The mainland tax agency wants to collect the financial information of non residents who live in China as it takes part in a multilateral scheme to crack down on tax shelters. By exchanging information with other countries, China will be able to levy taxes on Chinese nationals’ overseas financial assets, which means the days of not paying tax on foreign assets will soon end. The State Administration of Taxation released a draft plan on October 14, in which financial institutions will be required to perform due diligence on financial accounts of foreign residents in tax matters according to Common Reporting Standard released by the Organisation for Economic Co-operation and Development, aiming to help other nations protect their tax income. The move comes after China signed a multilateral agreement in December last year, which provides a mechanism to facilitate the automatic exchange of information in tax matters with other participating countries. Currently, 104 countries and regions have signed the agreement. The practice is set to start from January next year for all new financial accounts and the information collected will be exchanged with other participating countries, with the first exchange to take place in September 2018. China aims to complete due diligence on existing accounts of individual with assets exceeding 6 million yuan (HK$6.87 million) and companies with assets exceeding 1.5 million yuan by the end of next year. Information collection on other accounts will be completed by the end of 2018. While China hands the information to other countries, it will also get information on Chinese nationals’ overseas accounts. The information about their overseas financial assets, including bank deposits, securities, investment-oriented insurance products, or financial assets held through trusts or special facilities, will be handed to the government. “For Chinese individuals, the move will enable the government to have necessary information to levy taxes on their overseas assets,” said Ye Weiwen, the national financial services tax leader at Deloitte in Hong Kong. “It signals that the days of paying no tax to the government on overseas income will end soon, especially for high net worth individuals.” The news comes as an increasing number of Chinese nationals are seeking to transfer their assets overseas, given the sharp depreciation of the yuan. Ye said the treaty would “provide more necessary information for the government to investigate the sources of individuals’ overseas assets”. Currently, there are limited channels for the Chinese tax authorities to determine overseas financial holdings. “For institutions, the new requirement may trigger the need to modify their anti-money-laundering or know-your-customer system in better recording the information if it comes in heavy volume,” said Stella Fu, a tax partner at PwC in China. “Financial institutions that will see a bigger impact on compliance changes include big domestic banks, big foreign banks, life insurers and securities companies with foreign currency-denominated B shares and qualified foreign institutional investors business.” “One challenge for local financial institutions could be the lack of experience in dealing with the [Common Reporting Standard] due diligence requirement,” Citibank China said. “Comparing with the early adopting countries, China’s guideline leaves a tight time for financial institutions to complete system solution.” Danny Po, a Deloitte tax partner in Hong Kong expressed similar concerns, saying “a question mark remains whether financial players can really meet the deadline, especially for a large number of companies that have zero experiences in the area.” “I don’t think financial institutions are fully prepared now and it will be highly challenging for them to meet the deadline in the remaining two months,” Po said.