Insightsfrom Global MobilityHong Kong: Introduction ofAutomatic Exchange of Information(AEOI) - what it will mean foremployers and employeesOctober 11, 2016In briefThe Legislative Council of Hong Kong passed Inland Revenue (amendment) (No.3) Ordinance (theOrdinance) in June 2016 to implement the Automatic Exchange of Information (AEOI). This legislationis in line with the Organisation for Economic Cooperation and Development’s (OECD) global initiative toimprove cross-border communication of financial account information and increase tax transparency. InSeptember 2016, the Inland Revenue Department (IRD) released further details with respect toimplementation. Under the Ordinance, financial institutions in Hong Kong need to start conducting duediligence processes to determine the tax residency of their account holders with effect from January 1,2017.Globally mobile employees who have financial accounts with Hong Kong financial institutions will needto be aware of these changes as financial institutions may ask them to confirm a number of detailsincluding their tax residency status as part of the due diligence reviews. Employers may also expect toreceive queries from their mobile employees if the individuals are unclear on their tax residency status asa result of their overseas travels. As such, companies should consider the impact of AEOI - how theymanage these questions and implement corresponding strategies to ensure minimal disruption to bothemployees and employers.In detailGeneral rulesThe AEOI is part of the widerCommon Reporting Standard(CRS) which has beenintroduced to help align taxreporting and ensure that thetax authorities are aware of theoverseas financial holdings oftheir tax residents.From January 1, 2017, financialinstitutions in Hong Kong willbe required to conduct duediligence reviews on theirexisting and new accounts todetermine the jurisdictions oftax residence of their accountholders. If through these duediligence processes it isdetermined that an accountholder is a resident for taxpurposes in a reportablejurisdiction, the financialinstitution where the account isheld has the obligation to reportcertain details of the accountholder to the IRD. The IRD willthen (if required) provide thesedetails to the competentauthority of that reportablejurisdiction.A reportable jurisdiction refersto a jurisdiction with whichHong Kong has entered intowww.pwc.com
Insights(1) a comprehensive double taxagreement (CDTA) or tax informationexchange agreement (TIEA) and (2) acompetent authority agreement forAEOI. The list of reportablejurisdictions will be updated by theIRD from time to time.50% of the income is derived frominterest/dividends/annuities). Acontrolling person is an individualwho exercises control over a nonfinancial entity such as a trust.This would include beneficiaries,settlors, and trustees. (For a fulldefinition of controlling personsplease refer to section 50A of theIRO.)Who will be impactedUnder the Ordinance, a reportableperson is an individual or an entitythat holds a reportable account with afinancial institution resident in HongKong and is a tax resident in areportable jurisdiction(s).For individuals, this definition isfurther broken down into thefollowing categories: Individuals holding reportableaccountsAn individual who holds areportable account and is a taxresident in a reportablejurisdiction is a reportable person. Controlling person of a passivenon-financial entity (NFE)A passive NFE includes any nonfinancial entity where over 50% ofthe gross income is derived frompassive sources (for example over2If the controlling individual is atax resident in anotherjurisdiction they will be classifiedas a reportable person.Which accounts will be reportableThe Ordinance has outlined thefollowing five types of accounts whichwill be reviewed: depository accounts; custodial accounts; equity and debt interests; insurance contracts (cash value);and annuities.If any of these account types are heldby a reportable person, they willbecome a reportable account.Excluded accountsSubject to required conditions beingmet, certain accounts within financialinstitutions will be excluded from thedefinition of a financial account. Forexample, retirement and pensionaccounts, term life insurancecontracts, and dormant accounts witha balance of less than HK 7,800.Mandatory Provident Fund (MPF)schemes or occupational retirementschemes (ORSO) which are registeredunder the respective legislations inHong Kong are treated as nonreporting financial institutions forAEOI reporting purposes.What information will be reportableIf, through the due diligenceprocesses, an individual or controllingperson of a passive NFE is determinedto be resident for tax purposes in areportable jurisdiction, the details ofthe account should be reported to theIRD by the financial institution withwhich the account is held. The IRDwill provide the data to the relevantcompetent authority as part of itswider CRS obligations.The specific data relating to thereportable account that must beprovided to the IRD is as follows:pwc
