How Common Reporting Standards will impact high net value individuals

9 minute read
05 December 2016

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The Organisation for Economic Co-operation and Development's (OECD) Common Reporting Standards (CRS) are designed to facilitate global exchange of financial account data. Foreign accounts and structures (such as companies and trusts) owned by Chinese tax resident individuals may no longer be confidential and private.

Last October, the State Administration of Taxation of China issued the Administrative Measures for Due Diligence of Tax-related Information on Financial Accounts of Non-residents (the "Administrative Measures") for public comments. This shows that the Chinese government has already initiated the legislation process for the exchange of tax and financial related information with other global institutions. The Administrative Measures are part of a series of actions developed by the Chinese government in response to treaties and cooperation commitments it has made to improve its tax and financial transparency.

Chronology of Events

February 2013

The Organisation for Economic Co-operation and Development issued a report called "Addressing Base Erosion and Profit Shifting (BEPS)" and agreed to formulate a set of common reporting standards on international tax matters as commissioned by the G-20

August 2013

State Administration of Taxation of China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in Paris, France on behalf of the Chinese government

July 2014

CRS was issued by OECD and supported by G20

September 2014

China commits to implement CRS

December 2015

State Administration of Taxation of China signed and approved the Multi-lateral Competent Authority Agreement ("MCAA"), a formal international agreement where signatories agree to adopt the CRS

October 2016

China starts its CRS legislation process

What is the CRS?

Generally speaking, the CRS establishes an information sharing mechanism. The OECD's formulated mechanism requires financial institutions to identify foreign tax resident account holders. Financial institutions broadly include:

  • banks
  • trust companies
  • custodial institutions
  • funds and fund managers; and
  • insurance companies,

Once these account holders have been identified, the financial institution will need to determine whether to report any financial information relating to these accounts to the relevant country competent authority. Information that will need to be reported includes the holders' (individuals or enterprises):

  • Name
  • address
  • place and date of birth
  • account numbers
  • interest
  • dividend
  • account balance
  • proceeds from sale; and so on.

Once an account is considered reportable, financial institutions are required to report the aforesaid information to the competent authority in its country. The relevant country competent authority will later need to exchange such information with the taxation authority of the country where the account holders are its tax payers.

It is important to note that this system does not involve tax collection or payment. Whether foreign account holders need to pay extra tax, based on the financial account information exchanged between competent authorities, and the amount of such tax shall be determined and implemented in accordance with the tax laws of the state in which the taxpayers belong. The CRS simply sets out the criteria which determine whether financial information of an account needs to be reported.

There are currently over 100 jurisdictions committed to implement the CRS and over 80 that have signed the Multi-lateral Competent Authority Agreement and have thus formally committed to exchange financial account information in accordance with CRS standards, including:

  • western countries, such as UK, Germany, France;
  • major Asian economies, such as Japan, South Korea, Singapore; and
  • tax heavens, such as BVI and Cayman Islands.

These countries have committed to start exchanging information from 2017.This means that major economies around the world will work together to eliminate barriers on tax-related information which makes illegal tax avoidance and evasion more difficult.

Actions taken by Chinese government

The Chinese government has been very active in initiating the legal process to fulfill this commitment. On 27 August 2013, the State Administration of Taxation, on behalf of Chinese government, signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in Paris, France. Since then, China has not only been dedicated to the multilateral negotiations of tax information exchange through international organisations, but has also tried to sign bilateral agreements on tax information with countries separately. As the implementation of the CRS standards require the committed countries to set up internal legislation and to sign bilateral or multilateral agreements on automatic exchange of information, we believe that the Chinese government will continue to ensure the commencement of information exchange in 2018.

Although the Administrative Measures are currently in draft form, it requires Chinese financial institutions to conduct due diligence on their clients from 1 January 2017. The requirement of opening an account in Chinese financial institutions has been relatively easy, without the need for due diligence to be carried out. The Administrative Measures stipulate that due diligence must be carried out on all accounts opened after 1 January 2017. In addition, the Administrative Measures state that, financial institutions must complete, within 2017, due diligence on personal or corporate accounts that have a combined balance of more than 6 million RMB at or before December 31, 2016. By the end of 2018, due diligence on all clients (including those who have a balance below 6 million RMB in their accounts) must be completed.

The Administrative Measures not only provide guidance to financial institutions which have the obligations to conduct due diligence on accounts that need to be investigated and how to conduct such due diligence, but it also identifies which accounts are free from due diligence. These include accounts of social security, retirement accounts which hold a certain amount and soldier's accounts. According to the Administrative Measures, those who violate the provisions, and if the circumstances are serious, will be punished and may have their business license revoked or have their qualification abrogated. The Administrative Measures do not provide a deadline for the submission of information or for the implementation of specific procedures, leaving it to local bank authorities to decide. The State Administration of Taxation showed that it will, together with Chinese financial competent authorities, formulate submission methods for tax-related financial information.

What impact will the CRS have?

The implementation of the Administrative Measures and the fulfilment of CRS information exchange may not have much of an impression on Chinese tax residents who do not have overseas accounts, except that they will need to submit more information when opening a foreign account. However, there will be a significant impact on Chinese tax residents who have overseas accounts or non-resident enterprises or individuals who have accounts in China.

Overseas Chinese or Chinese who have obtained an indefinite leave to remain in foreign countries, regardless of the limits of their residency, are considered "non-residents". Chinese who stay in foreign countries may be categorised as "non-residents", depending on the duration of their stay within the relevant foreign county. Although the Administrative Measures do not give a concrete definition on what a "non-resident" is, it is implied that enterprises, organisations and individuals that are not tax resident in China are non-resident. Furthermore, the Administrative Measures lists various factors for financial institutions to consider when determining whether their clients are non-residents, such as having foreign ID cards, living outside China and having a foreign contact number. Generally, financial institutions tend to interpret the definition of a non-resident broadly in order to minimise their liabilities.

With most of the major economies in the world undertaking to implement the CRS standards, we have every reason to believe it will inflict a significant impact on the global asset allocation of high net value individuals.

Our team, specialising in private capital, has been keeping a close eye on CRS standards, and we have set up a working team led by our Singapore office to provide relevant legal assistance for high net value individuals.

A Chinese language version of this article is also available.


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