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  • Writer's pictureMarco Zawar MBA (VWA)/ LLM (MCI, FSFM)

CRS amendments - What are the impacts on Asset Managers in Hong Kong?




1. Summary

Since the first implementation of CRS, financial markets have evolved and given rise to new financial products. To reflect these developments the OECD has following a comprehensive review on June 8, 2023, released amendments to the Common Reporting Standard (CRS) as part of the Crypto Asset Reporting Framework (CARF).
The amendments to CRS bring E-money products - any product that is a digital representation of a single FIAT Currency issued on receipt of funds to make a payment -, digital fiat currency issued by a central bank (CBDC) and investments in Crypto-Assets through derivatives held in Custodial Accounts into the scope of CRS[1].
The amendments expand existing due diligence and reporting obligations to disclose
- the role of the controlling person concerning the entity account holder,
- of whether the account is pre-existing or new, and of whether a valid self-certification has been obtained from the account holder/controlling person(s),
- whether the account is a joint account including the number of joint holders, and
- the type of financial account.
In addition, income derived from Crypto-Assets, the excess of gains over losses from the sale or exchange of Crypto-Assets and the excess of gains over losses from transactions (including futures, forwards options, futures and similar transactions) in Crypto-Assets.
It is anticipated that the first exchanges of information under CARF shall be made in 2027. It is expected that CRS amendments will be enforced before this timeframe, to ensure CRS’s consistency with the CARF and to facilitate CARF’s orderly implementation.

2. Introduction

In 2014 the OECD released the Common Reporting Standard (CRS), an information-gathering and reporting standard for the automatic exchange of financial account information between participating jurisdictions to help fight against tax evasion and protect the integrity of tax systems.
As of 2023, 120+ jurisdictions have agreed to exchange financial account information.
Since the first implementation of CRS, financial markets have evolved and given rise to new financial products. To reflect these developments the OECD has following a comprehensive review on June 8, 2023, released amendments to the Common Reporting Standard (CRS) as part of the CARF.
The amendments to CRS bring electronic money products, Central Bank Digital Currencies (CBDC), and investments in Crypto-Assets through derivatives held in Custodial Accounts into the scope of CRS[2] as they are seen as an alternative to holding money or Financial Assets in an account that is currently subject to CRS reporting
Enhancements are also made to strengthen due diligence procedures and disclosure requirements (including the reporting of the role of each Controlling Person)[3].
The amendments were endorsed during the G20 Summit in India in September 2023.

3. Impact on Asset- and Wealth Management Providers (AMPS)

The following chapter describes on a high-level base the requirements for existing due diligence and reporting obligations.

3.1. Digital Financial Products in Scope

To guarantee a level playing field between digital money products and traditional bank accounts and to ensure consistent reporting, the following modifications to the CRS were considered:
-  the inclusion of Specified Electronic Money Products (any product that is a digital representation of a single FIAT Currency issued on receipt of funds to make a payment), and Central Bank Digital Currencies (CBDC) covers the official currency of a jurisdiction, issued in digital form by a Central Bank in the scope of CRS.
-  the amendment of the term Depository Account includes accounts maintained for customers representing Specified Electronic Money Products and CBDCs.

3.2. Due diligence procedures

3.2.1. Identification of a Controlling Person

To identify a Controlling Person, an AMPS may rely on information collected and maintained under AML/KYC Procedures, provided that such procedures are consistent with the 2012 FATF Recommendations. If the RFI is not legally required to apply AML/KYC Procedures that are consistent with the 2012 FATF Recommendations, it must apply substantially similar procedures to determine the Controlling Persons.

3.2.2. Integrating of CBI/RBI guidance

The OECD in October 2018 released guidance addressing the misuse of citizenship and residence by investment (CBI/RBI) schemes[4]. Such schemes allow individuals to obtain citizenship or temporary or permanent residence rights based on local investments or against a flat fee to circumvent the CRS.
The explanatory guidance reiterates that an RFI may not rely on a self-certification or Documentary Evidence where it knows or has reason to know, that it is incorrect or unreliable. The explanatory guidance is now included in the Commentary.
AMPS should enhance existing AML/KYC and Client Due Diligence (CDD) procedures to consider information on high-risk CBI/RBI schemes published by the OECD.

