China: Account due diligence measures to support automatic exchange of tax information

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China: Account due diligence measures to support automatic exchange of tax information

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Khoonming Ho

Lewis Lu

On May 9 2017, the State Administration of Taxation (SAT), together with five other government ministries and agencies, issued the Administrative Measures for Due Diligence Investigation of Financial Accounts of Non-Residents as Announcement 14 [2017].

This is the finalised version of draft measures, issued for public consultation in October 2016, which provide the administrative basis for China to participate in the OECD-led global initiative on the automatic exchange of tax information, the common reporting standard (CRS). Over 100 countries have committed to the CRS, and 90 of these have signed the CRS multilateral competent authority agreement (CRS MCAA), including China. Approximately half of the jurisdictions committed to CRS will commence exchanges in 2017 and half in 2018, with China amongst the latter. The OECD observes that already 1,800 CRS bilateral information exchange relationships have been activated, largely through the CRS MCAA with some through separate bilateral agreements. While China has yet to activate any of these exchange relationships, the new measures lay the requisite groundwork.

The measures contained in announcement 14 establish the review procedures that must be followed by financial institutions with a presence in China, both local institutions and China branches of foreign institutions, to identify accounts with non-resident holders or ultimate controlling persons. This includes where the accounts are held by foreigners via passive non-financial enterprises. Details of these accounts, which may be held by foreign individuals or entities, are to be gathered by the Chinese tax authorities. These are to be shared with foreign tax authorities, in return for equivalent details on Chinese residents, through the CRS exchange platform – the first exchange is set for September 2018. Financial institutions are defined broadly, including banks, trust companies, investment fund managers, and insurers.

Chinese financial institutions must start to collect set information on newly opened accounts, involving new account opening procedures, starting from July 1 2017. They must also review pre-existing accounts on a staggered basis, with high net worth accounts to be reviewed by end 2017 and the rest to be reviewed by the end of 2018. Annual submissions to the SAT need to be made by May 31 each year, starting from May 2018.

The final preparations for the launch of CRS in China occur in tandem with plans, adopted by the government's central reform leading group on May 23 2017, to establish a new centralised national information system to store and manage data on personal income and property holdings. This is intended to facilitate the forthcoming individual income tax (IIT) and new real estate tax (RET) reforms. This interlinks with the plans in the forthcoming new Tax Collection and Administration (TCA) Law to have domestic banks supply extensive information to the tax authorities on account activity of all resident taxpayers. Advanced Chinese tax authority IT systems (e.g. Golden Tax III) and heavy investment in big data analysis capabilities are driving new approaches to tax audit targeting, e.g. taxpayer risk ratings. The new sources of taxpayer data from domestic and cross-border sources will provide the fuel for much more accurate and focused tax authority enforcement action, going forward.

Khoonming Ho (khoonming.ho@kpmg.com) and Lewis Lu (lewis.lu@kpmg.com)

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421

Website: www.kpmg.com/cn

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