Key obligations

Financial institutions (“FI’s”) have to establish, maintain and apply control procedures and communication channels to identify, on a daily basis, changes in circumstances (“CiC”) affecting their account holders’ tax residency status under the OECD Common Reporting Standard (“CRS”). Similar rules apply under the US Taxpayer Status under US Foreign Account Tax Compliance Act (“FATCA”).

The control procedures and communication channels include domestic and offshore account holder.

Both regimes have a 90-day curing period to obtain documentation and to verify the account holder’s tax residency or US taxpayer status.

CRS, unlike FATCA stipulates, that the 90-day curing period must not go beyond the reporting period (31 December).

The inaccurate implementation of the document curing requirements might lead to under/over-reporting under CRS.

Discussion

To comply with CRS and the FATCA Model-2 IGA requirements Hong Kong based financial institutions have the obligation to establish and to maintain control procedures and communication channels enabling them to identify trigger events (also known as Changes in Circumstances (“CiC”)). These trigger events can lead to a conflict with their account holder’s (domestic and offshore) current tax residency (e.g. account holder provides a new address). This in turn can affect reporting status under CRS and/or the US taxpayer status under FATCA.

Both regimes provide a curing period of 90 calendar days following the day of the identification of any indicium, to obtain adequate documentary evidence from the account holder. The purpose of this being to verify the tax residency status under CRS or US taxpayer status under FATCA.

For CRS purposes documentary evidence for individual account holder comprise “a certificate of residence issued by an authorized government body (including a government, a government agency and a municipality) of the jurisdiction of which the payee claims to be a resident for tax purposes and a valid identification issued by an authorized government body (including a government, a government agency and a municipality) of a jurisdiction that includes the individual’s name and is typically used for identification purposes;” (Schedule 17D Cap. 112 Inland Revenue Ordinance).

Financial institutions that are unable to obtain documentary evidence must, in accordance to the CRS regulations (as translated into local law), after 90 days classify the account holder as reportable to any additional jurisdiction identified through the CiC.

CRS, unlike FATCA, provides that the 90-days curing period shall not go beyond the end of the reporting year. Here is an extract from CRS and FATCA:

In CRS: “However, in case of a change in circumstances, a Reporting Financial Institution may choose to treat a person as having the same status that it had prior to the change in circumstances until the later of the last day of the relevant calendar year or other appropriate reporting period or 90 calendar days following the date that the indicium was identified due to the change in circumstances.” (OECD Commentaries on Section III).

In FATCA: “A participating FFI may rely on documentation that meets the requirements of §1.1471-3(c) until the earlier of the expiration date of such documentation or the date there is a change in circumstances that affects the account holder or payee’s claim of chapter 4 status. If the participating FFI is unable to obtain the required documentation within 90 days of a change in circumstances, the participating FFI must apply the presumption rules of section 3.04 of this agreement with respect to the account or payee until valid documentation is obtained upon which the FFI is permitted to rely.” (Updated FFI Agreement Rev. Proc. 2017-16)

FI’s that have not implemented procedures to measure and mark the end of the document curing period are at risk. They should be reclassifying these account holders based on the CiC. If they don’t, they are at risk of submitting incorrect CRS tax returns to the Internal Revenue Department.

Such FI’s may be treated and penalised as CRS non-compliant (Section 80 Cap. 112 Inland Revenue Ordinance).