Anthony Tam analyses the OECD Common Reporting Standard being implemented by financial institutions in China
The Organization for Economic Cooperation and Development Common Reporting Standard has been applied in China since 1 July. The final rules (“Due Diligence Procedures on Financial Account Information in Tax Matters for Non-residents”) were issued by the State Administration of Taxation, the Ministry of Finance and financial regulatory bodies on 19 May as Announcement (2017) No. 14. The announcement addresses financial institution reporting, what are to be reported, the so-called reportable financial accounts and due diligence procedures to be carried out by the financial institutions.
In 2014, the OECD addressed the concern that taxpayers were concealing reportable income in offshore assets and accounts in order to evade taxes in their home jurisdiction, being the country in which the taxpayer is a resident, by releasing a global standard for exchange of information: Automatic Exchange of Financial Information in Tax Matters. As of today, more than 100 countries, including China, have signed off to implement the exchange of information, which includes the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information containing the detailed rules on the exchange of information, and the Common Reporting Standard, which sets out the reporting and due diligence rules to be imposed on the financial institutions.
On 14 October 2016, the SAT published a draft version of the Common Reporting Standard rules for public consultation and the final rules were issued in Announcement 14.
Announcement 14 requires financial institutions to undertake due diligence procedures to identify specified financial accounts held by non-residents and report specific information on the accounts to the SAT. The SAT will then exchange the information with the tax authorities of jurisdictions in which the account holders are resident.
Reporting entity: Financial institutions
Financial institutions include depository institutions, custodial institutions, investment entities, specified insurance companies and their affiliates. These would include:
- Commercial banks, rural credit unions, other financial institutions for taking public deposits and policy banks;
- Security companies;
- Futures companies;
- Securities investment fund management companies, private equity fund management companies/partnerships;
- Insurance companies that issue cash value insurance and/or annuity contracts, insurance asset management companies;
- Trust companies; and
- Other qualifying institutions, such as entities engaged in investment, reinvestment, and trading of financial assets (including securities investment funds, private equity funds etc).
The last item would target those private investment companies which may not be registered and regulated, but which pool funds from investors to make investments.
It should be noted that foreign bank branches in China are equally required to adopt the Chinese Common Reporting Standard rules since 1 July. On the other hand, overseas branches or subsidiaries of Chinese financial institutions would be excluded from the Chinese rules, but would instead be covered by the rules in the jurisdictions where they operate.
Announcement 14 sets out different due diligence procedures and timelines for different categories of financial accounts:
Who would be reported?
The persons include non-resident individuals, enterprises and other organizations which are not Chinese residents. Passive non-financial entities, e.g. holding companies in China and its non-resident controlling persons could also be covered. Certain international organizations, government agencies, central banks, financial institutions or listed companies are excluded. For example, an investment fund having a bank account in one of the banks would likely be excluded as a reportable person, but the fund itself would need to complete the Common Reporting Standard registration with the SAT and would need to report its own reportable financial account holders itself.
What financial, tax and account information should be collected and reported?
The financial institution would need to report to the SAT the reportable financial account holder’s name, address, tax resident country, Tax Identification Number issued by the resident country, place and date of birth, account number, year-end balance of the account as well as income received by the account.
Due diligence: Financial accounts
Beginning on 1 July, affected financial institutions must undertake due diligence procedures and identify reportable information for both pre-existing and new financial accounts, the cut-off date being 1 July. New accounts could be treated as pre-existing accounts if the account holder has other accounts with the same financial institution on 30 June and these accounts meet certain other criteria.
Due diligence procedures and timelines
Financial institutions must register on the SAT website by 31 December and report the relevant account information of non-resident account holders by 31 May of each year. The SAT will exchange the first batch of reportable account information with other participating jurisdictions in September 2018. Financial institutions would need to complete the due diligence and remediation procedures on any high-net worth financial accounts by 31 December and the remaining financial accounts by 31 December 2018.
The total aggregate balance in the financial account would be in US dollars. There would be conversion rule for currencies other than US dollars.
Affected institutions should take immediate steps to perform compliance obligations in order to mitigate any risk of noncompliance.
For expatriates who have come to China for a long period of time, it is important for them to review their residency status of their home jurisdiction. It is conceivable that they may have become tax non-resident of the home jurisdiction, but as such status is not being known to the financial institutions, financial account information may have been exchanged to that home jurisdiction creating unintended tax implications. For Chinese tax residents who have financial assets outside of China, they should pay close attention to the development of the implementation of the Common Reporting Standard in the overseas jurisdictions. For example, Hong Kong has already implemented such regulation, with China being one of the reportable jurisdictions.
– Anthony Tam, Executive Director at Mazars Tax Services Limited ◆