Hong Kong has occasionally scared public health authorities in the United States with acronyms like SARS and H1N1, but now the U.S. is attacking the world’s financial health with a far more dangerous acronym: FATCA. The Hong Kong Economic Journal — the Financial Times of the Sinophone world, roughly speaking — ran a FATCA-related interview with Jennifer Wong of KPMG in this morning’s paper, on page A7. I’ve translated it below.
This is the first major item of FATCA coverage in a local general-circulation newspaper in Hong Kong that I’m aware of; Hong Kong’s newspapers have been far slower than those in mainland China or Taiwan to report on this topic. Wong has previously given FATCA-related interviews with the mainland media, but this is the first time that she addresses the five-country European agreement and the specific difficulties that Hong Kong financial institutions may face in dealing with FATCA. She’s focused primarily on the institutional response rather than the individual response to FATCA, but it’s still interesting reading for us minnows.
Killer FATCA on the loose; financial institutions need to prepare
Avoid being unable to meet law’s requirements and getting fined
Five countries in Europe have acceded to the U.S. government’s “Foreign Account Tax Compliance Act” and signed a cooperation agreement with the U.S. authorities to aid local financial institutions to carry out their obligations under the law. KPMG tax partner Jennifer Wong believes, Hong Kong and the U.S. will not have an easy time coming to a similar cooperation agreement, and suggests that financial institutions have to prepare, in order to avoid being unable to meet the law’s requirements and getting fined. Aside from this, the [Hong Kong] Monetary Authority states that it has already advised banks to make appropriate arrangements.
Market sources pointed out, Secretary for Financial Services and the Treasury K. C. Chan will visit the U.S. next month, and if the opportunity comes up may also exchange opinions with U.S. authorities on this topic. The [Financial Services and the Treasury] department’s reply pointed out, Chan’s visit to the U.S. is still being arranged, but they emphasised that the purpose of his trip is to promote the position of Hong Kong as an international financial centre, including the opportunities for development of renminbi banking business, as well as to discuss other topics of interest to both sides.
One interesting thing to note: it’s possible K. C. Chan himself was a U.S. citizen or at least a green card holder at some point in the past. He grew up in Hong Kong, but lived in the U.S. for nearly two decades, earning degrees at Wesleyan and U. Chicago in the 1970s and then teaching at Ohio State before returning to Hong Kong in the early 1990s. Under Article 61 of the Basic Law (Hong Kong’s mini-constitution), “[t]he principal officials of the Hong Kong Special Administrative Region shall be Chinese citizens who are permanent residents of the Region with no right of abode in any foreign country and have ordinarily resided in Hong Kong for a continuous period of not less than 15 years.” This means Chan would have been expected to give up any green card or U.S. citizenship he held in 2007 when he was appointed to Donald Tsang‘s administration, if he had not already done so earlier. The Federal Register “name-and-shame” list is of no help in answering this question, due to its habit of mysteriously leaving out renunciants’ names. There are always plenty of Chans listed every quarter in the Federal Register , but K. C. Chan does not seem to be one of those names (either under his Chinese given name Ka-keung or his English name Ceajer). If he were a green card holder, he wouldn’t have been listed anyway.
Regardless of whether Professor Chan has any personal experience with the U.S.’ tax imperialism, he certainly knows that the financial services industry here has a very hostile attitude towards it. This is best illustrated by a question that the Honourable Paul Chan asked him in the Legislative Council a few years ago, which not-so-subtly suggested that the government should expel IRS criminal investigator William Cheung from the U.S. consulate here.
China, U.S. may sign cooperation agreement
[FATCA] is aimed at preventing U.S. citizens and green card holders from evading taxes. Non-U.S. financial institutions will also have to play the role of compliance agents, which means distinguishing whether their clients are U.S. citizens and providing their information to the U.S.’ Internal Revenue Service. If they do not cooperate, their income in the U.S., such as interest or dividends, will face a 30% withholding tax. When buying stocks or real estate, the 30% withholding could be applied to the whole value of the transaction. If their customers are not willing to reveal whether or not they are U.S. citizens, or if they refuse for a financial institution to provide their information to the U.S.’ Internal Revenue Service, [the institutions] may have to pass on the punishment to their customers.
