Megan Brooks
As of 2014, 77,000 foreign banks in nearly 70 countries, including China, agreed to share tax information with the IRS as part of the Foreign Account Tax Compliance Act (FATCA). FATCA was designed to prevent Americans from hiding assets and evading taxes overseas. Under this law, foreign banks that don't agree to share information with the IRS face steep penalties when doing business in the U.S.
| Characteristics | Values |
|---|---|
| Do Chinese banks share info with the IRS? | Yes |
| Number of foreign banks that share tax info with the IRS | 77,000 |
| Countries that share info with the IRS | Switzerland, the Cayman Islands, the Bahamas, Albania, Andorra, Anguilla, Antigua and Barbuda, Argentina, Aruba, Australia, Austria, Azerbaijan, The Bahamas, Bahrain, Barbados, Belgium, Belize, Bermuda, Brazil, British Virgin Islands, Brunei, Bulgaria, Canada, Cayman Islands, Chile, Colombia, Cook Islands, Costa Rica, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Ecuador, Estonia, Faroe Islands, Finland, France, Georgia, Germany, Ghana, Gibraltar, Greece, Greenland, Grenada, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Jamaica, Japan, Jersey, Jordan, Kazakhstan, Kenya, Korea, Kuwait, Latvia, Lebanon, Liberia, Liechtenstein, Lithuania, Luxembourg, Macau, Malaysia, Maldives, Malta, Marshall Islands, Mauritius, Mexico, Monaco, Montserrat, Montenegro, Morocco, Nauru, Netherlands, New Zealand, Nigeria, Niue, Norway, Oman, Pakistan, Panama, Peru, Poland |
| Countries that don't report under CRS but report under FATCA | Almost every country that doesn't report under CRS |
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What You'll Learn
FATCA and its role
The Foreign Account Tax Compliance Act (FATCA) is a US federal law enacted in 2010. It requires all non-US foreign financial institutions (FFIs) to disclose their American account holders' information to the US government and the Internal Revenue Service (IRS). FATCA also requires US taxpayers with foreign financial assets exceeding a certain threshold (generally $50,000) to report those assets on Form 8938, which is filed along with their annual income tax return. This is in addition to the existing requirement to report foreign financial accounts on Form TD F 90.22-1, commonly known as FBAR.
FATCA aims to curb tax evasion and protect the integrity of the US tax system by increasing transparency in the global financial system. It does so by requiring foreign financial institutions to identify and report on their US account holders. This includes not only banks but also investment entities, brokers, and certain insurance companies. FATCA has led to a significant increase in the sharing of financial information between countries, with over 120 countries participating in automatic information exchanges as of December 2023, including China.
The role of FATCA is to ensure that the US government can effectively tax its citizens' and residents' global income. By requiring foreign financial institutions to report on their US account holders, FATCA helps the IRS identify previously undisclosed foreign accounts and ensure that US taxpayers are accurately reporting their global income. FATCA also requires US taxpayers with foreign assets to report them, with serious penalties for non-compliance, including a $10,000 failure-to-file penalty and a 40% penalty on any underreported income.
FATCA has had a significant impact on the global financial industry, with foreign financial institutions incurring substantial costs to comply with the law. These costs include initial investment, estimated at up to $500,000 for most institutions, as well as ongoing maintenance expenses. While FATCA has improved tax compliance, it has also raised concerns about the privacy of financial information and the complexity of reporting requirements for individuals and institutions.
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Local privacy laws
China has stepped up its game in protecting personal data with new privacy laws that affect companies both inside and outside its borders. The country has enacted several laws and regulations to protect the privacy of its citizens. The Personal Information Protection Law of the People's Republic of China (PIPL) is the most recent and comprehensive law that was passed by the National People's Congress in August 2021. The PIPL is targeted at personal information protection and addresses the problems with personal data leakage. It is applicable to organisations and individuals who process personally identifiable information (PII) in China, as well as those who process data on Chinese citizens outside of China.
Under the PIPL, entities that process personal information must obtain the consent of the data subject and provide clear and concise information about the purpose, method, and scope of the processing. They must also implement appropriate measures to ensure the security of personal information and report any data breaches to the relevant authorities and affected individuals. The PIPL grants individuals the right to access, correct, and delete their personal information and to withdraw their consent at any time. The regulators in charge of the protection of personal information under the PIPL include the Cyberspace Administration of China (CAC), the relevant cyberspace administration at the provincial level, relevant State Council departments, and relevant departments of local governments at the county level and higher.
One of the key requirements of China's privacy laws is the data localisation requirement. This means that businesses must store and process personal information within China's borders. Critical Information Infrastructure Operators (CIIO) must also comply with this requirement. This measure is designed to ensure that personal data is not transferred outside of China's borders, where it may be subject to different privacy laws or cybersecurity threats. However, there are some exceptions to this requirement. For example, businesses can transfer data outside of China if they have obtained the necessary approvals from the relevant authorities or if they have implemented appropriate security measures to protect the data during the transfer.
