Due to global implementation of common reporting standard (CRS) and automatic exchange of information (“AEOI”), financial institutions (“FIs”) are required to conduct due diligence on tax residency certificate holders to ascertain their tax residency, and accordingly whether certain information of the financial accounts of the account holders is required to be exchanged to foreign tax jurisdiction(s).

The due diligence procedures performed by the FIs generally depend on various factors, such as whether the financial account is held by an individual or an entity, whether the financial account is a pre-existing account or a new account and whether the financial account is a high value account or a low value account. The FIs then apply the required procedures, such as

• residence address test
• electronic/paper record search
• relationship manager inquiry
• self-certification from account holders, to identify the tax residency of their account holders.

As you may be aware, the tax residency of an account holder is determined based on the information possessed by the FIs and to certain extent the judgement of the personnel of the FIs. As a result, there is a potential risk that the tax residency of an account holder may be incorrectly determined by the FIs and accordingly, the financial account information of that account holder is erroneously exchanged by the FIs through the Hong Kong tax authority to a foreign tax jurisdiction(s).

Due Diligence Based on Internal Records

As mentioned above, the FIs may determine the tax residency of an account holder through residence address test, electronic/paper record search and relationship manager inquiry. If the information of the account holder maintained by the FIs is incorrect/not updated, the tax residency of the account holder as identified by the FIs would potentially be incorrect.

Hence, it is important for the account holder to ensure that their relevant information in the hands of to the FIs is correct, complete and updated. Another potential concern is whether the tax residency of the account holder can be correctly determined by the officers of the FIs based on the rather limited information, such as nationality of an individual/place of incorporation of an entity, residential/business address, mailing address, telephone number, etc. possessed by the FIs.

For example, the number of days spent by an individual in a tax jurisdiction is usually relevant when determining whether he/she is a tax resident of that tax jurisdiction. One may wonder whether the FIs can determine the tax residency of an individual in the absence of his/her travel itinerary/passport copy.

In addition, the rules for determining the tax residency of an individual/entity are not the same among the different tax jurisdictions. Whether the standard information possessed by the FIs is sufficient for determining the tax residence of their account holders? Whether the personnel of the FIs has conducted a thorough study on the relevant tax rules of each tax jurisdiction and accordingly made a correct assessment on the tax residency for each account holder?

Due Diligence Based on Self-Certification Forms

Some account holders are requested by the FIs to complete a tax residency self-certification form. It is found that the information required to be supplied in the self-certification forms is also rather limited, such as the place of incorporation and type of the entity, Hong Kong identity card/passport number of the individual, business/residential address, mailing address as well as the tax residency and taxpayer identification number of the entity/individual.

As a result, follow-up enquiries might be raised by the FIs if the information provided is considered by the FIs as ‘inconsistent’, such as the place of incorporation of an entity being declared as in Jurisdiction A while the tax residency of the same entity being declared as in Jurisdiction B.

It has also been experienced that bank officers, when opening a personal bank account for their customers, often input wrong tax residency information in their banking system. For example, if a person is tax resident in Hong Kong but has an UK passport at the same time, banks tend to consider the account holder to have both a Hong Kong and UK tax residency, which is obviously incorrect. It is questionable whether the banks in such scenario will also send follow-up enquiries to their customers.

Automatic Exchange of Tax Residency Information Without Prior Notice

In case the FIs consider that a financial account is reportable pursuant to AEOI, they will not inform the account holders of the exchange of the financial account information to the foreign tax jurisdiction(s). Hence, the account holders’ account information will be exposed to the foreign tax jurisdictions without their consent.

The worst scenario may be that the financial account is erroneously regarded by the FIs as a reportable account and accordingly the account information is disclosed to the foreign tax authorities.

In view of the above, an account holder is suggested to well ascertain his/her/its tax residency as well as voluntarily provide the relevant and updated information together with the supporting documents to the FIs, if necessary, with a view to mitigate the chance of the financial account information to be mistakenly exchanged by the FIs to the foreign tax jurisdictions.