As we previously discussed, China and the U.S. decided during their annual Strategic & Economic Dialogue in June to hold another round of discussions on FATCA “as early as practicable this summer”. Well, the autumn equinox has come and gone, but we haven’t heard any more rumours about how an Intergovernmental Agreement is “imminent”. Hong Kong’s Oriental Daily News has been keeping up with local financial institutions’ FATCA preparations, earlier reporting on Standard Chartered’s updated account opening procedures requiring new customers to declare whether or not they are U.S. citizens. After the jump I’ve translated their latest article from Monday about FATCA’s impact on local retirement plans.
Though the article doesn’t directly mention those ongoing Beijing–Washington negotiations nor their effect on Hong Kong, the implication is that they’re not going too well; apparently, most plan administrators aren’t expecting the success of the Hong Kong government’s efforts for the system to gain a FATCA “deemed compliance” exemption either through an amendment to the regulations or through a hypothetical IGA, and they’re making preparations to report the information required by FATCA themselves. However, there remain legal difficulties with that approach as well, and I’ve seen no evidence that the Hong Kong government plans to ameliorate those either.
美FATCA難豁免港積金 |
Hong Kong provident funds not likely to be exempt from U.S. FATCA |
| http://orientaldaily.on.cc/cnt/finance/20130923/00202_017.html | |
| 美國實施《海外帳戶稅務合規法案》（FATCA）或明年七月起生效，本港財經事務及庫務局代表正與美國政府有關部門斡旋，爭取強積金等退休計劃獲豁免，惟業界普遍不寄予厚望，更認為自願性供款多數不獲豁免。據了解，業界已積極更新電腦系統，方便日後申報。 | The Foreign Account Tax Compliance Act (FATCA) being implemented by the United States is expected to come into effect next July, and Hong Kong’s Financial Services & the Treasury Bureau (FSTB) is currently mediating with U.S. authorities in an effort to obtain exemptions for Mandatory Provident Fund and other retirement plans, but the industry for the most part does not have high hopes, and furthermore believes that most voluntary contributions will not be exempted. It is understood that the industry has already proactively begun to upgrade computer systems for the convenience of future reporting. |
“Voluntary contributions” are a fairly simple concept: basically, in addition to the mandatory contribution of HK$1,000 or 5% of monthly salary, Hong Kong retirement plan participants can transfer additional amounts into their plans at their own option. Unlike mandatory contributions, voluntary contributions are not tax-deductible and not limited as a proportion of salary. Of course as we all know, when Treasury meets a very simple non-U.S. concept which U.S. citizens abroad easily grasp, its first thought is that it must be evil, un-American, and conducive to tax evasion. So the issue of voluntary contributions is one of the bigger hurdles to Hong Kong retirement plans’ ability to meet the U.S. FATCA deemed compliance exception under the most recent version of the “final regulations”.
The draft FATCA regulations required that for a retirement plan to be deemed FATCA compliant, contributions had to be “limited by reference to earned income” as well as tax-advantaged or tax-deductible, and gains from the account had to be “deferred or taxed at a reduced rate”. Hong Kong retirement plans broke all three of these assumptions. First, Hong Kong does not tax dividends or capital gains (the government funds itself mostly through land sales, property taxes, and stamp duty on stock transactions), meaning there is no tax to be deferred or reduced. Furthermore, voluntary contributions are neither limited by reference to earned income nor tax-deductible. (For that matter, U.S. Roth IRA contributions aren’t tax-deductible either, but we haven’t seen anyone demanding that Homelanders be buried in paperwork, thrown out of their banks, and fined tens of thousands of dollars in order to prevent them from using Roth IRAs for nefarious purposes)
These issues were pointed out to Treasury during the comments period back in 2012, but the only one they fixed was the “reference to earned income” one. Unsurprisingly they didn’t really care about the problems they’re causing for ordinary people in the rest of the world trying to save for retirement; as long as the possibility remains that some U.S. subject somewhere might not have assets reported to Treasury by dumping them in a bunch of high-fee, underperforming mutual funds, the U.S. government follows the opposite of Blackstone’s formulation: “better that ten innocent parties suffer than one guilty person walk free”.
