Written by: FinTax
Related News: Hong Kong Commits to Implement Crypto Asset Reporting Framework
Author: Hong Kong Government News Office
On December 13, the Hong Kong government informed the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) of the OECD that Hong Kong is committed to implementing a reporting framework for crypto assets to enhance international tax transparency and combat cross-border tax evasion activities.
In light of the rapid development of the crypto asset market, the OECD announced the reporting framework in June 2023 to ensure the maintenance of global tax transparency. As an extension of the existing Common Reporting Standard (CRS) for automatic exchange of financial account information on tax matters, the reporting framework establishes a similar mechanism for users or controllers of crypto assets in their tax residency jurisdictions to automatically exchange tax information related to crypto asset accounts and transactions annually. To ensure the fair and effective global implementation of the reporting framework, the Global Forum has invited all jurisdictions with relevant crypto asset industries and identified as directly related to the reporting framework (including Hong Kong) to implement the reporting framework.
The Secretary for Financial Services and the Treasury, Christopher Hui, stated: "The reporting framework is the latest global standard for tax transparency. Implementing the reporting framework is crucial for maintaining Hong Kong's reputation as an international financial and business center, and it reflects Hong Kong's commitment as a responsible tax jurisdiction in promoting international tax cooperation."
Hong Kong is committed to implementing the reporting framework with suitable partners on the basis of reciprocity, and the relevant partners must meet standards for data confidentiality and security. Considering the latest timetable established by the Global Forum, the government plans to complete the necessary local legislative amendments by 2026 or earlier, and to begin the first automatic data exchange under the reporting framework with relevant tax jurisdictions starting in 2028.
Christopher Hui added: "The government will listen to the opinions of relevant stakeholders and the public when preparing the necessary legislative amendments."
Hong Kong has consistently supported international efforts to enhance tax transparency and combat tax evasion. Since 2018, Hong Kong has automatically exchanged financial account information with partner tax jurisdictions annually. Relevant tax authorities can use this information for tax assessments and for investigating and combating tax evasion.
FinTax Brief Comment:
The OECD's Crypto Asset Reporting Framework (CARF) aims to establish a unified framework for tax information exchange to address the regulatory issues surrounding crypto asset taxation, providing tax authorities with more third-party data on taxpayers' crypto asset activities. CARF requires crypto asset service providers to follow detailed due diligence requirements and report this information to tax authorities accurately and timely. CARF is closely related to the existing Common Reporting Standard (CRS) and essentially extends the international automatic information exchange system established by the CRS into the crypto asset domain—crypto asset service providers need to report their non-resident clients' crypto asset information and automatically send this information to the tax authorities in the clients' countries, thereby enhancing tax transparency in the crypto asset space and preventing tax evasion using crypto assets.
In addition to enhancing the transparency of crypto asset information, Hong Kong has implemented a series of measures in recent years regarding crypto asset regulation and has gradually established a relatively comprehensive policy framework, including but not limited to: in November 2018, the Hong Kong Securities and Futures Commission (SFC) issued a regulatory framework for virtual assets, aiming to set regulatory standards for virtual asset trading platforms; in 2020, the Hong Kong Monetary Authority (HKMA) introduced a licensing system for virtual asset service providers (VASP), requiring all businesses engaged in virtual asset trading, transfer, or management to obtain a license from Hong Kong Customs; in 2022, the HKMA published a discussion paper on crypto assets and stablecoins, beginning to clarify regulatory requirements for stablecoins. Subsequently, the SFC launched a regulatory sandbox that allows innovative virtual asset trading platforms to test their business models in a controlled environment while ensuring compliance with existing regulatory requirements. Recently, the Hong Kong government plans to offer tax incentives for hedge funds and wealthy family offices regarding crypto assets to strengthen Hong Kong's position as an offshore financial center.
Overall, Hong Kong's commitment to implementing CARF is an important step in aligning with international crypto regulation systems and is a necessary choice for continuing to play its role as an international financial center and promoting the healthy development of the crypto asset industry. Perhaps from a short-term perspective, increased transparency brings more compliance pressure and tax risks to Hong Kong's crypto businesses and investors, which may affect the growth of Hong Kong's crypto market; however, from a long-term perspective, CARF helps prevent tax fraud and evasion through crypto assets, balancing the rapid development of the crypto market with the healthy stability of market order, and establishing a sustainable environment for the crypto market, which overall aids the transition of the crypto asset industry from wild growth to orderly development. Therefore, Hong Kong's crypto businesses and investors should adopt a more proactive attitude towards CARF and seek professional assistance when necessary to ensure timely tax compliance and avoid unnecessary losses and penalties.