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.
Hong Kong provident funds not likely to be exempt from U.S. FATCA
|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 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.
|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.
|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.
|Industry making software and hardware preparations
|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!