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Hong Kong Commits to Implementing Crypto Asset Reporting Framework
Author: The Hong Kong Government
The Government informed the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) of the Organisation for Economic Co-operation and Development (OECD) today (December 13) of Hong Kong’s commitment to implementing the Crypto-Asset Reporting Framework (CARF) for enhancing international tax transparency and combating cross-border tax evasion.
In June 2023, the OECD published CARF with a view to ensuring that global tax transparency would be maintained in light of the rapid growth of the crypto-asset market. As an extension of the existing Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI), CARF provides for a similar mechanism for annual automatic exchange of tax-relevant crypto-asset account and transaction information among jurisdictions where crypto-asset users or controlling persons are tax residents. To ensure an effective global implementation of CARF on a level playing field, the Global Forum has invited all tax jurisdictions that host a relevant crypto-asset sector and have been identified as immediately relevant to CARF (including Hong Kong) to implement it.
The Secretary for Financial Services and the Treasury, Mr Christopher Hui, said, “CARF is the latest global standard on tax transparency. Its implementation is crucial for maintaining Hong Kong’s reputation as an international financial and business centre. It also reflects Hong Kong’s ongoing efforts in promoting international tax co-operation as a responsible tax jurisdiction.”
Hong Kong is committed to implementing CARF on a reciprocal basis with appropriate partners that meet the required standards for protecting data confidentiality and security. Based on the latest timetable set by the Global Forum, the Government aims to commence the first automatic exchanges with relevant jurisdictions under CARF from 2028, based on the initial plan that the necessary local legislative amendments can be put in place by 2026.
Mr Hui added, “The Government will engage relevant stakeholders and members of the public when preparing the necessary legislative amendments.”
Hong Kong has been rendering unwavering support to international efforts to promote tax transparency and combat tax evasion. Since 2018, Hong Kong has conducted annual AEOIs with partner jurisdictions. The information can be used by the relevant tax authorities to conduct tax assessments and to detect and counter tax evasion.
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FinTax Commentary:
The OECD’s Crypto Asset Reporting Framework (CARF) aims to establish a unified tax information exchange framework to address regulatory issues related to crypto asset taxation and provide tax authorities with more third-party data on taxpayers’ crypto asset activities. CARF requires crypto asset service providers to adhere to detailed due diligence requirements and accurately and promptly report this information to tax authorities. CARF is closely linked to the existing Common Reporting Standard (CRS), essentially extending the CRS’s international automatic information exchange system to the crypto asset sector. This means that crypto asset service providers must report information on their non-resident clients’ crypto assets and automatically send this information to the tax authorities of the clients’ home countries, thereby enhancing tax transparency in the crypto asset field and preventing the use of crypto assets for tax evasion.
In addition to increasing the transparency of crypto asset information, Hong Kong has taken a series of measures in recent years to regulate crypto assets and has gradually established a relatively comprehensive policy framework. These measures include, but are not limited to:
November 2018: The Hong Kong Securities and Futures Commission (SFC) issued the “Virtual Asset Regulatory Framework,” aiming to set regulatory standards for virtual asset trading platforms.
2020: The Hong Kong Monetary Authority (HKMA) introduced a licensing regime for Virtual Asset Service Providers (VASPs), requiring all businesses engaged in virtual asset trading, transfer, or management to obtain a license from the Hong Kong Customs.
2022: HKMA released the “Discussion Paper on Crypto Assets and Stablecoins,” beginning to clarify regulatory requirements for stablecoins.
Subsequently, the SFC 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 offer crypto asset tax incentives for hedge funds and wealthy family offices to strengthen Hong Kong’s position as an offshore financial center.
Overall, Hong Kong’s commitment to implementing CARF is a significant step towards aligning with the international crypto regulatory framework and is a necessary choice for continuing to function as an international financial center and promoting the healthy development of the crypto asset industry. In the short term, increased transparency may bring more compliance pressures and tax risks to Hong Kong’s crypto businesses and investors, potentially affecting the growth of Hong Kong’s crypto market. However, in the long run, CARF is beneficial in preventing tax fraud and evasion through crypto assets, balancing the rapid development of the crypto market with the healthy and stable order of the market, and establishing a sustainable crypto market environment. This will overall help the crypto asset industry transition from wild growth to orderly development. Therefore, Hong Kong’s crypto businesses and investors should adopt a more proactive attitude towards CARF, seek professional assistance when necessary, and promptly ensure their own tax compliance to avoid unnecessary losses and penalties.