Hong Kong Occupational Retirement Scheme Ordinance

Hong Kong Occupational Retirement Scheme Ordinance provides the most serious CRS loophole globally under the auspices of a Competent Authority
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The fight against offshore tax evasion continues: CRS disclosure facility delivers first results





Economist article on HK ORSO sham used for tax evasion.
01/06/2017 - On 5 May, the OECD launched a public disclosure facility for information on schemes designed to circumvent the application of the Common Reporting Standard. Several ‎submissions highlighted the use of so called Occupational Retirement Schemes (ORS) in Hong Kong, China to avoid reporting under the CRS. The Hong Kong authorities have taken swift action, issued relevant guidance on the inland revenue website to clarify that only certain registered ORSs are out of scope of CRS reporting and are assessing whether further action is required in this respect. The OECD is also in close contact with a number of jurisdictions in order to assess whether other schemes that have been disclosed through the facility (including a number of residence by investment programmes) may pose an actual risk for avoiding CRS reporting and therefore need to be addressed.

This is insufficient and purposefully devious of HK MPF authorities as it is registered ORSOs that are providing the tax evasion products discussed below.

1. The Hong Kong Authorities, through naivity, incompetence or likely complicitly have established a major CRS loophole by adding Occupational Retirement Schemes to the list of non-reporting Financial Institutions, despite this being a high-risk institution used to frustrate the purpose of the CRS.

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Hundreds of of billions of Asian offshore assets, mainly from Chinese mainland, is rushing into newly established trusts registered as Hong Kong Occupatioal Retirement Schemes.

This is because the legislation for these personal pension type plans, permitted by the Hong Kong Occupational Retirement Scheme Ordinance ("ORSO") is the perfect escape from the Common Reporting Standard. It allows unlimited investments with unrestricted access for any non-resident establishing a fake employment contract with a newly incorporated Hong Kong company as the pension sponsor.
2. How the Hong Kong Authorty facilitates the CRS loophole

Inland revenue Amendment Ordinance 2016, enables Hong Kong to comply with the international standard for automatic exchange of financial account information regarding tax matters.
Page 69 of 109 par 12 - Occupational Retirement Schemes (ORS)

(2) An occupational retirement scheme registered under the Occupational Retirement Schemes Ordinance (Cap. 426) (ORSO scheme) is a Non-Reporting Financial Institution
Adding Non-Reporting Financial Institutions

The CRS summary foreword states "The Financial Institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they present a low-risk of being used for evading tax and are excluded from reporting"

CRS page 46 defines which Financial Institutions are Non-Reporting. This includes "Any other Entity that presents a low-risk of being used to evade tax, and has substantially similar characteristics to any of the Entities described in subparagraphs B(1)(a) and (b), and is defined in domestic law as a Non-Reporting Financial Institution, provided that the status of such Entity as a Non-Reporting Financial Institution does not frustrate the purposes of the Common Reporting Standard.
3. How the ORSO is a loophole

An ORSO is the ideal investment vehicle as a sham pension. It provides unrestricted access conditions for the tax evader who is not geuinely employed by Hong Kong employer.
A trust registers as an ORSO, then markets the ORSO as a CRS solution.

Any non-resident of Hong Kong wanting this sham retirement scheme as a CRS solution, incorporates a Hong Kong company which makes a fake employment contract with the non-reesident. No salary is paid and the employee is a non-resident of Hong Kong. and neither does the employee have a Hong Kong work permit. The pension contributions are not linked to salaries, nor are the retirement contributions or benefits tax-favoured.

  • No limit to contribution;
  • No limit to type of contribution (Direct holding of residential property, private company shares, private bank and stock broking accounts, personally owned retirement savings plan, securities/bond accounts);
  • No restriction on residence jurisdiction of Member;
  • No restriction on when member can access their money;
  • Can be for one member only (segregated accounts in the scheme for each member). This is a clever way of avoiding the 5% maximum per member. A fake employer company is set up to contribute to the scheme along with the employee (no restriction on if this company is a Passive NFE / Investment Entity)-
4. Why the ORSO should not qualify as a Non-Reporting FI

The CRS defines a Non-Reporting FI as a (i) broad participation, and (ii) a narrow participation retirement scheme. However, the ORSO does not match the CRS definitions of these two Non-Reportinng FIs. Therefore the Hong Kong authorities added ORSOs as a Non-Reporting Financial Institution, claiming that ORSO were similar to the definition of Non-Reporting FIs.
Why ORSOs should not qualify as a Non-Reporting retirement participation scheme :
  • ORSOs are not similar to the CRS broad retirement scheme because CRS page 47 par 5(a) does not have a single beneficiary with a right to more than five per cent of the fund’s assets;
  • ORSOs are not similar to narrow participation retirement schemes because as per CRS page 46 par 6(b) the fund is sponsored by one or more employers that are not Investment Entities or Passive NFEs. Every fake employer company using the ORSO as a CRS loophole is either an Investment Entity or a PNFE.
5. Hong Kong Authorities - Incompetent, Naive or Complicit

It is difficult to believe that the Hong Kong Authorities are unaware that ORSOs are being used by non-residents to circumvent the Common Reporting Standard.


6. Suspension of CAA
Commentary page 90 - Paragraph 2 provides details on the possibility for a Competent Authority to suspend the Agreement when it has determined that there is or has been significant non-compliance by the other Competent Authority with this Agreement. Where possible the Competent Authorities should try to resolve any issues of non-compliance, even those of significant non-compliance, before issuing a notice to suspend the operation of the Agreement.

3. To suspend the Agreement a Competent Authority must give notice in writing to the other Competent Authority that it intends to suspend the Agreement. The notice should provide a detailed description of the significant non-compliance that has occurred, or is occurring, and where possible a description of the steps that should be taken to resolve the issue. The suspension will have immediate effect.

4. The notified Competent Authority should, as soon as possible, undertake the necessary steps to address the significant non-compliance. As soon as the non-compliance is resolved, the notified Competent Authority should advise the other Competent Authority. Following successful resolution of the issue, the Competent Authority that sent the suspension notice should confirm in writing to the notified Competent Authority that the Agreement is no longer suspended and exchanges of information should recommence as soon as possible.
Paragraph 2 provides that significant non-compliance includes, defining the status of Excluded Accounts or Non-Reporting Financial Institutions in a manner that frustrates the purposes of the Common Reporting Standard.
7. Termination of CAA after one year suspension Paragraph 3 contains the termination clause. Either Competent Authority may terminate this Agreement by giving notice of termination in writing to the other Competent Authority. Such termination will become effective on the first day of the month following the expiration of a period of 12 months after the date of the notice of termination. For example, a Competent Authority may choose to terminate this Agreement when the Agreement has been suspended and the other Competent Authority has not resolved issues of significant non-compliance within a reasonable timeframe.