China Tightens Tax Evasion Rules Amid Increased CRS Enforcement

Compliance

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Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

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As Beijing increases its efforts to prevent tax evasion, wealthy Chinese are facing a variety of new tax rules both at home and abroad. The increased focus on reporting comes as the country experiences a boom in wealth, with some experts reporting that personal wealth in China skyrocketed to $24 trillion and $1 trillion of that is held outside the country.

Increased global cooperation through the CRS
At the forefront of worldwide anti-tax evasion efforts is the introduction of a global financial disclosure system – the Common Reporting Standard, or CRS – through which participating jurisdictions automatically share annual reports detailing reportable accounts, their balances, and their beneficiaries. For example, if a Chinese tax resident opens a bank account in the U.K., the CRS requires British authorities to send the information to Beijing as part of their report, and vice versa.

The CRS casts a broad net, with any entity or individual who’s a resident of a CRS signatory state being considered a reportable person (although real estate is an excluded asset). The process has become so common that even several tax-favorable jurisdictions have agreed to sign up for CRS. Last year, China started sharing information with approximately 100 participating jurisdictions.

However, there are holdouts – most of which are unsuitable as tax havens due to political, economic or social instability. Another notable exception is the U.S., as the country chose to maintain its own framework, the Foreign Account Tax Compliance Act (FATCA), through 113 bilateral agreements.

Domestic regulations tightened following the CRS
In addition to participating in the CRS framework, China is continuing its efforts to close loopholes in the system. Previously, wealthy Chinese citizens were not required to pay taxes on overseas earnings by acquiring a foreign passport or green card while maintaining Chinese citizenship. However, China recently began taxing global income from all holders of “hukou” household registrations, regardless of whether they may be citizens elsewhere.
Additionally, the government has implemented the “Golden Tax System Phase III,” a new data platform that gives it a more complete picture of a taxpayer’s finances. The government is hoping to stem the loss of tax revenue through means such as underground banks that facilitate illegal foreign exchange transactions. Uncertainty over those new rules has led certain Chinese taxpayers to create overseas trusts. For example, in late 2018, four Chinese tycoons transferred more than $17 billion into family trusts with ownership structures involving entities solely in the British Virgin Islands.

Participation in CRS, changes to the “hukou” system, and the implementation of the Golden Tax System together signal the Chinese government is tightening its anti-tax evasion legislation and enforcement. Chinese taxpayers with investments or property overseas should be aware of the new disclosure requirements and seek professional advice.

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