PRC State Administration of Taxation (“SAT”) solicits public comments for the Administrative Measures for Due Diligence of Tax Related Information in respect of Non-Resident Financial Account (Draft for Comments) (the “Consultation Paper”).

Background Time Table

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Purpose of the Consultation Paper

The Consultation Paper issued by SAT on 14 October 2016 is essentially the operating rules for the implementation of CRS within PRC mainland territory by converting the international applicable CRS into detailed requirements suitable for PRC national conditions and providing legal basis and operational guideline for such implementation.

In accordance with the Consultation Paper, commercial banks, securities companies, fund management companies, specified insurance companies, trust companies and other entities fall within the definition of “Financial Institution” thereunder located in PRC are required to undertake due diligence obligation in respect of their clients (i.e. account holders) for purpose of identifying non-resident financial accounts and obtaining account information necessary for reporting. The Consultation Paper has set out the minimum due diligence requirements in detail.

The period for soliciting public comments will elapse on 28 October 2016 and the final regulation is supposed to be promulgated by the end of 2016 and is expected to take effect from 1 January 2017.

Major Views by KWM

1. PRC financial institutions required to perform the due diligence obligations

The Consultation Paper has followed the approaches adopted by FATCA and CRS to define “Financial Institutions” which are categorized into depository institutions, custodial institutions, investment entities and specified insurance companies and their branches. This definition departs from that used under PRC laws and regulatory requirements.

The following entities are PRC financial institutions but are not “Financial Institutions” as defined by the Consultation Paper:

  • Financial Asset Management Companies;
  • Financial Companies;
  • Financial Leasing Companies;
  • Automobile Finance Companies;
  • Consumer Finance Companies; and
  • Money Broking Companies.

The following entities are not PRC financial institutions but are “Financial Institutions” as defined by the Consultation Paper:

  • private investment fund management companies; and
  • partnerships engaged in the business of private investment fund management.

The following entities are not legal persons but are “Financial Institutions” as defined by the Consultation Paper:

  • mutual funds;
  • private investment funds; and
  • trust plans.

2. Due diligence obligation related to financial products promoted and sold through a third party

The Consultation Paper has inherited the requirements under FATCA and CRS which authorise financial institutions to engage a third party such as the sales agency in the due diligence procedures while the ultimate liabilities shall be assumed by the financial product issuer.

The Consultation Paper further indicates that the sales agency is obliged to co-operate with the financial product issuer to conduct due diligence and provide information to such financial product issuer for reporting. Therefore, even if qualified sales agencies for financial products such as independent fund sales institutions are not “Financial Institutions” as defined by the Consultation Paper, they shall establish complete due diligence rules and produces in accordance with the Consultation Paper.

3. Whether FATCA due diligence produces are included in the Consultation Paper

The Consultation Paper provides that the due diligence for accounts opened and held by US tax residents shall be conducted pursuant to the “relevant rules” which are not explicitly set out.

As the due diligence requirements under CRS are crafted on the basis of those under FATCA inter-governmental agreement, regardless of their minor discrepancies, we are of the view that due diligence rules and produces established in accordance with CRS or the Consultation Paper would satisfy the due diligence requirements under FATCA with minor adjustments and switching costs for financial institutions are not significant.

In addition, currently, there is no public available time table for the execution and implementation of FATCA inter-governmental agreement between PRC government and US government. Nonetheless, we still suggest that onshore institutions which fall within the scope of “Foreign Financial Institutions” under FATCA file and register with US Internal Revenue Service (“IRS”) and obtain Global Intermediary Identification Number (“GIIN”) issued by IRS when necessary in order to avoid possible punitive FATCA tax withholding.

4. Form of Self-Certificate for purpose of due diligence

In order to identify the tax residency status of clients, the Consultation Paper requires financial institutions to obtain self-certificate for tax residency status (the “Self-Certificate”) during the due diligence procedures and has set out three samples used for different types of clients as appendices thereto.

The Consultation Paper clarifies that such samples are for reference only and financial institutions may incorporate such Self-Certificate into their account opening forms. The Consultation Paper has also noted the online account opening practice and Self-Certificates in electronic forms are also acceptable thereunder. The Consultation Paper further stipulates that Self-Certificates may be preserved in electronic forms.

Nevertheless, it is required under the Consultation Paper that when Self-Certificates are preserved in electronic forms, financial institutions shall ensure that they are able to provide paper documents at the request of regulatory authorities. It is not clear whether such paper documents shall be originals executed by clients or could be printed versions of electronic records and we are expecting a clear guidance in the final regulation.

5. Penalties

FATCA has empowered financial institutions to decide whether to comply with FATCA while non-compliance will lead to 30% punitive tax withholding when receiving any US source payment. This mechanism is not adopted by CRS and the Consultation Paper which require mandatory compliance by finance institutions. The Consultation Paper has also set out strict penalties for such incompliance. SAT is entitled to order incompliant financial institutions to make corrections within designated time period and downgrade the tax credit level of such financial institutions. SAT is even empowered to make suggestions to other financial regulatory authorities who may be able to impose the following penalties:

  • order such financial institutions to suspend business for rectification or revoke their business or financial licences;
  • disqualify the directors, senior management personnel and other persons who are directly responsible and prohibit such persons from being employed in the financial industry; and
  • order such financial institutions to grant sanctions to directors, senior management personnel and other persons who are directly responsible.

Countermeasures which could be adopted by PRC entities

We recommend that PRC entities take the following measures so as to face the implementation of CRS/FATCA:

  • determining whether they are “Financial Institutions” as defined by the Consultation Paper or the sales agencies for financial products;
  • studying the requirements under CRS/FATCA and the Consultation Paper and analysing the operating feasibilities under the background of its existing business operations;
  • taking an active role by providing comments to the Consultation Paper; and
  • launching training programmes in relation to the requirements under CRS/FATCA and the Consultation Paper in advance so as to get fully prepared for the implementation of such requirements in early 2017.

Editor’s note: this article was simultaneously published on