3.2.3. Due diligence obligations for cases where a valid self-certification was not obtained

CRS requires AMPS to obtain and validate self-certifications for all new Accounts during a 90-day period. CRS does not foresee any fall-back due diligence procedure to apply in cases where a Reporting Financial Institution did not comply with this requirement.
AMPS that cannot obtain the self-certification within the 90-day period is required to determine the residence of the Account Holders and/or Controlling Persons based on the due diligence procedures for pre-existing Accounts. It should be noted that the OECD does not see this as a standard procedure until a valid self-certification is obtained.  The OECD clearly stated that this approach is not an alternative to the requirement to obtain a valid self-certification as part of the client onboarding procedures.

3.2.4. Government Verification Services as part of the due diligence procedures

CRS due diligence procedures at present are based on AML/KYC documentation, self-certifications, and other account-related information collected as part of the local client onboarding and documentation rules.
As technology is evolving in a direction that can potentially drastically simplify the documentation of taxpayers. Specifically, so-called Government Verification Services (GVS) may allow RFIs, to obtain a direct confirmation from the tax administration of the jurisdiction of residence of the taxpayer concerning their identity and tax residency.
CRS shall allow AMPS to rely on a GVS procedure to document an Account Holder or Controlling Person in the due diligence procedures, to make the “CRS future-proof “for “future IT developments.” Confirmation of an Account Holder’s or Controlling a Person’s identity and tax residence obtained via a GVS or similar IT-driven process is considered a functional equivalent to a TIN.

3.3.  Expansion of the reporting requirements

The reporting requirements under CRS are primarily focused on the transmission of data to disclose Account Holders and Controlling Persons including income realized during the reporting period and balances at the end of the reporting period.
As the regulatory compliance space is undergoing a significant transformation globally,and data granularity is at the forefront the OECD is following this approach.
As of 2027 AMPS are requested to provide more granular information about Account Holders, Controlling Persons, and the Financial Accounts they own. This shall position tax authorities to better contextualize the information they receive and to facilitate the use of the data for tax compliance purposes.

3.3.1. Additional information on Controlling Persons

The reporting requirements are therefore expanded to cover the following:
-  the role of Controlling Persons concerning the Entity Account Holder and
-  the role(s) of Equity Interest Holders in an Investment Entity.
This shall guarantee that tax authorities have visibility on the role(s) a Controlling Person/Equity Interest Holder plays within the Entity, and allow tax authorities a distinction between those Controlling Persons/Equity Interest Holders that have an interest through ownership, control, or as beneficiaries, as opposed to those that have a managerial role (e.g. senior management officials, protectors, trustees).

3.3.2. Information for each account on whether a valid self-certification was obtained

AMPS shall provide information on whether the account is pre-existing or new, and whether a valid self-certification has been obtained. This information allows tax administrations to verify whether the due diligence procedures established are in line with the local CRS regulations. Under this approach, tax authorities will obtain better insights into the reliability of the information provided.
The term “pre-existing account” means for Hong Kong any Financial Account maintained as of 31. December 2016 or, if the account is treated as a Financial Account solely by virtue of the amendments to the Common Reporting Standard, as of the effective date of the revised CRS-1 day.
The term “New Account” means a Financial Account opened on or after 01. January 2017 or if the account is treated as a Financial Account solely by virtue of the amendments to the Common Reporting Standard, on or after the effective date of the revised CRS.
Financial Accounts opened on or after 01. January 2017 and before the effective date of the revised CRS shall be treated as pre-existing accounts as of the effective date of the revised CRS-1 day.
They also shall more detailed information on whether an account that they maintain is a joint account, as well as the number of joint Account Holders. The information permits tax administrations to take the fact into account that the income and balance on joint accounts may not be attributable in full to each Account Holder, but would rather need to be apportioned, as appropriate, between the Account Holders.

3.3.3. Information about the account type held by a reportable person

Finally, tax authorities expect to obtain information on the type of Financial Account. WPMS shall distinguish between Depository Accounts, Custodial Accounts, Equity and debt Interests, and Cash Value Insurance Contracts. Tax administrations to better understand the financial investments held by their taxpayers.

4. What’s next?

Work is ongoing on an implementation package to ensure consistent domestic and international application and effective implementation of the CARF. Similarly, work will also progress to put in place the appropriate mechanisms to automatically exchange information under the amended CRS. This includes the implementation of enhanced IT Solutions to support the exchange of information under the amended CRS
Finally, coordinated implementation timelines for both the CARF and amended CRS will be agreed.
After the release of the implementation package of the CARF and CRS, I expect the Hong Kong Government to implement legislation to bring the CARF and the amended CRS rules (including penalties) into effect in Hong Kong. 

[1]   OECD (2023), Page 91
[2]   OECD (2023), Page 91
[3]   OECD (2023), Page 4
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