Recently, the issue of overseas investment tax declaration has been affecting the nerves of many investors.
What taxes are involved in overseas investment? Is CRS (Common Reporting Standard) the basis for taxation? Will financial institutions report personal overseas transaction information to tax authorities?
In response to many questions in the market, Chinese journalists from securities firms interviewed several professionals in an attempt to clarify the issues related to overseas investment taxation and CRS that investors are concerned about.
Controversy over tax issues related to speculation in US stocks continues
What taxes may be encountered when investing in US stocks?
"Taking the US stock market as an example, suppose a mainland Chinese investor (non US tax resident) directly invests in US stocks overseas. As there is no stamp duty on US stocks, there is no tax on US stock trading, and only dividend tax will be charged when dividends are distributed. In terms of dividend tax, mainland Chinese investors are 10%, while Hong Kong and Macau investors have a dividend tax rate of 30%." A tax expert from a foreign securities firm told a Chinese journalist.
Tang Yanqian, KPMG tax partner and head of KPMG's private and family business services in the South China region, told a Chinese journalist at a securities firm that according to US tax laws, if Chinese individual investors are non US tax residents, their dividend income from investing in US stocks must be subject to withholding income tax in the US, with a tax rate of 10% under the applicable conditions of the US China tax treaty. US securities firms will withhold this portion of tax when paying dividends. When investors sell US stocks and receive capital gains, they need to further determine based on their tax residency status. Normally, for non US tax residents, if they do not constitute local or engage in trade activities in the United States, their capital gains tax impact in the United States is relatively controllable.
Meanwhile, Tang Yanqian stated that according to relevant Chinese tax laws and regulations, Chinese resident investors are required to declare and pay personal income tax on their global income to Chinese tax authorities for their domestic and foreign income.
The Chinese journalist from the securities firm learned that there are relevant regulations in China that involve the returns of overseas investment, but there is currently a gap in implementation.
According to the Announcement of the Ministry of Finance and the State Administration of Taxation on Personal Income Tax Policies Related to Overseas Income (Announcement No. 3 of 2020), "Income obtained from the transfer of immovable property outside China, the transfer of stocks, equity, and other equity assets formed from investments in enterprises and other organizations outside China, or the transfer of other property outside China" shall be subject to personal income tax as required.
However, on the official tax website, there are only four types of income declaration for personal overseas income: wages and salaries, labor remuneration, remuneration, and franchise fees.
Individual investors do not need to actively file CRS declarations
Chinese journalists from securities firms have noticed that in a series of rumors circulating online recently, CRS is often seen as the basis for foreign direct investment in US stocks to pay taxes. Insufficient understanding of CRS has also raised concerns among some investors.
The Common Reporting Standard (CRS) is an international standard developed by the Organization for Economic Cooperation and Development (OECD) to improve tax transparency and combat cross-border tax evasion. Since its launch in 2014, CRS has received support and implementation from 125 countries and regions worldwide. After promising to join the CRS exchange country in September 2014, China conducted its first foreign exchange in September 2018 and continued to deepen its efforts.
"For individual investors, the requirement for financial institutions to automatically report specific account information to tax authorities increases their tax transparency," Tang Yanqian told a securities firm in China.
A common question among current investors is, who reports CRS information? In fact, CRS is not declared by individual investors themselves, but by financial institutions.
CRS requires financial institutions to automatically report the financial account information of non resident customers to the tax authorities of their tax residency countries. Mainstream financial institutions, including depository institutions (such as commercial banks), custodial institutions, and investment entities (such as investment funds and insurance companies), will also make declarations.
According to Tang Yanqian, when an individual investor opens an overseas financial account, that is, if the individual investor has a financial account overseas, such as a bank deposit, securities investment account, etc., the financial institution should conduct due diligence on the relevant accounts opened with the institution, identify non resident financial accounts, record and submit information related to non resident financial accounts.
"According to the relevant regulations of CRS, individual investors do not need to declare voluntarily. When opening a financial account, they need to provide accurate tax resident identity information so that financial institutions can accurately report relevant information. Financial institutions have an obligation to proactively report relevant information to tax authorities, including account information, such as account holder information, account balance and net amount, total interest and dividend amount, etc." Tang Yanqian said.
CRS exchange of information is not a tax basis
The second question is, will the information in the CRS report serve as a tax basis?
The aforementioned tax experts of overseas securities companies told the Chinese reporter of securities companies that in addition to the general personal information such as name, date of birth, tax identity, tax number, ID card number, etc., the financial part includes total assets (cash, stocks, funds, bonds), fund dividends, stock dividends, bond interest, total sales amount, preferential amount, etc.
"Many people's misunderstanding is that they mistakenly believe that securities companies or banks will report all personal transaction records to the tax bureau, which is a serious misconception. In fact, CRS reports data at a specific point in time, usually the last day of each year. Moreover, CRS reports only include information such as total assets, dividends, dividends, and total selling amounts, which cannot reflect customers' trading situation and profit and loss information. CRS is also not the basis for taxation." The above-mentioned person stated that.
The main battlefield for CRS information exchange is in banks, not securities firms
It should be pointed out that currently, most mainstream countries and regions in the world have joined CRS, with the exception of the United States.
According to the OECD CRS official website, CRS has received participation and support from 125 countries and regions, including but not limited to EU countries, China, the UK, Canada, Australia, New Zealand, Japan, South Korea, Singapore, etc.
According to Tang Yanqian, the United States is not a country or region that has signed or committed to signing CRS as published by the OECD. However, the United States will exchange information through the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to report account information of US taxpayers to the Internal Revenue Service (IRS). At present, 113 countries and regions around the world have signed the FATCA agreement with the United States. In 2014, China and the United States reached an agreement on the substantive content of the FATCA intergovernmental agreement, but it has not yet been substantially implemented in practice.
A senior figure from an overseas securities firm told a Chinese journalist from the securities firm, "All financial institutions have an obligation to exchange CRS information, and deposit account banks are the first tier. However, the clearest data on overseas income is actually from banks, not securities firms."
The above-mentioned person stated, "For example, even if you open an account with a US securities firm (such as Yingtou Securities), any withdrawal or deposit involving non US banks, such as Singapore Bank, will still be reported to the bank for CRS, so the key here lies with the bank."
A Chinese journalist from a securities firm has noticed recent rumors on the internet that "speculating in US stocks will start collecting taxes this year", and some have even suggested that opening an account at a US securities firm can help avoid related taxes.
Does choosing a Chinese or American securities firm have an impact on investor taxation? According to an interview with a Chinese journalist from a securities firm, choosing which securities firm to register in has no impact on tax payment. The key lies in the investor's own tax residency status.