Is the new financial information swapping scheme a ticking bomb for China’s richest?

Some of China’s richest individuals – who have been transferring substantial assets overseas for decades – could be vulnerable under a new schemeannounced recently, that tax agencies in Hong Kong and mainland China can collect non-residents’ financial information, starting this year.

However, tax experts say such high-net-worth individuals probably don’t need to worry too much, as the scheme will not necessarily lead to the mainland tax agency tracking down residents who are going to have their information reported by the overseas countries in which they have those assets.

“There are a number of people who have misunderstood the Common Reporting Standard (CRS) plan,” said Stella Fu, a Shanghai-based senior tax partner at PwC.

“It doesn’t necessarily mean whoever has overseas assets will have to pay double taxation.”

She explained the CRS is mostly being seen as a means by which the mainland’s tax authorities can get more of an idea of the overseas financial status of wealthy Chinese nationals, and that the authorities could use that as an extra reference to decide whether they will get in contact with certain people.

“The situation also might vary between different Chinese provinces,” she said. “If tax agencies in certain provinces think they have achieved their annual financial goals then they might not be that aggressive in tracking down residents who have overseas assets, even if they have those people’s information.”

The CRS was developed by the Organisation for Economic Cooperation and Development (OECD) as a global reporting standard for the automatic exchange of information (AEoI).

Its goal is to allow national tax authorities to obtain a clearer understanding of the financial assets held abroad by their residents, for tax purposes.

More than 100 countries have signed up to share information on residents’ assets and incomes in accordance with the reporting standards.

Under the CRS rules, financial institutions including banks, custodians, brokers, asset managers, intermediaries, certain collective investment vehicles and certain insurance companies are required to comply.

In China, it will mean the collection of due diligence on existing accounts of non-Chinese individuals with assets exceeding 6 million yuan (HK$6.87 million), and companies with assets exceeding 1.5 million yuan.

The implementation process is expected to be finished by the end of this year, with information collection on accounts completed by the end of 2018.

The tax legislation on implementing the CRS in Hong Kong was passed in June 30, 2016, and became effective, with Hong Kong financial institutions starting to collect information beginning 2017 who will then have to report this to the Hong Kong Inland Revenue Department by 2018, to facilitate the start of information exchange by the end of that year.

“Implementation of the CRS does not change China’s foreign exchange control rules themselves, and thus will not necessarily tighten China’s foreign exchange controls,” said Jinghua Liu, senior tax counsel at FenXun Partners in Beijing.

“That said, if China decides to strengthen its foreign exchange controls in future, the CRS information exchange could be a useful weapon to do so.” said Liu.

Liu further explained that it might not be sensible for anyone thinking of transferring assets to countries that have not agreed to share information.

“Nearly all major countries in the world will have automatic information exchange with China.” she said, “therefore, it is not realistic for high-net-wealth mainland Chinese people to transfer assets to countries that have not joined the CRS, in order to circumvent the automatic information exchange. “

Echoing her thoughts, Paul Ho, divisional deputy president 2017 CPA Australia - Greater China, said countries and regions that have not joined the scheme such as Thailand, Taiwan, and the Philippines are likely to have to do so under increasing “international pressure” – so there will be few countries left that are not included.

“This more transparent tax information exchange system is a global trend, and no one will eventually be able to avoid it,” said Ho, who is also financial services tax partner at Ernst & Young in Hong Kong.