The journalist deserves commendation for writing “non-U.S. financial institutions” (非美國金融機構) rather than perpetuating the irritatingly U.S.-centric term “foreign financial institutions” (most commonly seen in Chinese media in the form 海外金融機構). For those of us living outside the United States and depositing our paychecks down the street from our homes and offices, our bank accounts are not offshore and they are not foreign; Congress and the IRS are the ones who are offshore, and they write their gobbledygook laws and regulations in a foreign language. (Petros, the scholar of ancient languages that he is, claims to have identified it as Orcish.)
Wong pointed out, earlier when the U.S. published the law’s regulations, at the same time they also signed a cooperation agreement with five European countries: the United Kingdom, Germany, France, Italy, and Spain. This was primarily because some of those countries’ laws do not permit financial institutions to reveal customer information to regulatory authorities of other countries. Under the cooperation agreement, the signatory countries’ local financial authorities do not need to directly provide customer information to the U.S.’ Internal Revenue Service, but only need to report it to their own countries’ governments. Regardless, financial institutions still need to carry out complicated work in order to classify customers and to fulfill their duty to confirm whether customers are U.S. citizens and to report that information to the regulatory authorities, but if the customer refuses to cooperate, financial institutions will not have responsibility for carrying out the work of withholding income, which will lessen the chance that their customer relationships will be affected.
Wong pointed out, of the European countries which signed cooperation agreements with the United States, some did it because the U.S. will establish bilateral measures which will aid those European countries to attack the problem of tax evasion by their own citizens. The market also expects that mainland China will later sign a similar cooperation agreement with the United States.
This is similar to what Don Pomodoro mentioned earlier: China, Russia, and Switzerland all seem poised to give into FATCA and sign their own intergovernmental agreements like the five-country European one. However, any agreement signed by Beijing is not likely to cover Hong Kong. The IRS in Notice 97-40 established its policy of treating mainland China and Hong Kong separately for tax purposes, and like Wong said, Hong Kong may not be able to come to a similar agreement with the U.S. anyway.
Off-topic rant: It’s worth highlighting the irritating side effects of the IRS’ decision to pretend that mainland China and Hong Kong are “separate countries” for tax purposes, including for purposes of Subpart F’s ridiculous “Foreign Base Company Services Income” rules. Because of this, if an American expat owns a Hong Kong company which earns income for services performed half an hour’s train ride away in Shenzhen, the IRS may pretend that the corporation had paid that income out to the American owner and apply immediate U.S. taxation to it, basically disregarding the fact that the corporation exists and the owner may have intended to re-invest the income into the company’s growth. This is yet another example of how the U.S.’ worldwide citizenship taxation laws, combined with its Controlled Foreign Corporation legislation, put useless burdens on American expat entrepreneurs trying to keep up with German and Japanese competitors. And Congress wonders why the U.S. has suffered trade deficits for the past three decades?
As for whether or not Hong Kong will sign a relevant cooperation agreement with the United States, Wong has suspicions over the possibility of it, because such an agreement would involve the mutual exchange of information between the two places, but at present Hong Kong does not even have a double taxation agreement with the U.S. If the two places want to exchange information, legislation would have to be passed first. Due to these considerations, she believes it may not be possible to achieve this by the time FATCA comes into force.
Wong pointed out, starting from January next year, financial institutions will need to sign cooperation agreements with the U.S. authorities by June, otherwise, in 2014 when withholding facilities are implemented they may find themselves in violation of the law and be fined. Because of this, financial institutions need to do their preparations.
