Written by：Evan Zhang
What is CRS?
The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, financial institutions required to report, different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
In short, the purpose of CRS is to help fight against tax evasion and protect the integrity of tax systems.
For example, due to the isolation of financial information among jurisdictions, tax evasion is possible if financial assets are placed under a lower tax jurisdiction. After CRS adoption, committed jurisdictions would annually collect and exchange non-resident financial information which would enable the tax authority to catch a taxpayer if non-compliance exists.
Who will be monitored?
Where an individual or entity is a Non-resident for tax purpose in a CRS accepted jurisdiction, it will be monitored under CRS. The key of CRS for the individual is to determine where you are a “tax resident” in.
If you are tax resident outside the country where you bank, then your bank may be required to provide details, including information relating to your accounts, to the national tax authority in the country where the account is held. They may then share that information with the tax authority of the country (or countries) where you are tax resident.
– Criteria for Individuals to be considered a tax resident in China
In general, individuals who have a domicile of origin in China, or have resided there for one year or more, are deemed to be residents of China. Domicile refers to habitual residence in China because of domiciliary registration, family ties or economic interests. One year means 365 days in a tax year. The days on a temporary trip away from China, including a single trip not exceeding 30 days or combined trips not exceeding 90 days, shall not be deducted.
– Criteria for Individuals to be considered a tax resident in Australia
Residency for tax purposes is based on different tests. You may, in fact, qualify as an Australian resident for tax purposes without being an Australian citizen or permanent resident.
You will be an Australian resident for tax purposes if:
- have always lived in Australia or have come to Australia and live here permanently;
- an Australian travelling overseas temporarily and do not set up a permanent home in another country;
- International student who has come to Australia to study and are enrolled in a course that is more than six months long;
- have been in Australia continuously for six months or more, and for most of that time you worked in the one job and lived at the same place;
- have been in Australia for more than half of the financial year, unless your usual home is overseas and you do not intend to live in Australia.
How would it be monitored?
For accounts opened after the commencement of the CRS, the financial institution will be required to ask the person opening the account to certify their residence for tax purposes. If the individual has tax residency in another jurisdiction, irrespective of whether that jurisdiction has adopted the CRS, the details of the account need to be reported to the national tax authority, Australian Taxation Office (ATO) for Australia and State Administration of Taxation of The People’s Republic of China (SAT) for China respectively. They will, in turn, exchange that information with other jurisdictions, but only if they have adopted the CRS and signed Multilateral Competent Authority Agreement (MCAA).
Similarly, for accounts existing at the date of commencement of the CRS, the general requirement is for financial institutions to use the information they have on file to establish whether information about the account holder needs to be reported – unless cured by the account holder. Again, if the person is resident in another jurisdiction, then the details of the account need to be reported, irrespective of whether that jurisdiction has adopted the CRS or not. They will then exchange that information with other jurisdictions that have adopted the CRS and signed MCAA.
Reporting financial institutions include:
- Depository institutions, e.g., savings banks, commercial banks, savings and loan associations and credit unions;
- Custodial institutions, e.g., custodian banks, brokers and central securities depositories;
- Investment entities, e.g., entities investing, reinvesting or trading in financial instruments, portfolio management or investing, administering or managing Financial Assets; and
- Specified insurance companies.
The monitored assets under CRS rules
CRS rules monitor nearly any assets that may be held in an account maintained by a Reporting Financial Institution, such as:
- Savings in a commercial bank;
- Shares in a corporation;
- Shares or units in a real estate investment trust;
- Note, bond, debenture, or other evidence of indebtedness, including negotiable debt instruments that are traded on a regulated market or over-the-counter market and distributed and held through Financial Institutions;
- Insurance Contract or Annuity Contract.
