Written by: FinTax

Related news: Hong Kong pledges to implement crypto asset reporting framework

Author: Hong Kong Government Information Department

On December 13, the Hong Kong Government informed the Organisation for Economic Co-operation and Development (OECD) Global Forum on Transparency and Effective Exchange of Information for Tax Purposes (Global Forum) that Hong Kong is committed to implementing a reporting framework for crypto-assets (reporting framework) to enhance international tax transparency and combat cross-border tax evasion.

In view of the rapid development of the crypto-asset market, the OECD announced a reporting framework in June 2023 to ensure global tax transparency. As an extension of the existing "Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters", the reporting framework stipulates a similar mechanism for tax jurisdictions with crypto-asset users or controllers as their tax residents to automatically exchange tax information related to crypto-asset accounts and transactions every year. To ensure that the reporting framework can be implemented fairly and effectively around the world, the Global Forum has invited all tax 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 to promote international tax cooperation."

Hong Kong is committed to implementing the reporting framework with suitable partners on a reciprocal basis, and the relevant partners must meet the standards for safeguarding data confidentiality and security. Considering the latest timetable set by the Global Forum, the government initially plans to complete the necessary local legislative amendments by 2026 or earlier and to conduct the first automatic data exchange with relevant tax jurisdictions under the reporting framework 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 annually with partner tax jurisdictions. The relevant tax authorities can use this information for tax assessment 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 the exchange of tax information to address tax regulation issues related to crypto assets and to provide tax authorities with more third-party data on taxpayers and their crypto asset activities. CARF requires crypto asset service providers to follow detailed due diligence requirements and to report this information accurately and promptly to tax authorities. CARF is closely related to the existing CRS (Common Reporting Standard), essentially extending the internationally agreed automatic information exchange system defined by CRS into the field of crypto assets—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 of residence, thereby enhancing tax transparency in the crypto asset sector and preventing tax evasion through crypto assets.

In addition to enhancing the transparency of cryptocurrency asset information, Hong Kong has also taken a series of measures in cryptocurrency asset regulation in recent years and gradually established a relatively complete policy framework, including but not limited to: In November 2018, the Hong Kong Securities and Futures Commission (SFC) released the (Virtual Asset Regulatory Framework) aimed at formulating regulatory standards for virtual asset trading platforms; In 2020, the Hong Kong Monetary Authority (HKMA) introduced a licensing system for Virtual Asset Service Providers (VASPs), requiring all companies engaged in virtual asset trading, transfer, or management to obtain licenses from Hong Kong Customs; In 2022, the HKMA published the (Discussion Paper on Crypto Assets and Stablecoins), beginning to clarify regulatory requirements for stablecoins. Subsequently, the SFC also launched a regulatory sandbox, allowing 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 is planning to provide tax relief for cryptocurrency assets for hedge funds and wealthy family offices to strengthen Hong Kong's status as an offshore financial center.

Looking at the big picture, Hong Kong's commitment to implementing CARF is an important step towards aligning with international cryptocurrency regulatory frameworks, and it is an inevitable choice for continuing to play the role of an international financial center and promoting the healthy development of the cryptocurrency industry. Perhaps from a short-term perspective, the increase in transparency has brought more compliance pressures and tax risks for cryptocurrency companies and investors in Hong Kong, which may affect the growth of the cryptocurrency market in Hong Kong; however, from a long-term perspective, CARF is beneficial in preventing tax fraud and evasion through cryptocurrency assets, balancing the rapid development of the cryptocurrency market with the healthy stability of market order, and establishing a sustainable cryptocurrency market environment, which overall helps the cryptocurrency industry transition from barbaric growth to orderly development. Therefore, cryptocurrency companies and investors in Hong Kong should adopt a more proactive attitude towards CARF, seek professional assistance when necessary, and timely ensure their tax compliance to avoid unnecessary losses and penalties.