On Sept. 1, China shared tax-related information with authorities that operate under the Common Reporting Standards (CRS) as set forth by the Organization for Economic Co-operation and Development (OECD). It will complete the investigation on personal low-net accounts with deposits of $250,000 in the Chinese mainland as well as all institutional accounts, which is expected to expose $2.1 billion illegal tax-avoiding assets.
Prof. Wang Cong, Associate Director of Shenzhen Finance Institute (SFI), said in the “Caizhijingyinghui” (财智菁英汇) held by Phoenix Satellite TV, that some people who work both in China and the United States usually avoid tax by obtaining residency or citizenship in lower-tax countries, or through opening financial accounts in lower-tax countries, which will lead to an increasingly stagnant financial situation in the country. Therefore, China joined international financial data exchange to take on overseas tax avoidance.
Prof. Wang Cong mentioned that Chinese tax residents (including companies) invested more than 100 billion U.S. dollars overseas in 2016, which reached a peak level. At that time, China's foreign exchange reserves have shrunk sharply. The government started to notice that some overseas investment was with the purpose of avoiding taxes across the border and transferring assets through money laundering. The OECD released the rules for international financial data in 2014 and the Chinese government began to consider joining them.
Who will be affected by the CRS regulations? CRS regulations have impact on Chinese tax residents including those who obtain foreign residency, invest overseas, purchase cash-value insurances, and have trade or family trust arrangements through offshore companies. Financial information exchanged between countries and regions includes:
1. depositary institutions, custodial institutions, investment institutions and specified insurance companies, etc.
2. depositary accounts, custodial accounts, cash-value insurance contracts, stakes in financial institutions, etc.
3. account type, name, fund amounts, tax residency and asset type, etc.
However, non-financial assets such as real estate, jewelry, vehicles, boats, antiques, and artworks are not included in the CRS investigation as long as they are not in financial accounts. This will lead tax residents to buy offshore real estate to avoid tax in the future.
Prof. Wang pointed out that the domestic and foreign real estate markets were different. China's real estate market has been in a rising cycle, whereas the overseas market is very volatile. If the interest rate increases or crisis occurs, there will be significant risks and fall in foreign real estate market. In addition, property taxes in a foreign country would be high and buyers would pay property tax during ownership. Although people will purchase overseas real estate to avoid tax, this should not be the main problem caused by joining CRS.