Hong Kong Common AEOI Reporting Errors

Hong Kong Financial Institutions: Addressing Common CRS Due Diligence & Reporting Errors

The implementation of the Common Reporting Standards (CRS) and Automatic Exchange of Information (AEOI) has significantly impacted financial institutions globally. Designed to enhance tax transparency and cooperation among jurisdictions, CRS mandates stringent due diligence and reporting obligations. A report published in May 2024 by Hong Kong’s Inland Revenue Department (IRD) highlighted several recurring due diligence and reporting errors in Hong Kong financial institutions' adherence to these regulations.

Hong Kong: Common AEOI Reporting Errors

The inspections conducted by IRD revealed that many financial institutions (FIs) are still grappling with compliance issues related to AEOI due diligence and reporting. Key deficiencies identified include:

Taxpayer Details

• Issue: Non-reporting of Taxpayer Identification Number (TIN) or Incorrect TIN, and Date of Birth (DOB)

• Requirement:

  • Financial institutions are required to report the information so long as they possess the relevant records of TIN (together with the issuing country) and DOB of the account holders and controlling persons.

  • If FIs have not collected the TIN of the account holder or controlling person in the records, they should leave the “TIN” data field blank and not input other values (e.g., NIL, 0, A, B, C).

  • Institutions should check the information for TINs of tax residents of different jurisdictions published on the Automatic Exchange Portal by the OECD.

  • If FI do not store the TIN and DOB, they are required to use reasonable efforts to obtain such information by the end of the second calendar year following the year in which such accounts were identified as reportable accounts.

Misunderstanding on the Meaning of Undocumented Account

• Issue: Undocumented accounts are not pre-existing individual accounts without self-certification forms in support.

• Clarification: An undocumented account is one where the institution maintains a pre-existing individual account with only a “hold-mail” instruction or “in-care-of” address in a reportable jurisdiction and no other indicia is identified. The institution must try to obtain a self-certification or documentary evidence to establish the account holder’s residence.

Misunderstanding on Change-in-Circumstances and Follow-up Procedures

• Issue: Some financial institutions might have a misperception that a change in circumstances only refers to changes in the account holder’s information.

• Clarification: A change in circumstances affects the account holder's status for AEOI purposes. An example would be an address change from one jursidiction to another, but does not include address change made within same jurisdiction. Financial institutions must follow due diligence procedures when new information impacts the reportable status of the account holder.

 Incorrect Classification of Entity Holder Type

• Issue: Some institutions might be confused about the entity holder type when preparing the data file.

• Requirement: Institutions must correctly classify entity types according to the Financial Account Information Return XML Schema. Examples include CRS101 for a passive NFE with a reportable controlling person and CRS102 for an active NFE that is a reportable person.

Misreporting Due to Human Errors and Computer System Errors

• Issue: Some institutions might omit reportable accounts or wrongly report financial information due to human or computer system errors.

• Solution: Institutions should implement reconciliation checks at data extraction and prior to reporting to ensure the completeness and accuracy of return filing.

These deficiencies can lead to non-compliance and significant consequences, including financial penalties, reputational damage, and increased scrutiny from regulatory bodies. Hong Kong FIs must address these gaps promptly to ensure compliance and maintain their standing in the global financial ecosystem. Penalties for non-compliance are set out in Sections 80B to 80F of the Inland Revenue Ordinance:

1. Section 80B: Failure to comply with specified requirements can result in a penalty of up to HKD 10,000.

2. Section 80C: Non-compliance with providing requested information or documents may lead to a penalty of up to HKD 100,000.

3. Section 80D: Submitting incorrect returns or statements can result in a penalty of up to three times the amount of tax undercharged.

4. Section 80E: Failing to keep proper records or accounts may lead to a penalty of up to HKD 100,000.

5. Section 80F: Obstructing the Commissioner in performing duties can result in a penalty of up to HKD 50,000 and imprisonment for up to 6 months.

Best Practices to Remediate AEOI Deficiencies

Technology solutions are designed to streamline and enhance AEOI compliance processes. By leveraging cutting-edge technology, FIs can address the critical deficiencies identified in the recent inspections:

Automated Due Diligence:

• Enhanced Self-Certification Verification: automate the verification of self-certification forms, ensuring that TINs and other critical data points are accurately captured and validated against global standards.

• Real-Time Data Validation: Technology can provide real-time validation and correction of customer information, reducing the risk of errors and omissions.

Comprehensive Reporting Solutions:

• Accurate Data Formatting: Ensure that all reporting files are produced in the correct format as specified by jurisdiction’s CRS guidelines, minimizing the risk of submission errors.

• Timely Reporting: Automated workflows help institutions meet reporting deadlines efficiently, avoiding the risks associated with delayed submissions.

Robust Internal Controls:

• Integrated Review Mechanisms: Integrated review processes that allow institutions to verify the accuracy and completeness of data before submission.

• Audit and Compliance Features: Built-in audit trails and compliance checks ensure that institutions maintain thorough documentation and adhere to all CRS requirements.

User-Friendly Interface:

• Streamlined Processes: An intuitive interface simplifies the due diligence and reporting processes, making it easier for staff to navigate and complete tasks accurately.

• Training and Support: Comprehensive training and support of FI staff will ensure understanding of CRS regulations and how systems can support each other.

How TAINA Can Help

The deficiencies highlighted by Hong Kong’s IRD underscore the challenges financial institutions face in complying with CRS regulations. However, with the right tools and technologies, these challenges can be effectively addressed. TAINA Technology offers a robust solution that automates and streamlines due diligence processes, ensuring compliance, accuracy, and efficiency. By adopting TAINA’s innovative solutions, Hong Kong financial institutions can enhance their compliance procedures and mitigate risks.

TAINA is the market-leading, fully automated FATCA and CRS Validation Platform that is revolutionizing the way that financial institutions manage compliance. TAINA’s automated platform is being used at scale by the world’s largest and most sophisticated financial institutions to revolutionize their customers’ experience and compliance.  

TAINA’s flexible and lightweight platform validates tax forms including CRS Self-Certifications in all formats, saving our clients costs and time, reducing their risk, and radically improving their customer and investor experience. 

Additionally, the TAINA platform can help manage the differences in requirements by country/jurisdiction. Although CRS represents a standard or general framework for reporting, the jurisdictions can still amend and enhance the requirements for reporting.

We would love to talk to you more about your current documentation validation process and how our award-winning FATCA and CRS Validation platform may add value to your organisation.

For more information on how our fully automated FATCA and CRS Validation platform can add value to your business, get in touch or request a demo to see it in action.