Hong Kong (China)
This report analyses the implementation of the AEOI Standard in Hong Kong with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
Hong Kong’s legal framework implementing the AEOI Standard is in place and is consistent with the requirements of the AEOI Terms of Reference. This includes Hong Kong’s domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) and its international legal framework to exchange the information with all of Hong Kong’s Interested Appropriate Partners (CR2).
Effectiveness of AEOI in practice
Hong Kong’s implementation of the AEOI Standard is on track with respect to the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. This includes ensuring Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1) and exchanging the information in an effective and timely manner (CR2). Hong Kong is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
Overall rating in relation to the effectiveness in practice: On Track
General context
Hong Kong commenced exchanges under the AEOI Standard in 2018.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, Hong Kong:
amended the Inland Revenue Ordinance (Cap. 112) by inserting new provisions implementing the CRS and its Commentary; and
issued further guidance, which is admissible in evidence before a court though is not legally binding.
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 January 2017. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete the due diligence procedures on High Value Individual Accounts by 31 December 2017 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2018.
Following the initial Global Forum peer review, Hong Kong made various amendments to its legislative framework to address issues identified, the last of which will be effective from 1 January 2021.
With respect to the exchange of information under the AEOI Standard, Hong Kong:
has the Convention on Mutual Administrative Assistance in Tax Matters in place1 and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2018; and
put in place 15 bilateral agreements under which exchanges started in 20182 and 20193.
Table 1 sets out the number of Financial Institutions in Hong Kong that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that Hong Kong requires the reporting of Financial Accounts based on a prescribed list of exchange partners and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of Hong Kong’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by Hong Kong in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to Hong Kong’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard in Hong Kong:
the Inland Revenue Department (IRD, the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with Hong Kong’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place with the IRD’s AEOI Portal through which XML files are uploaded; and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of Hong Kong’s legal frameworks implementing the AEOI Standard concluded with the determination that Hong Kong’s domestic and international legal frameworks are In Place. This has been taken into account when reviewing the effectiveness of Hong Kong’s implementation of the AEOI Standard in practice.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for Hong Kong are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
Hong Kong’s domestic legislative framework is in place and contains all of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (SRs 1.1 – 1.3). It also provides for a framework to enforce the requirements (SR 1.4).
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
Hong Kong has defined the scope of Reporting Financial Institutions in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
Hong Kong has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in accordance with the CRS and its Commentary.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
Hong Kong has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
Hong Kong has a legislative framework in place to enforce the requirements in accordance with the CRS and its Commentary.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
Hong Kong’s international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of Hong Kong’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from Hong Kong and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
Hong Kong has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
Hong Kong put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
Hong Kong’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Assessed jurisdiction’s comments on the assessment of its legal frameworks
Hong Kong, China (“Hong Kong”) would like to thank the Secretariat, members of the AEOI Assessment Panel and the AEOI Peer Review Group for their efforts and contributions in finalising the report on Hong Kong.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for Hong Kong are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
Hong Kong’s implementation of the AEOI Standard is on track with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures and are therefore reporting complete and accurate information. This includes ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). Hong Kong is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, Hong Kong implemented all of the requirements in accordance with expectations. The key findings were as follows:
Hong Kong implemented an overarching strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources including industry information and information gained from other compliance activities. Hong Kong’s compliance strategy facilitates compliance and incorporates a credible approach to enforcement. Hong Kong keeps its compliance strategy and risk assessment under review, including incorporating findings from previous compliance activities, to ensure its effectiveness on an ongoing basis.
Hong Kong has worked effectively to understand its population of Financial Institutions, including relevant non-regulated entities, utilising various relevant information sources, such as registers of regulated entities maintained by local regulators, the Foreign Financial Institution list for FATCA purposes and information obtained from trustee service providers. Hong Kong is taking action to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. Hong Kong intends to keep its understanding of its Financial Institution population up to date on a routine basis.
