6 June, 2017
On May 19, 2017, the State Administration of Taxation ("SAT"), the Ministry of Finance, the People‘s Bank of China (“PBOC”), the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission jointly released the Administrative Measures on Due Diligence of Non-resident Financial Account Information in Tax Matters (the "Administrative Measures"). The Administrative Measures were published after over nine months following the release of the Draft Administrative Measures on Due Diligence of Non-resident Financial Account Information in Tax Matters (the "Draft Measures") on October 14, 2016, and will go into effect on July 1, 2017. The Administrative Measures are intended to comply with the international obligations for automatic exchange of the financial information in tax matters and regulate the financial institutions in conducting due diligence on non-resident financial account information in tax matters.
I. Background
1. In July 2014, upon commissioning by G20, the OECD released the Standards for Automatic Exchange of Financial Information in Tax Matters ("AEOI Standard"). The AEOI Standards are comprised of two parts: the Model Competent Authority Agreement (“MCAA”) and the Common Reporting Standard (“CRS”). The MCAA is the operational document on how to conduct the automatic exchange of information among tax authorities in different jurisdictions. The CRS stipulates the identification requirements and reporting obligations of financial institutions, as well as the related requirements and procedures on collecting and reporting information of foreign tax-resident individuals and entities to domestic tax authorities. The AEOI Standard aims to increase tax transparency by strengthening the exchange of financial account information in tax matters internationally, which is called global FATCA and similar to the US FATCA rules in general with certain difference in details. Currently, 100 countries (regions) have committed to implementing the AEOI Standard.
2. In September 2019, China committed to implementing the AEOI Standard starting with the exchange of the first batch of information in September 2018.
3. In July 2015, the Chinese Government approved the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which came into force in China in February 2016. It laid the legal foundation for China’s implementation of the AEOI Standards.
4. In December 2015, the SAT signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information in Tax Matters, which provided the basis from an operational perspective.
The formally published Administrative Measures are China’s CRS, providing the legal basis and operational guidelines for financial institutions to conduct due diligence in the collection and reporting of information of foreign tax-resident individuals and entities.
II. Highlights
The Administrative Measures were enacted based on the main contents of CRS, and consist of 7 sections and 44 articles with 3 attachments. It basically keeps the contents of the Draft Measures, with no material changes except for some minor alterations of the details, e.g. US dollar is adopted as the measuring unit instead of RMB. It also provides that other currencies shall be converted to US dollars on the basis of the middle price of the foreign exchange rate published by PBOC on the computation date when total accounts’ balances are added.
The Administrative Measures mainly stipulate the principles and procedures for PRC financial institutions to follow in identifying non-resident accounts and collecting the relevant financial information, including the basic definition, the procedures of due diligence on personal accounts and institutional accounts, the scope of financial institutions and the accounts that are exempted from the due diligence process, the required information to be collected and reported by the financial institutions and punitive measures for violations. With reference to the official interpretation made by the issuing authorities, the following highlights of the Administrative Measures are worth noting:
1. From July 1, 2017, PRC financial institutions should conduct due diligence on deposit accounts, custodian accounts, the equity interest and debt interest of the investment institutions and the insurance contracts or annuity contracts with cash values. The due diligence shall be conducted to all the above accounts to identify whether the account holders are non-residents regardless of the size of such accounts.
2. In addition to the traditional financial institutions (including banks, security companies, futures companies, insurance companies, and trust companies), the security investment fund management companies, private equity fund management companies, and partnerships engaging in private equity funds management are also considered financial institutions subject to due diligence and information reporting obligations. However, financial lease companies, finance companies, and financial assets management companies are not financial institutions stipulated in the Administrative Measures and are not required to conduct due diligence but should report tax resident status as the non-financial institutions.
3. The procedures of due diligence: the Administrative Measures divide accounts into two types, i.e. personal accounts and institutional accounts, each of which is classified into newly-opened accounts and pre-existing accounts as of June 30, 2017. The requirements and procedures of due diligence for different types of accounts are not the same. The due diligence for newly-opened accounts is comparatively stricter, requiring the account opener to provide a declaration of tax residency status and the financial institutions to carry out the review of the account opening materials on a reasonable basis. The due diligence for pre-existing accounts is comparatively simpler. Financial institutions will conduct searches based on the retained materials.
4. Due diligence under the Administrative Measures refers to the procedures which financial institutions should conduct to identify the tax residency status of account holders or related controllers, identify the non-resident financial accounts and collect and record relevant account information.
5. Financial institutions may entrust third parties to conduct due diligence and the information reporting but will still assume ultimate responsibilities. As to funds and trusts that are investment entities, the due diligence can be conducted by the fund management companies, and trust companies as third parties.
6. The qualified retirement accounts, social security accounts, term insurance contracts, dormant accounts and other qualified accounts are exempted from the due diligence.
7. Financial institutions should log in the website of SAT to complete registration by December 31, 2017 and report the required information before May 31 of each year.
8. Where an account holder is a PRC tax resident individual, the financial institutions will not collect and report the related account information, nor exchange with other jurisdictions. Where an account holder is both a tax resident of China and another jurisdiction, the account information within the territory of China will be exchanged with the competent tax authority in the corresponding tax jurisdiction and the overseas account information would be exchanged with the SAT.
III. Major Impacts
1. The financial institutions are required to conduct due diligence and information reporting from July 1, 2017 pursuant to the Administrative Measures. Therefore, relevant financial institutions need to make all necessary preparations, formulate necessary internal mechanisms and procedures and update their related account opening documents as soon as possible.
2. The Administrative Measures have a relatively high impact on the non-resident or passive non-financial institutions with non-resident controller which open accounts in China. When they open financial accounts, they should fill in the declaration of tax residency status of the account holder or controller, including name, current address, the tax jurisdiction, the taxpayer’s tax number, birth place, birth date and other information which should be verified true and accurate. After such information is reported to the related authorities, the SAT will exchange the information with the competent tax authorities of account holders in accordance with the agreement signed with relevant jurisdictions.
3. The Administrative Measures have a relatively low impact on PRC tax residents.
4. The implementation of CRS is a measure to enhance cross-border tax source administration which will not increase the tax burden of the taxpayer. The tax payers who make tax declarations in compliance with the tax regulations and in good faith do not need to be concerned that their tax burden may increase due to the information exchange.
For further information, please contact:
Hong (Julie) CHENG, Partner, Jun He
chengh@junhe.com