| FATCA旨在防止美國海外公民逃稅，但牽連全球金融業，本港強積金供款同樣難幸免，積金受託人若發現為美國籍公民，同樣需要向美國政府申報。 | FATCA aims to prevent U.S. citizens overseas from evading tax, but the finance industry around the world has been dragged into it as well, and Hong Kong Mandatory Provident Fund contributions might also not be spared. If provident fund administrators discover [customers] to be U.S. citizens, they must also disclose them to the U.S government. |
| 消息透露，美國稅務局將於明年四月底接受非美國的外國金融機構登記，成為FATCA的參與機構，有關計劃最快明年七月起生效，屆時參與方須識別客戶是否美國公民，並向美國稅務局匯報資料，避免被徵預扣稅。 | Earlier reports revealed that the U.S. Internal Revenue Service will begin accepting registrations from non-U.S. Foreign Financial Institutions in late April next year to become FATCA Partner Institutions. The relevant plan will come into effect as soon as next July, and by that time participating [institutions] must determine whether or not their customers are U.S. citizens, and report their information to the IRS, in order to avoid having taxes levied against them. |
| 財經事務及庫務局代表積金業界與美國政府部門磋商，惟至今未取得突破性進展，業界普遍認為自願性供款獲豁免機會極低，而且憂慮搜集客戶資料或引發其他法律問題。 | The FSTB is in discussions with U.S. authorities on behalf of the provident fund industry, but up to now has not been able to make any breakthroughs. The industry widely believes that the chances of an exemption for voluntary contributions is quite low, and furthermore worries that collecting customer information may raise other legal issues. |
The first of those “other legal issues” is the Personal Data (Privacy) Ordinance, in particular the § 33 prohibition against transfer of personal data to place outside Hong Kong except in specified circumstances, which would require account-holders to consent in writing for their information to be disclosed to a foreign government. More specifically for retirement plans, we have Mandatory Provident Fund Schemes Ordinance § 41 and Occupational Retirement Schemes Ordinance § 77, which are far stricter on the issue of data disclosure.
The Hong Kong Monetary Authority reminded the local finance industry in a circular last month that:
Whenever there is a need, AIs (Authorised Institutions) should inform customers and obtain their specific consent before reporting the requested information to the IRS. At all times, AIs should ensure that they comply with all provisions of the Personal Data (Privacy) Ordinance and adequate preparation should be made to respond to customer enquiries, taking into account the Ordinance.
To support AIs’ efforts in the above matters, the HKMA has suggested that the Hong Kong Association of Banks and the DTC Association offer appropriate assistance to facilitate the development of good practices for compliance with overseas tax regimes, including the FATCA of the US.
The implication behind these words, in particular the second paragraph, is that the Hong Kong government will not be stepping in with taxpayer money and legal amendments to relieve institutions of their compliance costs or privacy law burdens; instead, the government suggests that institutions take their own measures either individually or through industry associations, meaning the costs of those measures will probably be passed on to customers.
The Hong Kong Legislative Council (LegCo) is still in recess, and won’t return until next month. Before the recess, LegCo passed a tax law amendment relating to information exchange; some Washington-based tax lawyers erroneously claimed this cleared the legal barriers to the signing of a FATCA IGA by the Hong Kong government, but in fact as we clarified here, the amendments were aimed at complying with the standards of the OECD Global Forum Phase 2 assessments, and did not resolve any of the tax or data privacy law barriers to automatic information exchange of Hong Kong residents’ personal data which the U.S. demands for FATCA purposes.
| 業界軟硬件做足準備 | Industry making software and hardware preparations |
| 不過，有強積金受託人已做好兩手準備，更新公司電腦系統，包括設立多重關卡，例如供款人是否有美國住址、是否經常離港等，以便尋找潛在美國客戶。本港銀行已經積極部署，當中渣打香港已率先於上月起更新開戶程序，要求客戶開設新戶口時申報是否美國公民。 | However, some MPF administrators have already made other preparations, making updates to their company’s computer systems, including multiple layers of checks, such as whether the contributors have U.S. addresses, whether or not they are often away from Hong Kong, and the like, in order to search for hidden U.S. customers. Hong Kong banks have already rolled out some new measures; among them, Standard Chartered Hong Kong took the lead in updating its account opening procedures to require customers establishing new accounts to disclose whether or not they are U.S. citizens. |
Big banks offering MPFs alongside a wide variety of other financial products obviously have an advantage over smaller ORSO administrators in the amount of data they have on their scheme members, and in particular their ability to determine whether customers “are often away from Hong Kong” or have U.S. indicia: they can check whether customers applied for travel insurance, where they have used their ATM cards, whether they receive salary or pay rent or mortgage in Hong Kong, etc. In other words: did you withdraw money during your last trip to Hawaii? Okay, just try and prove you are not a camel green card holder!