The institution responsible for implementing Hong Kong’s compliance strategy appears to have the necessary powers and resources to discharge its functions. With respect to resourcing, Hong Kong has assigned the equivalent of four full time staff to monitor and ensure compliance by Reporting Financial Institutions, and additional support is also provided by IT personnel for this compliance work. Overall, they appear to have effectively implemented an operational plan to verify compliance with the requirements, incorporating appropriate compliance activities.
It appears that Hong Kong effectively enforces the requirements, including through the inspection of records of Reporting Financial Institutions and the application of dissuasive penalties and sanctions for non-compliance. Hong Kong has carried out desk-based reviews and onsite visits as part of its compliance activities. Hong Kong has also made use of questionnaires to gather information on the collection of self-certifications, including in cases after the opening of the Financial Account. Hong Kong has taken action to verify compliance through accessing records held by Reporting Financial Institutions, including obtaining self-certifications to verify their proper collection and validity. Hong Kong is ready to take effective action to address circumvention of the requirements if such circumvention is detected.
Hong Kong has taken action to ensure that Reporting Financial Institutions understand the requirements on the interaction between the CRS and AML frameworks, including monitoring to ensure that recent legislative changes are being applied in practice.
Hong Kong has followed up on undocumented accounts. Hong Kong is also keeping its jurisdiction-specific lists of Non-Reporting Financial Institutions and Excluded Accounts under review to ensure they continue to pose a low risk of being used for tax evasion purposes.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
With respect to the Financial Account information collected and sent by Hong Kong, the presence of the key data points of Tax Identification Numbers and dates of birth appeared to be in line with most other jurisdictions, as did the level of undocumented accounts.
More generally, many of the exchange partners that received a significant number of records from Hong Kong indicated that they achieved a success rate when matching the information received from Hong Kong with their taxpayer database that was broadly equivalent to, or better than, what they usually achieve.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. Hong Kong is encouraged to continue its implementation process accordingly.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, Hong Kong implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. In particular, Hong Kong received notifications from four partners (representing 6% of its partners) and successfully processed them in a timely manner, resolving the issues raised. This is depicted in Figure 1. It also appears that Hong Kong will notify its partners effectively if errors or suspected non-compliance are identified when utilising the information received.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. Hong Kong is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
Hong Kong’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). Hong Kong is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Feedback from Hong Kong’s exchange partners did not raise any concerns with respect to their ability to process the information received from Hong Kong and therefore with respect to Hong Kong’s implementation of these requirements. More generally, one of Hong Kong’s exchange partners reported rejecting more than 25% of the files received although not more that 50%, due to the technical requirements not being met. This is a relatively low amount when compared to other jurisdictions. It was noted that Hong Kong has already successfully addressed the issue.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to sorting, preparing and validating the information. Hong Kong is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, Hong Kong linked to the CTS.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. Hong Kong is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Feedback from Hong Kong’s exchange partners did not raise any concerns with respect to the timeliness of the exchanges by Hong Kong and therefore with respect to Hong Kong’s implementation of this requirement.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to exchanging the information in a timely manner. Hong Kong is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from Hong Kong’s exchange partners did not raise any concerns with respect to Hong Kong’s use of the agreed transmission methods and therefore with Hong Kong’s implementation of this requirement.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. Hong Kong is therefore encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
Feedback from Hong Kong’s exchange partners did not raise any concerns with respect to Hong Kong’s receipt of the information and therefore with Hong Kong’s implementation of these requirements.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to the receipt of the information. Hong Kong is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
Hong Kong has responded to notifications and provided corrected, amended or additional information in a timely manner and no such concerns were raised by Hong Kong’s exchange partners and therefore with respect to Hong Kong’s implementation of these requirements.
Based on these findings it was concluded that Hong Kong is fully meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. Hong Kong is encouraged to continue to ensure the ongoing effectiveness of its implementation.