(Yicai) April 14 -- Hong Kong has introduced legislation to implement the Common Reporting Standard 2.0, the latest version of the international framework for combating tax evasion, which may close loopholes on the reporting of cryptocurrency holdings and tax avoidance by Chinese mainlanders.

The Inland Revenue Amendment Automatic Exchange Information Bill was submitted to the Legislative Council of the Hong Kong Special Administrative Region for its first and second readings on April 1. The bill strengthens the administrative framework for Hong Kong's automatic exchange of information regime, and if passed, it would take effect on Jan. 1, 2027.

 

The Organisation for Economic Co-operation and Development brought in the CRS in 2014 to enhance international tax transparency, strengthen international tax cooperation, and tackle cross-border tax evasion. In 2023, it updated the CRS to introduce mandatory reporting for tax information related to cryptocurrency transactions and digital financial products.

Over 120 tax jurisdictions, including the Chinese mainland and Hong Kong, had committed to implementing the CRS as of the end of last year.

“The first CRS mainly focused on traditional financial accounts, but with the development of digital assets, cryptocurrencies, and multi-layer investment vehicles, the original rules have shown limitations in terms of asset scope and control identification," Wang Wenxing, a well-known expert on international tax law, told Yicai.

"Following a comprehensive review, the OECD revised the CRS, which, along with the Crypto-Asset Reporting Framework, constitutes what is commonly referred to in the industry as CRS 2.0," said Wang, who is also senior vice president of Healthcare Integration Consulting Group. 

“The core feature of this updated framework is that the regulatory focus is no longer only on whether there are offshore accounts, but further inquires who controls, benefits from, and is obligated to disclose the accounts behind them,” he said.

Mandatory Reporting

If the bill is implemented, mandatory reporting for crypto assets will be introduced, reducing the 'anonymity' of these assets; the automatic exchange of tax information will be strengthened, making offshore structures less effective as tax havens; and tax evasion by Chinese mainland residents using Hong Kong identities and similar methods will be curbed.

Moreover, the amendment will remove the 'either/or' option for tax information reporting on dual tax residents and promote a comprehensive upgrade of information transparency, which will trace back to the ultimate beneficial owners.

If the bill passes, five groups will need to pay attention to the new regulations, according to the Research Center of M&T Lawyers Beijing Office.

They are individuals and entities holding financial accounts, such as bank deposits, securities, funds, and insurance in Hong Kong and overseas, beneficial owners who establish offshore companies and hold financial assets, entities holding cryptocurrency and related derivatives, individuals with dual or multiple tax resident statuses, and individuals involved in residency planning who need to determine Hong Kong tax residency status.

Even though there is still time before the actual implementation, concerns have already started to arise among Chinese mainland residents, especially high-net-worth individuals who viewed Hong Kong as an asset allocation option with 'tax advantages.’

The CRS 2.0 will significantly enhance the transparency of cross-border assets, which may be the biggest concern for these individuals, an executive at a cross-border financial planning and wealth management service agency told Yicai, adding that business leaders are worried about being asked why they have so much money abroad.

In the short term, the CRS 2.0 will play an important role in regulating the outflow of funds and tax reporting, the executive noted. In the long term, more people may seek to switch wealth management and tax planning approaches, such as 'obtaining residency' through immigration.

Editor: Futura Costaglione