Hong Kong will likely abandon its bilateral approach to signing ‘tax treaties’ in order to fast-track its preparations for the common reporting standard (CRS) regime, given that the Financial Action Task Force (FATF) will evaluate its progress in just three months’ time, a lawyer says.
“Hong Kong may be changing from a bilateral approach to a multilateral approach,” says Joanna Caen, senior consultant and head of private wealth for China at law firm Herbert Smith Freehills. “This may be because Hong Kong will have a FATF review in October and November this year, and may be facing pressure to increase the number of countries with which it is exchanging information in a short period of time,” Caen tells Asian Private Banker.
While Hong Kong has identified 75 “reportable jurisdictions”, its current approach means regulators must sign bilateral agreements with each partner jurisdiction in order to exchange individuals’ tax information from next year. At present, Hong Kong has signed agreements with just 13 of these 75 jurisdictions.
However, the Inland Revenue Department (IRD) said recently that it plans to join the multilateral convention on mutual administrative assistance in tax matters (MCAA) – which is essentially a network of tax partners. As such, an amendment bill will be introduced into the Legislative Council by late 2017 to further expand Hong Kong’s tax reporting network.
“We must expedite the expansion of the AEOI [automatic exchange of financial account information] network in view of the recent international developments,” a spokesperson for the tax department said recently.
Benchmarking Hong Kong’s preparation efforts
Although Singapore beat Hong Kong to the punch when it entered the MCAA recently, the city-state “seems to be still taking the bilateral approach, which appears different to Hong Kong’s recent shift”, according to Caen.
“Singapore seems to see its competitor jurisdictions as both onshore and offshore centres while Hong Kong may be just focusing on onshore jurisdictions,” she says.
This means that Singapore is taking a similar approach to Switzerland – a signatory to the MCAA that is also taking the bilateral approach.
“Hong Kong was considered to be lagging behind in the previous FATF review. We have rather few tax agreements signed, compared to Singapore,” a Hong Kong-based leader at an international consultancy firm says.
Despite this, he says that local financial institutions are ready for the onset of the AEOI scheme, adding that banks started keeping records of clients’ tax information for such purposes from 1 July.
“Hong Kong’s financial institutions are already collecting data, and legislation is already in place to collect the information. From now, any new account opening needs to adopt AEOI [standards], with legacy account processing happening at different speeds in different banks,” the source says.
Meanwhile, Peter Stein, MD of Hong Kong’s Private Wealth Management Association (PWMA), sees the shift towards a multilateral approach as a positive development.
“Extending the application of the multilateral convention to Hong Kong would allow for faster progress in signing AEOI agreements with other jurisdictions. Our association is generally supportive regarding Hong Kong’s efforts to expand the application of CRS,” Stein says.
To ensure that its members are prepared, the PWMA updated its AEOI fact sheet in May.
The industry body is also working with the Hong Kong Association of Banks to update AEOI reference materials for their members in order to account for ordinance changes that were implemented at the end of June, Stein says.