InsightsDetails of the account holderDetails of the accountNameAddressTaxpayer Identification Number *Jurisdiction of residenceDate/place of birthAccount number/balanceThe account balance or value (including, in thecase of a cash value insurance contract or annuitycontract, the cash value or surrender value) or, ifthe account was closed during the reportingperiod, the closure of the account.* An identification numberissued by a tax authority in thejurisdiction of residence shouldbe included. For example, theUK Unique Taxpayer Referencenumber (UTR)Transactions in the accountJoint account holders who arereportable persons will have the fullvalues of their accounts reported.Amounts will not be prorated toreflect percentage holdings.Unlike a tax year in Hong Kong whichends on March 31st, account valueswill be typically taken at the end of acalendar year (i.e., December 31st),with reporting financial institutionsproviding account details to the IRDby the following May 31st. Under theOrdinance, there are no withholdingrequirements with respect toreportable accounts.Due diligence process and selfcertificationAs part of the AEOI procedures, HongKong financial institutions willundertake due diligence reviews onexisting accounts held up to December31, 2016 and all new accounts openedafter January 1, 2017. Through thesedue diligence procedures, a financial3 For accounts other than custodial ordepository accounts, the total gross amountpaid or credited to the account holderrelating to the account of which the reportingfinancial institution is the obligor or debtor. For custodial accounts, the gross interest /dividends / other income paid or credited tothe account, or gross proceeds from the saleof financial assets credited to the account(s). For depository accounts, the total grossamount of interest paid or credited to theaccount.institution will seek to determine if anaccount holder is resident inreportable jurisdiction(s) by reviewingits internal data. The immediateimplication to individuals is therequirement to verify their taxresidence status through completionof a self-certification form which willbe issued by the financial institution.For existing accounts held up toDecember 31, 2016, if a financialinstitution cannot verify the taxresidency status of an account holderupon completion of due diligenceprocedures, it will seek to obtain aself-certification from the accountholder. For new accounts opened onor after January 1, 2017, selfcertification will be required to beobtained from the account holderwhen the account is opened.The self-certification form will requirethe account holder to confirm his/herpersonal particulars (such as names,HKID or passport numbers,residential addresses, etc). Theaccount holder is also required todeclare (1) the jurisdiction(s)(including Hong Kong) where he/sheis resident for tax purposes and (2)his/her taxpayer identificationnumber or equivalent in suchjurisdiction(s). In the case of anindividual who is a controlling personof a passive non-financial entity,he/she is also required to disclose thenames of the entities, the nature of theentities and his/her relationships withthese entities.If an account holder’s situationchanges, he/she is required to submitan additional self-certification form tothe relevant financial institution. Thisform should outline the specifics ofthe new situation including anychanges in tax residence. Thecompleted self-certification should bereturned to the financial institutionpwc
Insightswithin 30 days from the date of thechange.It is an offence for an individual whointentionally or recklessly providesmisleading or incorrect data inrelation to the self-certification form.The penalty for committing such anoffence is HK 10,000.Implications to employers andemployeesDetermination of tax residency statusWhile most of the self-certificationdata is straightforward to provide,individuals (especially mobileemployees) may find it hard todetermine their jurisdiction of taxresidence. Unlike nationalities, theconcept of tax residency can be morecomplex and is determined based onvarious factors including, but notlimited to, employment arrangement,the number of days an individual ispresent in a jurisdiction, personal tiesto a jurisdiction, etc.The below example highlights thecomplexities in determiningjurisdictions of tax residence:ExampleMs. Jones, a UK national, moves fromthe UK to Hong Kong to undertake atwo year secondment. Her familyremains in the UK and continues tolive in the family home which sheowns. She spends 40 days workingback in the UK each year and 20additional days visiting family duringwhich time she stays in her familyhome. As she is based in Hong Kong,she spends over 180 days per year inHong Kong.Under this example she would beconsidered Hong Kong resident due tothe amount of time that she spends inHong Kong each tax year (i.e., over180 days). In general, an individual isconsidered a tax resident of HongKong if (a) he/she ordinarily residesin Hong Kong; or (b) he/she stays in4Hong Kong for more than 180 daysduring a year of assessment or formore than 300 days in twoconsecutive years of assessment, oneof which is the year of assessment atissue.if they have any questions. Thisproactive stance can help to reducethe negative sentiment that employeesmay have and minimise the number ofqueries