Am I avoiding too much tax?

Since September 2018, China and Australia's first automatic exchange of financial account information made CRS possible, destroying many overseas tax havens. So what is CRS and what is the impact on high net-worth individuals who have overseas investments?

What is CRS?

CRS stands for Common Reporting Standard. As we all know, tax policies vary from country to country and consequently, residents abide by different forms of tax reporting. It is because of this difference, financial accounts and tax information cannot be exchanged internationally. This is also why many high net-worth individuals choose to transfer capital to so called 'tax heaven' countries, such as Cayman Islands and British Virgin Islands. Some of these places are very small, some you may have never heard of before, but these countries have crazy huge total asset amounts. The number of companies registered in these countries amount to several times the local population. Once assets and income has been transferred into these foreign countries, it is almost impossible for the individual's residential country to trace their real taxable income due to barriers to financial and taxation information. This provides an effective mean of tax evasion for many high net-worth, high income individuals.

CRS is a unified, single global standard for the collection, reporting and exchange of financial account information employed by various countries. Through the process of information exchange, these countries using CRS can seamlessly retrieve citizens' income records from foreign tax authorities.

Who does the reporting and how is it done?

CRS does not require each and every person to actively report. If one owns overseas assets, there is no need to report it in both countries. Financial institutions including banks, fund companies, are the main bodies of the report. These active agencies will investigate and report on foreigners who have opened accounts in their operating country. We should be aware that the categorisation of locals residents and foreigners will be not based on nationality, but rather based on the concept of tax residency. A tax resident is a long-term citizen with income and tax payments all within the one country. Thus, as long as I reside and work in Australia on a long-term basis, I remain Australia's tax resident despite not being a permanent residence or citizen.

When will CRS be implemented?

As early as July 2014, the relevant rules and regulations for CRS were issued by the Organisation for Economic Co-operation and Development (OECD). Since the release of these standards, various countries have successively signed materials and agreements. As of June 30, 2017, 101 countries and regions around the world contracted to implement corresponding reporting standards and 96 countries and regions have carried out multilateral or bilateral agreements. According to data released by OECD, 49 countries and regions have undertaken the first exchange in 2017 and 53 countries by 2018 that have performed information exchange.

In Australia, the CRS legislation received Royal Assent on 18 March 2016 and came into effect on July 1, 2017. Both China and Australia undertook the first exchanges of information in 2018. Under the bilateral agreements, the frequency of information exchange occurs once a year. Although China has just began exchanging information, but in 2017 alone China has completed investigation on non-residents' accounts with balances over US $1 million. For Australia, according to the Australian Taxation Office (ATO) accounts with balance over AUD$250,000 will undergo regular due diligence, while accounts with over AUD$1 million require high-net worth due diligence. These investigations include identity verification for both individuals or companies and tax reports, just to list a few. These parties under investigation face the penalty of repaying tax or even a fine.