For example, under the CRS requirements, all Chinese citizens with Australian Permanent Residence – recognised as tax residents in Australia – will need to report their financial assets such as bank deposits, securities in Chinese stock market or insurances, will be reported to Australian taxation office from Chinese financial institutions under the CRS requirements. However, his or her assets in Australia will not be required to report Chinese regulator. Chinese regulator will not acquire the financial asset information of the individual.
Alternatively, an Australian citizen, who is working in China and recognised as a Chinese tax resident, all of his/her financial assets will be disclosed to Chinese Government automatically.
What won’t be monitored under CRS?
Many assets are not classified as the disclosable assets under CRS requirement. Generally speaking, the non-financial assets are not being monitored. So how will financial assets and property, the most considered investment for Chinese investors, be treated differently under CRS?
Financial assets are the key asset type that CRS is targeting. Most of the related financial assets will be collected and reported automatically to the tax authority of the country where the individual recognised as the tax resident locally.
No tax evasion would be possible on the financial assets after CRS implement. It means using the financial product investment as the priority tool to escape from tax responsibilities are no longer an option. Some of the financial products which are designed to offer such conveniences for international tax evasion will expect much less demand.
Chinese Domestic financial market instability, the devaluation of the renminbi and many other factors make a lot of people in China willing to invest abroad, especially some of the real estate market with relatively stable investment environment, as evident in Australia. Will the ownership of overseas real estate information be disclosed to Chinese government under CRS for Chinese Tax Resident？
– An individual holds a foreign property directly
CRS has no impact on foreign property owned by individual directly. Mr. Zhang, for example, is a Chinese tax resident, own a $2 Million house in Sydney. CRS only identifies the financial information under financial institution. The ownership of the property has no financial institutions involved. Therefore, the ownership of the foreign property under Mr. Zhang will not be disclosed under the CRS to the Chinese government.
– An individual holds a foreign property through a company or trust
In Australia, in tax planning or other considerations, a lot of real estates are owned by company or trust. For example, Unlike the case of individuals, the company or the trust belongs to the concept of “entity” under the CRS. Disclosure of the asset depends on whether the company or the trust belongs to the financial institution category under the “entity” classification of CRS. If it is a financial institution, you need to complete the CRS account identification, and information needs to be submitted under the obligation. However, for companies or trusts that hold property directly, the entity may not satisfy the definition of financial institutions under CRS, in which chase they do not need to identify the individuals behind it.
For example, Mr. Zhang is a Chinese tax resident who has a property holding company A in Australia that owns a portfolio of real estate assets of $ 10 Million AUD. The properties are managed by the local management company B. In such scenario, company A does not meet the concept of financial institutions under CRS, and the real estate holding relationship has no financial institutions involved rather than a property management company. Therefore, the property information is not under the CRS and will not be disclosed to the Chinese government.
However, if the property is held indirectly through two or more entities, the situation becomes complicated because it is necessary to analyse in detail whether the other indirect holding company is an investment institution.
The above does not apply to real estate: the assets such as yachts, sports cars, painting, jewellery and other non-financial assets are not within the scope of the CRS compliance. If your assets have no relationship with financial institutions within the countries where monitored by CRS, you don’t have to worry about the implementation of CRS.
The timeline for CRS implementation
The CRS legislation received Royal Assent on 18 March 2016 and will take effect on 1 July 2017. The first exchange of information will occur in September 2018.
The State Council of the People Republic of China approved the CRS legislation in December 2015. And according to the time line, financial institutions will start collecting relevant financial information from 1 January 2017. The first exchange of information will occur in September 2018.
In short, most of the Chinese citizens who are working and living in Australia are recognised Australian tax residents. Their financial information in Australia will not be shared with Chinese authorities. However, Chinese financial institutions are required to disclose their clients’ financial information such as cash deposit, securities or insurances in China to Australian Taxation offices if the client is Australian tax resident.
The CRS may have some impact on the Australian investment products which are designed to target overseas Chinese residents if the money invested in the products cannot be explained adequately. Investment in real estate or other non-financial assets will not be disclosed to the authorities where the tax resident belongs.