghai, Beijing, Guangzhou and Paris.
Philip was graduated from the University of Toronto in accounting, and then an LL.B (law) degree from the University of London. He is a qualified accountant in Hong Kong, US and Australia.