China Common Reporting Standards Against Tax Evasion
Game-Changing Government Policies & Drivers
By William Hillis
Broker & Research Editor, Realogics Sotheby's International Realty
"The trend toward international monitoring of transactions and tax enforcement is inexorable, and involves governments worldwide."
[Disclaimer: the author is not a certified public accountant, and none of the following should be regarded as financial advice. Any reliance on this article is accordingly disclaimed. Consult a qualified professional before making any investment decision.]
In recent years, the U.S. has made enormous strides in tracing overseas tax evasion by U.S. citizens through enforcement of its Foreign Account Tax Compliance Act (FATCA). Not so with China; until now, the Middle Kingdom has been scarcely equipped to trace the foreign deposits and transactions of their own countrymen. China Common Reporting Standards (“China CRS”), intended to be interoperable with the equivalent OECD standards, are aimed at correcting this. Like the U.S.’s FATCA, the standards direct financial institutions in China to comply with due diligence procedures “to identify the tax residency of financial account holders, collect and record reportable information.”
U.S. citizens living in China will be aware that Chinese financial institutions have been complying with FATCA under an “agreement in substance” with effect from June 2014, due to an IRS threat to withhold payments to foreign financial institutions with U.S. account holders. In contrast, the U.S. has not honored its promises to partner countries to comply with CRS. What does this mean for foreign investors in the U.S.?
Some advisors have suggested to their clients that despite the extension of China CRS to progressively more countries, the lack of reciprocity with the U.S. makes this country a tax haven for Chinese nationals. This is not a path in which those investors should have confidence. The trend toward international monitoring of transactions and tax enforcement is inexorable, and involves governments worldwide. As Jinghua Liu, senior tax counsel at FenXun Partners in Beijing advises, “[I]t is not realistic for high-net-[worth] Mainland Chinese people to transfer assets to countries that have not joined the CRS, in order to circumvent the automatic information exchange.”
Impact: In the short term, Chinese authorities will remain unable to effectively monitor financial activity of Chinese citizens inside the U.S., but technology and international relations are likely to shape the longer-term outcome. Some Chinese investors in Washington state are at risk.