Now that Treasury are refusing to take meetings with FATCA stakeholders, I guess Hong Kong retirement funds are just out of luck!
http://www.lexisnexis.com/legalnewsroom/tax-law/b/newsheadlines/archive/2013/09/24/aba-meeting-treasury-no-longer-taking-meetings-on-fatca.aspx
Obviously there is a huge exodus of cash being hidden in Hong Kong retirement funds, in order to avoid US taxes. THis should be a high priority item for USA to hold out against. Those trillions lost in the offshore evasion have to be found somewhere.
I find it curious that the US is playing hardball on IGAs. You would think they would be ready to make concessions to get the agreements in place. This would increase the pressure on other countries to sign up. Perhaps they want the negotiation to fail?
@ Eric
I do hope all these excellent pieces you put together are available in other places too. There’s so much work put into them and they deserve to be spread far and wide.
The USG will go for ‘watered down’ FATCA for China / HK exempting different financial products in the hope they can broaden the scope of FATCA later to include them.
At this stage it’s far more important for the USG to establish the principle of FATCA. China and HK need to lay down the ground rules with the US now if they sign an ‘lip service’ IGA.
Eric
Thomas Reuters doing its FATCA co-enabler work again. I don’t have access to the entire report, but maybe you do?
Hong Kong securities regulator warns on FATCA compliance
http://www.complinet.com/global/news/news/article.html?ref=167272&goback=%2Egde_3731046_member_5793853205326614528#%21
@Just Me: thanks for that. No one around here seems to have a Reuters Accelus subscription, but here’s the original circular:
http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=13EC30
Roughly paraphrased: “Dear brokerages, there’s this thing called FATCA. In case you can’t tell from the way we describe it: we don’t have a clue how it’ll impact you. Go hire a lawyer. We’re too busy losing market manipulation cases to help you guys.”
Incidentally, our Finance Secretary is on his way to DC right now:
http://www.news.gov.hk/en/categories/finance/html/2013/10/20131010_122229.shtml?pickList=topstories
May be related to negotiations. Certainly doesn’t mean an IGA is imminent (contrary to what Reuters no doubt wants to read into the phrase “note any announcement made by the Hong Kong Government advising that it has concluded an IGA with the U.S. Government”) — the person who signs on behalf of Inland Revenue is the Financial Services & Treasury Secretary (KC Chan), not the Finance Secretary (John Tsang), and I’m not aware that Chan is travelling to the U.S. right now.
The French Finance Minister is on his way too. And this is to sign the IGA.
See Victoria’s latest post:
http://thefranco-americanflophouse.blogspot.com/2013/10/fatca-comes-to-france-iga-to-be-signed.html
Oh yeah, there was another circular from the exchange on Monday
http://www.hkex.com.hk/eng/market/partcir/hkscc/2013/Documents/ce185_2013.pdf
Same old, same old:
I.e.: “We don’t know what’s going on with this IGA. (The SFC doesn’t know what’s going on either but we’re gonna pretend that they do so they don’t get pissed at us. By the way, here’s a direct link to the FATCA section on the IRS website that the SFC was too lazy to give you. See, at least we did more research than them before we sent out our circular.)”
@ Eric
The list at the Treasury of signees and potential signees for IGAs hasn’t been updated since 6/11/13. Is there something somewhere more up to date?
http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx
US-France tax fraud pact falls victim to shutdown
@ calgary411
RE: US-France tax fraud pact falls victim to shutdown
Great find!
