By Bill Ye , Jessie Yu and Mona Lan  King & Wood Mallesons’ Commercial & Regulatonry group

ye_billIn February, the Measures on the Due Diligence of Non-resident Financial Account Information in Tax Matters (draft for comment) (hereinafter referred to as “the Measures”) issued by the State Administration of Taxation (“SAT”) has attracted the attention of many high net worth individuals in China. This series of articles will canvas interpretation of the Measures in a systematic way and potential responses.

In the first place, it should be remembered that this is a tax matter in nature. Along with the development of an international economy and trade as well as increasing globalization, more and more taxpayers conduct cross-border transactions by using offshore financial accounts and these accounts have become important information sources for tax regulation. However, it is usually impracticable for tax authorities to collect information about such accounts.

Against the background of the OECD’s Base Erosion and Profit Shifting (“BEPS”) action plan, in order to tackle the information asymmetry problem in international tax regulation, the Group of Twenty (G20) and the OECD is actively promoting global information transparency in tax matters, and proposes a global exchange of tax-related information by setting up unified standards for information collection and reporting and executing multilateral agreements. The foremost objective of the Automatic Exchange of Financial Account Information (AEOI) regime implemented by the OECD is to increase transparency of cross-border tax-related information through international collaboration. It is worth mention that the exchange of financial information will surely influence management of foreign exchange control, anti-money- laundering measures and other sectors, as pointed out by the SAT and the State Administration of Foreign Exchange in their previous notices.

What is AEOI?

International tax regulation essentially covers information collection, collation and analysis, tax determination, and tax collection and management. AEOI provides solutions for information collection and collation.

AEOI is an international standard for tax-related information exchange, an effort by the OECD to increase global tax transparency. It is composed of three parts: the Model Competent Authority Agreement (CAA), the Common Reporting Standard (CRS) and interpretation of the CAA and the CRS.

  • CAA is a model agreement between contracting countries/regions, providing an international legal basis for the exchange of tax-related financial account information. Based on the CAA, the Multilateral Competent Authority Agreement (MCAA) sets out rules for automatic information exchange through multilateral agreements.
  • CRS primarily sets out standards and criteria for information exchange, including the account information to be exchanged, the financial institutions that need to report, types of accounts covered, and due diligence procedures to be followed by reporting financial institutions.

Except for the United States which has been getting tax information from other countries under the Foreign Account Tax Compliance Act (FATCA) through intergovernmental agreements (IGA), other  countries are dealing with offshore finance and taxation by using the AEOI regime. As at November 2016, over 110 countries/regions had committed to participate in the AEOI, of which, 87 have signed the MCAA, formally converting themselves into members of the automatic exchange of financial account information regime.

The first batch of countries/regions, including Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Jersey, Luxembourg and Netherlands, will have their first automatic information exchange in September of 2017. China, Cook Islands, Mauritius, Switzerland, and others, will follow in September 2018. Among others, Hong Kong, Macau and Singapore, who are not yet signatories to the MCAA, have committed to implement the AEOI.

It should be noted that, although the MCAA, may have been executed, it may not be effective and enforceable in the signatory country. For example, China has signed the MCAA, but the MCAA will not be effective until it is ratified under China’s national legislation. The AEOI has been world’s largest economy and, all participating countries have committed to sign the MCAA and complete their domestic ratification procedures before September 2018.

How does AEOI work?

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As shown in the above flow chart, the financial institutions of country/region A will collect and collate information in accordance with the CRS or the national requirements and report that information to their tax authority. The tax authority of country/region A will then sort out this information and provide the tax authorities of other countries/regions with corresponding taxpayers’ account information in country/region A.

How are financial accounts connected with tax regulation?

First of all, let us consider how Chinese financial accounts are connected with tax regulation. Basically, taxpayers’ financial accounts may be grouped into four categories: (i) Chinese residents’ domestic accounts; (ii) Chinese residents’ offshore accounts; (iii) non-resident accounts in China; (iv)non-resident accounts outside China.

From the above categories, it is obvious that information under category (i), which is regulated by Chinese domestic laws, is the most indispensable for the Chinese tax authority. Category (ii), information held by overseas financial institutions, may be necessary for the Chinese tax authority Category (iii) information held by Chinese domestic institutions appears to be more useful for other countries’ tax authorities than for the Chinese tax authority, and category (iv) information may only occasionally relate to Chinese taxation.

