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Common Reporting Standard: Tax Compliance in China

Updated:2018-9-5 18:11:24    Source:www.tannet-group.comViews:711

The Common Reporting Standard (CRS) is an information standard for the automatic exchange of information (AEOI) regarding bank accounts on a global level, between tax authorities, which the Organization for Economic Co-operation and Development (OECD) developed in 2014. The purpose of CRS implementation is to increase tax transparency through the strengthening of global tax cooperation and combating against tax evasion through the use of offshore accounts.

Over 100 countries/jurisdictions have already committed to the AEOI Standard, of which 50+ “early adopter” countries/jurisdictions implemented the AEOI Standard with effect from 1 January 2016, while others, being the “late adopters” have implemented the standard since 1 January 2017 (whereas China, Canada, Australia, New Zealand and Malaysia have deferred the implementation date to 1 July 2017).

Starting from September 2018, the State Administration of Taxation (SAT) will exchange the first batch of collected information with other participating countries/jurisdictions.

Who will be affected by the CRS regulations?
China’s CRS will not have as strong an impact on individuals as may be thought. Although, non-resident accounts opened in China, Passive NFE with non-resident controllers and Chinese financial institutions will be directly affected.

To the contrary, CRS regulations in other countries may have more impact on Chinese tax residents who invest overseas, purchase cash-value insurances or have trade or family trust arrangements through offshore companies. With increasing global tax transparency, information pertaining to the offshore financial accounts of Chinese tax residents will gradually be obtained by Chinese authorities. If Chinese taxpayers hide their overseas assets and income from tax authorities, they may face high tax bills in the future.

Who will be reported?
Broadly speaking, non-resident individuals, enterprises and other organizations other than Chinese tax residents. Passive non-financial entities and its non-resident controlling persons could also be reported. Certain international organizations, government agencies, central banks, financial institutions2 or listed companies are excluded.

How the information exchange will work?
Financial institutions operating in China will conduct certain due diligence procedures to identify any reportable non-resident account holder as well as the controlling persons of passive non-financial enterprises, then report the required financial account information to the Chinese authorities. Likewise, other countries will follow the same mechanism of collecting their reportable non-resident account holders’ information. As early as September 2018, China will conduct automatic information exchange with other participating countries or jurisdictions on financial account information.

By 31 December 2018, financial institutions need to complete due diligence and remediation procedures on the remaining pre-existing individual low-net worth financial accounts as well as all other pre-existing entity financial accounts.

Important Tips
The purpose of the CRS is information exchange. Therefore, all legal risks that may arise through information exchange must be considered. These include: confidentiality of an investor’s identity and operation of assets, money laundering, commercial bribery, and the impact on the wealth management industry.

The CRS must be considered when engaging in cross-border transactions and asset acquisitions for issues arising from information exchange, especially tax issues and tax planning. In designing transaction and asset possession structures, investors must consider the CRS and related laws and regulations.

It is noteworthy that if PRC tax residents have financial assets outside of the PRC, they should also pay close attention to the development of the implementation of the AEOI Standard in the overseas jurisdictions as there are over 100 countries/jurisdictions which have agreed or implemented their local CRS rules and as early as 2018.

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