China (People’s Republic of)
This report analyses the implementation of the AEOI Standard in China with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
China’s legal framework implementing the AEOI Standard is in place and is consistent with the requirements of the AEOI Terms of Reference. This includes China’s domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) and its international legal framework to exchange the information with all of China’s Interested Appropriate Partners (CR2).
Effectiveness of AEOI in practice
China’s implementation of the AEOI Standard is on track with respect to the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. This includes ensuring Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1) and exchanging the information in an effective and timely manner (CR2). China is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
Overall rating in relation to the effectiveness in practice: On Track
General context
China commenced exchanges under the AEOI Standard in 2018.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, China:
issued the Regulations of Due Diligence on Financial Accounts of Non-residents for Tax Purposes; and
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 July 2017. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete the due diligence procedures on High Value Individual Accounts by 31 December 2017 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2018.
During the initial Global Forum peer review, China made various amendments to its legislative framework, the last of which was effective from 16 September 2020.
With respect to the exchange of information under the AEOI Standard, China:
is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2018; and
put in place a bilateral agreement.1
Table 1 sets out the number of Financial Institutions in China that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that China requires the reporting of Financial Accounts held by all non-residents and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of China’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by China in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to China’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard in China:
the State Tax Administration (the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with China’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place through the tax authority’s online system; and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of China’s legal frameworks implementing the AEOI Standard concluded with the determination that China’s domestic and international legal frameworks are In Place. This has been taken into account when reviewing the effectiveness of China’s implementation of the AEOI Standard in practice.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for China are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
China’s domestic legislative framework is in place and contains all of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (SRs 1.1 – 1.3). It also provides for a framework to enforce the requirements (SR 1.4).
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
China has defined the scope of Reporting Financial Institutions in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
China has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in accordance with the CRS and its Commentary.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
China has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
China has a legislative framework in place to enforce the requirements in accordance with the CRS and its Commentary.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
China’s international legal framework to exchange the information is in place and consistent with the Model CAA and its Commentary and provides for exchange with all of China’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from China and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
China has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
China put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
China’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for China are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
China’s implementation of the AEOI Standard is on track with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures and are therefore reporting complete and accurate information. This includes ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). China is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, China implemented all of the requirements in accordance with expectations. The key findings were as follows:
China implemented an overarching strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources including using profiles of the financial sector provided by the regulator, analysing annual surveys and identifying systemic risks using peer feedback. China’s compliance strategy facilitates compliance and incorporates a credible approach to enforcement. China intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
China has worked effectively to understand its population of Financial Institutions, including relevant non-regulated entities, utilising various relevant information sources, such as regulatory lists of Financial Institutions, the Foreign Financial Institution list for FATCA purposes and other information held by the tax authority. China is taking action through cross-checks of these information sources to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. China intends to keep its understanding of its Financial Institution population up to date on a routine basis.
The institution responsible for implementing China’s compliance strategy appears to have the necessary powers and resources to discharge its functions. With respect to resourcing, China has assigned the equivalent of 15 full time staff to monitor and ensure compliance by Reporting Financial Institutions, which have access to IT systems and tools to conduct risk assessments. Overall, they appear to have effectively implemented an operational plan to verify compliance with the requirements, incorporating appropriate compliance activities.
It appears that China effectively enforces the requirements, including through the inspection of records of Reporting Financial Institutions and has carried out both desk-based and onsite audits. China has applied sanctions in cases where non-compliance has been identified. It also appears that China is ready to take effective action to address circumvention of the requirements if such circumvention is detected and has taken action to ensure self-certifications are obtained as required. China also has policies and practices which reduce and prevent the occurrence of undocumented accounts.
China will also keep its jurisdiction-specific list of Excluded Accounts under review to ensure they continue to pose a low risk of being used for tax evasion purposes. It is noted that China does not have a jurisdiction-specific list of Non-Reporting Financial Institutions for ongoing monitoring.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
With respect to the Financial Account information collected and sent by China, the presence of the key data points of the Tax Identification Numbers and dates of birth appeared to be in line with most other jurisdictions, as did the level of undocumented accounts.
Feedback from China’s exchange partners indicated that, compared to what they generally experience when seeking to match information received from their exchange partners with their taxpayer database, they achieved a much lower level of success when seeking to match information received from China. Furthermore, 12 exchange partners highlighted issues with respect to the information received, such as combined first and last names or missing names and high rates of invalid Tax Identification Numbers. One exchange partner specifically noted a significant proportion of financial accounts disclosed under its voluntary disclosure programme were not present in the information received from China. Follow-up discussions confirmed that China is aware of these issues and is engaging with its partners to improve the situation where possible. China noted that one of the reasons behind the low matching rates is likely related to language differences, in particular the differences between Latin and Chinese alphabet characters.
Based on these findings it was concluded that, overall, China is meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. It was noted that there is room for improvement with respect to addressing the issues raised by exchange partners. China is therefore encouraged to continue its implementation process accordingly, including by addressing the recommendation made.
China should continue to address the issues raised by its exchange partners.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, China implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. In particular, China received notifications from five partners (representing 7% of its partners) and successfully processed them in a timely manner, resolving the issues raised. This is depicted in Figure 1. It also appears that China will notify its partners effectively if errors or suspected non-compliance is identified when utilising the information received.
Based on these findings it was concluded that China is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. China is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
China’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4) and providing corrections, amendments or additions (SR 2.9), although there are some issues with respect to correctly transmitting information and in a timely manner (SRs 2.5 – 2.8). China is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Three exchange partners highlighted specific issues with respect to preparation and format of the information sent by China (representing 4% of its partners). These generally related to schema errors. More generally, three (or 4%) of China’s exchange partners reported rejecting more than 50% of the files received, due to the technical requirements not being met. This is broadly in line with the general experience of other jurisdictions and has improved over time. China has addressed some of the issues and is working to address the remainder.
Based on these findings it was concluded that, overall, China is meeting expectations in relation to sorting, preparing and validating the information. It was also noted that there is room for improvement with respect to validating data for standard errors before transmission. China is therefore encouraged to continue its implementation process accordingly, including in relation to the area highlighted.
China should review its procedures to sort, prepare and validate the information to ensure that the information exchanged is in accordance with the CRS Schema.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, China linked to the CTS.
Based on these findings it was concluded that China is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. China is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Feedback from China’s exchange partners did not raise any concerns with respect to the timeliness of exchanges by China and therefore with respect to China’s implementation of this requirement.
Based on these findings it was concluded that China is fully meeting expectations in relation exchanging information in a timely manner. China is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from China’s exchange partners did not raise any concerns with respect to China’s use of the agreed transmission methods and therefore with China’s implementation of this requirement.
Based on these findings it was concluded that China is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. China is therefore encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
Ten exchange partners highlighted delays in the sending of status messages by China, representing 10% of its partners. This represents a relatively high proportion of partners, although it has improved over time. China has still not sent some of the status messages for 2021 and for prior years.
Based on these findings it was concluded that China is partially meeting expectations in relation to the receipt of the information. However, significant issues have been identified with respect to processes to receive and acknowledge receipt of exchanged information. China should continue its implementation process to ensure its effectiveness, including by addressing the recommendation made.
China should ensure that it sends status messages to all of its exchange partners in a timely manner.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
China is ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by China’s exchange partners with respect to China’s implementation of these requirements.
Based on these findings it was concluded that China is fully meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. China is encouraged to continue to ensure the ongoing effectiveness of its implementation.
Note
← 1. With Hong Kong (China).