The Chinese tax authority swaps the information in its possession under the third category with other tax authorities for  the second category information. This is an important step in the flow of information for tax collection and administration.

1. Chinese residents’ domestic accounts

Information contained in Chinese residents’ domestic accounts does not fall within the scope of AEOI and providing it is not yet specifically required by law. However, the Tax Collection and Administration Law of 2015 (draft for comment) proposes to “specify the information reporting obligations of banks and other financial institutions”, and provides that,

  • financial institutions must provide the tax authority with relevant account information they hold, such as the account name and number, return on investment, the account’s total interest and closing balance, etc. according to a prescribed content, format and timeline.
  • financial institutions must report certain information to the tax authority about any account in which a single inflow or outflow of funds reaches RMB 50,000 or the one-day cash withdrawal amount exceeds RMB 50,000.

This reporting obligation was not included in the Tax Collection and Administration Law (2015 Amendment) for various reasons. However, amendment of the law is  ongoing, and to conform to the international tax regulation regime, similar rules will very likely be included in future amendments .

2. Chinese residents’ offshore accounts

The Chinese tax authority mainly targets getting information on Chinese residents’ offshore accounts through the AEOI, but the kind of information it can receive from foreign tax authorities is determined by local laws of the jurisdictions where those accounts are maintained. Therefore, it is the local rules, but not Chinese demand that matters. These local rules are probably similar to the Measures since they are all guided by the CRS. In light of this, Chinese high net worth individuals who own overseas assets should be aware that all information regarding their overseas assets will be completely exposed to Chinese tax authorities after 2019. How will the Chinese tax authority act when it has this information about historical and future financial activity? There are many issues worth thinking about.

China has committed to start information swapping in September 2018, and its domestic legislation provides that relevant information collection should commence from January 2017. On the basis of the principle of reciprocity and previous practice, we estimate that the probable commencement time for the Chinese tax authority to receive information about Chinese residents’ offshore accounts will be in September 2018, and the information to be received will be that for the year 2017.

3. Non-resident accounts in China

Non-resident Chinese account information to be sent by the Chinese tax authority to the tax authorities of other countries under AEOI is regulated by Chinese domestic law. This is to be covered by the Measures, which, although not finalized, should be implemented at a time in line with China’s obligation under the AEOI. That is to say, the Measures may be effective from January 1st, 2017.

The Measures mainly set out the due diligence and reporting obligations of financial institutions regarding non-resident financial account information based on the CRS standards. Specifically,


4. Non-resident accounts outside China

As mentioned above, China has committed to have its first information exchange in September of 2018, and the information to be initially exchanged will be relevant financial accounts information in 2017.4. Non-resident accounts outside China

Non-resident accounts outside China are not covered by the AEOI. If the Chinese tax authority needs information, it may resort to the information exchange mechanisms under bilateral tax agreements or the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and request the contracting parties to provide relevant information.

No doubt, the Measures mark the first step of financial information management in China’s global tax collection and administration. In the future,  tax collection and administration will be integrated at an international level, which means that using an offshore account to receive payments will no longer be an effective way for getting around the regulation. Tax efficiency optimization will only be achieved by proper design of transaction structures.

By posing the following questions, we highlight the possible impact of the new tax administration regime. Our further work will focus on providing solutions to problems that may arise for taxpayers.

Taxpayers should consider:

  • Are you a Chinese tax resident? If you are, the Measures do not apply to you for now. If you hold overseas assets, you may need to consider the next question in  reverse.
  • If you are a non-resident of China, what financial assets do you have in China?
  • Will the return on these assets be subject to tax in your country of residence (e.g. Australia)?
  • What might your country of residence do after obtaining this information, demanding payment of tax and perhaps penalties?
  • Is there any other way to tackle the historical, current and future positions, e.g. asset transfer or structure design?


Financial institutions might consider:

  • Building an identification and administration system?
  • Determing and identifying multiple identities?
  • Balaning services to clients and meeting compliance requirements?
  • What will be the consequences for banks of non-compliance?
  • What will be the impact of the new rules on clients’ foreign exchange assets management?
  • • Are we able to help clients with transaction structuring?
  • ······

Please stay tuned for further analysis.