that may be raised toemployers.However, due to the ‘connecting ties’that she retains back in the UK (home,family, days spent working) it is likelythat she will be considered taxresident in the UK. In this instance,Ms. Jones may need to declare HongKong and the UK as her jurisdictionsof tax residence in her selfcertification.To assist new arrivals into Hong Kong,employers should consider updatingtheir on-boarding processes to ensurethat individuals are fully aware notonly of the AEOI processes but alsowhat information they will need toprovide to the bank in order to openan account in Hong Kong.Employee policy reviewAEOI is a new concept in Hong Kongand it is likely that existing employeepolicies are silent on this issue.Employers may wish to considerwhether they will provide any supportto assist employees in meeting thenew AEOI reporting requirements.For example, while some employersmay provide tax support to mobileemployees in preparing individualincome tax returns, these employersmay consider whether additionalsupport will be provided to assist theemployees in determining their taxresidency status for the purpose ofcompleting the self-certifications.It is important that employers reviewand update their policies accordinglyin order to clearly outline theemployers’ support and theemployees’ obligations in relation toAEOI.Communication and on-boardingprocessIf employers decide to providesupport to their mobile employees inrelation to AEOI reporting, they mayconsider issuing or conductingcommunications to their assignees tolet them know the basics of AEOI andwhat this may mean for them. Thiswould ensure that employees knowthe next steps to take in terms of selfcertification forms and who to contactThe takeawayThe AEOI regulations have beenintroduced in Hong Kong and it isexpected that onerous due diligenceand review procedures will be carriedout by Hong Kong financialinstitutions soon, if this has not yetbegun. As part of the procedures, it isanticipated that the financialinstitutions will raise queries withaccount holders through the selfcertification process in order to verifytheir jurisdiction of residence.While the majority of the AEOI selfcertification questions arestraightforward, an individual mayfind it difficult to confirm thejurisdiction(s) where he/she isdeemed to be resident for taxpurposes.The new rules will encourageemployees to review their tax affairsand file tax returns to report anypreviously undeclared personalincome in their jurisdictions ofresidence. However, the AEOIchanges could also create someadditional considerations foremployers. If an existing humanresource policy is silent on coveringtaxes on personal income, there maybe a risk an employee would look toclaim these tax costs from theemployer especially in a scenario ofdual (or multiple) AEOI residencespwc
Insightsarising as a result of having beenmoved overseas by an employer.employees on the cause of thepenalties and who is responsible.Employers should also consider thescenario whereby employees aresubject to penalties if they provideincorrect information on their selfcertification forms. If the penalties arerelated to the determination of taxresidency status in respect of overseasassignments, there may be disputesbetween employers and mobileTo mitigate these risks, employersmay wish to conduct ‘health checks’ oftheir human resources policies tocheck whether there are clearpositions with respect to issues thatAEOI may create.In addition to considering theexposures to companies, employerswho take a proactive stance incommunicating these changes to theirmobile populations will help showtheir support for such employees.Effective upfront communications andclear policy updates are more likely toimprove the employees’ overallmobility experience and help ensurethat existing and new employees havethe correct information relating toAEOI obligations.Let’s talkFor a deeper discussion of how this issue might affect your business, please contact your regular Global MobilityServices engagement team or one of the following team members:Global Mobility Services – Hong KongJames Clemence, Asia Leader 852 2289 [email protected] Kwok 852 2289 [email protected] B Keys 852 2289 [email protected] Chan 852 2289 [email protected] Chan 852 2289 [email protected] Lam 852 2289 [email protected] Lim 852 2289 [email protected] Lee 852 2289 [email protected] Mobility Services – United StatesPeter Clarke, Global leader 1 203 539 [email protected] 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer tothe PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.SOLICITATIONThis content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.PwC United States helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network of firms in 157 countries with more than195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com5pwc
financial institution resident in Hong Kong and is a tax resident in a reportable jurisdiction(s). For individuals, this definition is further broken down into the following categories: Individuals holding reportable accounts An individual who holds a reportable account and is a tax resident in a reportable jurisdiction is a reportable person.