Mandatory Provident Fund Schemes and Occupational Retirement Schemes

By the Inland Revenue (Amendment) (No. 2) Ordinance 2019, the following entities are removed from the list of non-reporting financial institutions:

Mandatory provident fund scheme registered under the Mandatory Provident Fund Schemes Ordinance (Cap. 485) (MPF scheme);
Occupational retirement scheme registered under the Occupational Retirement Schemes Ordinance (Cap. 426) (ORSO scheme);
Pooling agreement as defined by section 2(4) of the Occupational Retirement Schemes Ordinance (Cap. 426) that only applies to 2 or more participating ORSO schemes (Pooling agreement); and
Approved pooled investment fund as defined by section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485 sub. leg. A), in which only either or both of the following schemes are invested (APIF) –

MPF schemes;
ORSO schemes.

The amendments will take effect from 1 January 2020. In other words, those MPF schemes, ORSO schemes, pooling agreements and APIFs that fall within the definition of a reporting financial institution will not be exempt from performing the obligations under Part 8A of the Inland Revenue Ordinance from 1 January 2020. For more details about reporting financial institution, please refer to Chapter 3 of the Guidance for Financial Institutions.

Investment Entity

An investment entity is treated as a financial institution, which specifically includes:

A collective investment scheme authorized under the Securities and Futures Ordinance (Cap. 571).
An entity that primarily conducts as its business one or more of the following activities or operations for its customers –

trading in –

money market instruments, including cheques, bills, certificates of deposit, and derivatives;
foreign exchange;
exchange, interest rate and index instruments;
transferable securities; or
commodity futures;

individual and collective portfolio management;
otherwise investing, administering, or managing financial assets or money on behalf of other entity or individual.

An entity that is managed by a financial institution; and whose gross income is primarily attributable to investing, reinvesting, or trading in financial assets.

MPF schemes, ORSO schemes, pooling agreements or APIFs falling within the definition of investment entity will be financial institutions. Apart from an authorized scheme under the Securities and Futures Ordinance that is specifically defined as an investment entity, a scheme / agreement will also be treated as an investment entity if it primarily conducts as a business investment activities or operations for its customers; or derives its gross income primarily from investing, reinvesting or trading in financial assets, and is managed by a financial institution.

In the context of an investment entity, the key element of the term “customer” is that the investment entity (e.g. an ORSO scheme) would need to manage the investments for unrelated investors, typically against a fee or a premium. Since the contributions from the employer and employees (if applicable) under an ORSO scheme are managed for the benefit of the employees against the payment of management fees, the employees would be customers in this particular setting. As an ORSO scheme primarily conducts investment activities or operations for the employees enrolled in the scheme, the scheme would be an investment entity even if it is not managed by a financial institution.

Pooling Agreements and APIFs

The definition of reportable person excludes a financial institution. As regards pooling agreements and APIFs, if all the participants of the schemes are those MPF schemes and ORSO schemes that are subject to reporting under AEOI (i.e. they are also financial institutions), the pooling agreements and APIFs are treated as not holding any reportable accounts. Each scheme participating in the pooling agreements and APIFs is responsible to identify and report on its own account holders.

Non-vested Benefits

In respect of MPF schemes, an employer is free to make voluntary contributions in addition to mandatory contributions. Upon a member ceasing employment prior to his normal retirement date other than due to specified circumstances, only the appropriate vested proportion of the employer’s voluntary balance shall be paid to the employee.

For ORSO schemes, the scheme member’s benefits may be subject to a vesting scale. The vesting scale may specify the percentage of the benefits derived from employer’s contributions that the member is entitled to base on the number of years of service. For example, a member is entitled to 30% of the benefits derived from employer contributions after completing 3 years of service and is only entitled to 100% of benefits after completing 10 years of service. In such case, during Year 1 to 3, no benefits would accrue to the scheme member. The benefits, however, would accrue to the scheme member increasingly from Year 4 to 10.

Questions will arise as to who is the beneficiary in respect of this non-vested portion and what is the account value attributable to the beneficiary.

For the account value, in general, it is the amount which the financial institution calculates for the purpose of reporting to the account holder. In respect of the non-vested benefits, if, for regulatory and customer reporting purposes, the MPF trustee / ORSO administrator calculates the account balance as zero in respect of the non-vested portion (as there is no vested benefit accrued to the scheme member), the value in respect of this portion should be also reported as zero.

It should be emphasized that the information of the scheme member should still be reported in this case, but only that the account value in respect of the non-vested portion would be zero. For example, if an ORSO scheme member who only has non-vested benefits in his account, then the information of the scheme member is required to be reported, but only the account balance would be zero. In subsequent years, should the benefits become vested in the member, the account balance should reflect such increases accordingly.

Review of Pre-existing Individual Accounts

The Inland Revenue (Amendment) (No. 2) Ordinance 2019 provides two timetables for MPF schemes, ORSO schemes and others to identify reportable accounts among pre-existing individual accounts. Review of a pre-existing individual account that is a high value account must be completed by 31 December 2020. On the other hand, review of a pre-existing individual account that is a low value account must be completed by 31 December 2021.