There are other barriers to an intergovernmental agreement which Wong doesn’t bring up. One obvious one is that Hong Kong taxation is based on the territorial principle without regard to citizenship or residence status. The Hong Kong government has almost no use for information about its residents’ overseas investments and bank accounts, because it manages to fund itself purely from local sources (primarily real estate, stock transaction, and corporate profits taxes). There’s no reason for the Hong Kong government to pursue what would effectively be a one-sided deal in which Hong Kong suffers all the costs and violations of its autonomy while the U.S. gets all the benefits.
Furthermore, neither side has sufficient information to figure out which accounts belong to the others’ residents. In Hong Kong’s case, even under the old Qualified Intermediary standards, banks do not have to collect passport information from account-holders who provide a permanent identity card, and even non-permanent identity card holders were exempt from the requirement to provide a passport for accounts opened before 2001. And there’s no hope that U.S. banks will be able to tell which of their account holders are Hong Kong people. Even the passport used to open the account will be almost useless as a distinguishing characteristic: millions of Hong Kong people hold British National (Overseas) passports, while others may have opened overseas brokerage and bank accounts using their old British Dependent Territories Citizen passports prior to 1997. And that doesn’t even count the hundreds of thousands of Canadian citizens living in Hong Kong who probably used Canadian passports or identification to open U.S. accounts, or the Hong Kong students and corporate assignees who used to live in the U.S., opened an account at their local bank with a driver’s license, and kept it after coming back to Hong Kong.
Another potential barrier lurks in our Basic Law. Beijing, as the sovereign power here, is the only government aside from Hong Kong’s own which has any legal right to levy taxes on the Hong Kong-source income of Hong Kong residents. (The U.S. always attempts to force other countries to recognise its “right” to tax their residents by forcing them to accede to “Savings Clauses” in double taxation agreements, but as mentioned above, Hong Kong has never signed such an agreement with the U.S.). In Basic Law Articles 106 and 108, however, Beijing gave up its own right to levy taxes in Hong Kong, in exchange for prohibiting Hong Kong from using its tax collection powers on behalf of any foreign government. In particular this prevented the United Kingdom from coming up with any scheme to collect any land rents beyond 1997, but the law as written imposes a general prohibition: “The Hong Kong Special Administrative Region shall practise an independent taxation system”. This may well prohibit the Hong Kong government from providing financial information about its own residents to a foreign government which intends to use that information to levy taxes against the Hong Kong-source income of those residents. A U.S. citizen or green card holder living in Hong Kong who stood to be negatively affected by a potential Hong Kong–U.S. information exchange agreement might throw a spanner in the works by applying for judicial review against it in the High Court on these grounds. That could tie up the implementation of such an agreement for quite some time, even if the case were to be unsuccessful in the end.
Wong stated, some international institutions with operations in Hong Kong have already begun making arrangements [regarding FATCA] at the direction of their headquarters, while Asian regional financial institutions have been slower to “warm up”. She also pointed out, the law will cause financial institutions’ compliance costs to rise. For institutions whose account-holders are primarily small and medium enterprises and Hong Kong people, the costs involved may exceed HK$1 million [US$130,000], while the costs involved for larger institutions could reach as high as HK$50 million to HK$100 million [US$6.5 to US$13 million].
Other than that, industry sources state, the [Hong Kong] Monetary Authority has already contacted banks in order to learn about their progress in making relevant arrangements. A spokesperson for the Authority stated that it is aware of the requirements of the law and has alerted the Hong Kong Association of Banks. As stated in general regulatory requirements, the Monetary Authority expects that all banks will take appropriate measures in order to ensure that they can comply with all regulatory laws which affect their operations.
For those of you who read Chinese and have an HKEJ subscription, you can see the original article on the HKEJ website; otherwise, only partial text is available to non-subscribers. Unfortunately, the “Google the title and beat the paywall” trick that works with search-engine-optimisation-obsessed U.K. and U.S. newspapers like the Financial Times and the Wall Street Journal doesn’t work with Hong Kong newspapers, who really don’t care about web traffic as long as they keep capturing the home subscription and mass transit commuter markets.