In terms of international cooperation, China is one of the countries participating in the Common Reporting Standard (CRS) system. The CRS system allows entire countries to mandate their banks to share financial data with other nations to keep tabs on their citizens and combat tax evasion. As of December 2023, China is one of around 120 countries that have signed up for the CRS and are exchanging data. Additionally, under the Foreign Account Tax Compliance Act (FATCA), international banks report information on American account owners to the US government and the Internal Revenue Service (IRS). Almost every country that doesn’t report under CRS still reports under FATCA.
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Automatic information exchange
The United States has entered into Tax Information Exchange Agreements (TIEAs) with several countries, allowing the exchange of information on tax matters to enforce domestic tax laws. The Internal Revenue Service (IRS) has various forms of information exchange, including specific exchanges (exchange of information on request or EOIR), spontaneous exchanges, and automatic exchanges. The automatic exchange of information (AEOI) is administered by the Program Manager, Automatic Exchange of Information.
The Common Reporting Standard (CRS) is an initiative by the Organisation for Economic Co-operation and Development (OECD) that allows countries to exchange tax and financial information automatically. As of December 2023, China is listed among the countries participating in the automatic exchange of information through the CRS. Under the Foreign Account Tax Compliance Act (FATCA), international banks, including those in China, must report information on American account owners to the US government and the IRS.
The US has also entered into bilateral competent authority arrangements (CAAs) with certain jurisdictions, relying on double taxation conventions, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters, which permit automatic exchanges of information. The US has a TIEA with Hong Kong, which is a Special Administrative Region of China, allowing the exchange of tax information between the competent authorities of both countries.
While the US does share some tax information with other countries, it also has strict disclosure laws governing the exchange of sensitive tax data with foreign tax officials under international exchange agreements. These exchanges are primarily founded on IRS Delegation Order 4-12, which authorises the disclosure of tax information under Mutual Legal Assistance Treaties.
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China's participation in CRS
The Common Reporting Standard (CRS) is a global framework for the automatic exchange of financial account information between governments. It was introduced by the Organisation of Economic Cooperation and Development (OECD) in 2014 and has since been adopted by over 100 countries, including China.
The CRS requires financial institutions, such as banks, to collect and report information on account holders to their local tax authorities, who then share this information with other participating countries. This includes details such as the name, address, taxpayer identification number, date and place of birth, account balances, and investment income of the account holder. The purpose of the CRS is to improve tax transparency and prevent tax evasion.
China committed to implementing the CRS standard in 2016, with financial institutions required to begin collecting information in 2017 and reporting it to the local tax authority in 2018. This included Hong Kong, which was a second-wave participating jurisdiction. As of December 2023, China is listed by the OECD as one of the countries participating in automatic information exchanges under the CRS.
While China participates in the CRS, it is worth noting that the effectiveness of information exchange may vary between countries. Some sources suggest that, in practice, it can be challenging for all participating countries to fully comply with information exchange due to factors such as the complexity of compliance forms or concerns about privacy rights and data protection.
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US tax havens
The United States has been described as "the world's largest tax haven" by Andrew Penney of Rothschild & Co. This is due to the country's attractive tax and privacy benefits for foreign investors, including:
- Financial privacy: The US offers a high degree of financial privacy for foreign investors. While US citizens and residents are required to report their foreign accounts to the Internal Revenue Service (IRS) under the Foreign Account Tax Compliance Act (FATCA), the US does not share information about financial activities within its borders with other countries. This one-sided flow of information has made the US an attractive destination for offshore funds.
- Favorable tax laws: Certain US states, such as Delaware, Nevada, South Dakota, and Wyoming, offer favorable tax laws for foreign-owned businesses. For example, Delaware does not impose corporate taxes on corporations that incorporate in the state but do business elsewhere. Additionally, foreign-owned US Limited Liability Companies (LLCs) that are not engaged in trade or business in the US are not liable to pay US federal income taxes on their income, even if it is generated while being based in the US.
- Ease of doing business: The US is one of the easiest places to set up anonymous shell companies, providing an attractive option for those seeking to reduce their tax burden while maintaining a reputable business address.
- Reputability: Having a business registered in the US carries more reputability than some other popular tax havens, which may be associated with negative media portrayals of wealthy individuals hiding their money.
While the US offers many of the benefits typically associated with tax havens, it is important to note that the effectiveness of these measures in preventing the US from being used as a tax haven is debated among financial experts and policymakers. Additionally, individuals and corporations must still comply with the tax laws of their home jurisdictions when utilizing the US as a tax haven.
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Frequently asked questions
Yes, as of December 2023, China is one of the countries that has agreed to share information from its banks with the IRS as part of a US law that targets Americans hiding assets overseas.
Under the law, foreign banks are required to supply the IRS with names, account numbers, and balances for accounts controlled by US taxpayers.
The law, known as FATCA (Foreign Account Tax Compliance Act), is designed to stop tax evasion and narrow the tax gap by making it more difficult for Americans to use overseas accounts to evade US taxes.
No, banks in many countries are prevented by local privacy laws from sharing account information with foreign governments. However, the US Treasury Department has been negotiating agreements for foreign governments to collect the information from their banks and then share it with the US.
Foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program.
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