One would think that US Treasury’s inability to sign off on a unilateral and self-serving pact of its own making – due to its own political and fiscal dysfunction – would somehow warn the other party (France in this case) to reconsider the wisdom of entering into an agreement! Does anyone else see the irony in this? Or the pathos?
The real howler is what follows:
“The French finance minister dismissed the possibility that the budget battle would force the United States into default for the first time in its history. ‘A US payment default would be so serious that it is improbable, even impossible,’ he said.”
Do these fools actually believe that just because events are ‘serious’ they are also ‘impossible’?
What about WWII, the Titanic sinking, genocide in Rwanda, the Holocaust, nerve gas in Syria, the Nazi conquest of France. Those were deadly serious – and yet they still happened. This guy is just tossing words around without any thought to their meaning.
(French Finance Minister) Moscovici added that he shared the view of European Central Bank president Mario Draghi, who said Thursday: “The world still doesn’t believe that the US will not find a way out of this.”
How dare he presume to read the mind of the entire world – what the “world believes” is pure hogwash!
More folly; just because the US raises its debt ceiling does not guarantee that investors will continue to buy its debt. Does “poor credit risk” sound familiar? How about “once burned, twice shy”?
Finally, are US banks gearing up to ask their customers if they were born in France?
@Eric…
I am just putting this here about Singapore so you see it…
The following is the speech Lee delivered in parliament today during the debate on Income Tax (Amendment) Bill
http://yeejj.wordpress.com/2013/10/21/iga-fatca/
@Eric…
Here is this from Thompson Reuters dated the 9th of October…
http://fatca.thomsonreuters.com/wp-content/uploads/2013/10/APAC-Hong-Kong-securities-regulator-warns-on-FATCA-compliance.pdf
That Singapore speech is interesting. Too bad he’s in an opposition party that has only about a tenth of the seats in Parliament. Not surprised it’s the Worker’s Party. Similar here in Hong Kong: the trade unionists are the only domestic constituency who ever stand up to the finance/law/real estate cabal who want to appropriate public spending for stuff they should be doing themselves. Either he’s better-informed about the issue than any other politician on the planet, or he has some constituents putting pressure on him (which would be kind of strange: dual citizenship is strictly illegal for adults, and there’s very few Americans who naturalise there — probably because they can’t justify to themselves forcing their sons waste two years in Lee Kwan-yew’s tinpot army.)
Re the Reuters thing: Same old same old. Back in June when Singapore announced it was negotiating its surrender on FATCA, the Hong Kong compliance-industrial complex jumped up and down and said “we’re next! we’re next!” The Economic Journal quoted PWC (in Chinese) specifically claiming that Hong Kong would sign an IGA by the end of October. Of course now we’ve got a week left in October and everyone with the power to sign a tax treaty is up in Beijing for some mainland economic cooperation symposium.
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Is there any way we get a button to report spam? As bad as things get with the IRS, I don’t think that they will be landing us in the hospital where we will need a personal injury lawyer from Miami to sort things out for us.
@Publius, I’m in the UK and see a lot of spam if I visit the site in the morning. By afternoon it has gone, presumably because mods in Canada have woken up. One way to look at it is that if this site is now on the spammers radar we must be reaching a worthwhile audience!
@Pacifica, @Petros, @other mods, if you want to give me the super-secret keys to mod-ness I’m happy to help out by cleaning up whatever I can from this side of the pond as and when. Note that the email connected to this id is fake, though — Pacifica has my real one.
To control spam postings: consider adding a CAPATCHA form to enable a comment to be posted?
http://encyclopedia2.thefreedictionary.com/Capatcha
Publius and others, thanks for your comments and concern about spam on the site.
There are, each day, likely over 10,000 – 15,000 spam (just my estimate) that the spam filter IBS has has caught. Moderators go through “the spam” to try to make sure there are not legitimate comments there. As well, the filter does not catch them all — we go through “Comments” many times each day to delete those that got through the filter. If you are seeing them as an email sent to you because you checked the box that says you want to receive comments on that thread, I think there is something at the end of that email that says you can report that comment as spam — but perhaps that is just on what I see when it comes to a post for which I have been the author. I hope most can ignore the spam they do see and wait for the administrators (who are doing plenty of other things) to catch up to the onslaught. It is disturbing but we are dealing with it the best we can.