Thanks to noone for spotting this significant new article from the South China Morning Post. This may be one of the first examples of non-FFI’s applying full 30% withholding directly to the salaries of overseas Americans – in this case, US pilots working for Cathay Pacific. Until now, most attention has been focussed on the role of foreign financial institutions, but now we see the first tangible signs of how FATCA will permeate the entirety of international business relations and reporting practices. How soon before NO Americans can work outside the compound, completing the self-destructive process whose beginnings Roger Conklin remembers so well from his days as a Telecoms executive?
Cathay to withhold US pilots’ wages for taxes
Airline says new laws are forcing it to hand over 30 per cent of salaries to American authorities
Cathay Pacific Airways is to start withholding about 30 per cent of its American pilots’ salary every month and pass the money to the US tax authorities together with the pilots’ personal information this year.
While the airline told the South China Morning Post the move was designed to comply with US tax regulations, its decision has been challenged by legal and tax experts in Hong Kong.
They said companies in Hong Kong had no obligation to fulfil demands made by a foreign government because of the two different jurisdictions.
Lawyer Albert Luk Wai-hung said that if the airline observed the US regulations, the affected pilots could sue the airline for underpaying them because part of their salaries would not find its way into their pockets. That could violate the spirit of their contracts.
“The company also cannot pass their employees’ personal information to any third parties without their consent,” Luk said, pointing to the Personal Data (Privacy) Ordinance.
At the centre of the controversy are two US tax regulations – an income tax withholding requirement in the Internal Revenue Code and the Foreign Account Tax Compliance Act.
Patrick Yip, a national financial services tax leader at Deloitte Touche Tohmatsu, said the tax withholding law required overseas companies which hired US citizens to withhold an amount of tax and pass it to the US Internal Revenue Service. It applies to US citizens who make more than US$97,600 a year – about HK$63,000 a month.
“But practically, Hong Kong and the US are two jurisdictions so I have never seen any companies here which comply with this law,” Yip said, adding there would be no penalty even in the case of non-compliance.
“Even the US companies in Hong Kong which have US employees don’t do it … no wonder the pilots have such big reactions because no one has ever heard about it.”
Cathay will start withholding tax from the second quarter of the year, and pilots said it would affect 300 to 500 of them – up to 18 per cent of cockpit crew.
The pilots said they already had to pay Hong Kong and US taxes, but before Cathay changed its policy they could file US taxes themselves once a year.
CPA Australia’s divisional president for Greater China, Ronald Yam, and the chair professor of accounting at the University of Hong Kong, Amy Lau Hing-ling, said they had not heard of a local company withholding US employees’ taxes.
As for Fatca, it was passed into law in 2010 but will only take effect in July this year.
The anti-tax evasion law requires foreign financial institutions such as banks to declare to US tax authorities the foreign holdings of anyone liable under US tax.
“The US Internal Revenue Service is actively seeking airlines flying into the US to ensure they are fully compliant with all US income tax requirements,” Cathay said. “As an international airline flying into the US, we are working with the IRS on this compliance.”
Cathay added that no disclosure of information would be made to the IRS without “notifying” the pilots.
Yip, an expert on Fatca, said that if Cathay did not comply, the US tax authorities would withhold 30 per cent of its US-source income.
He said it was “strange” that the tax authorities had demanded airlines declare pilots’ financial details because airlines were not financial institutions.
Two American pilots employed by Cathay said the plans would create cash-flow problems for them. They also said that filing tax was a complex matter and they were concerned they might pay more than they should.
There is some definite conflict between the statute and the regulations on the hand and how the IRS and the tax court appear to be interpreting them. The regulations make no mention of “international waters” they simply refer to foreign source income. Generally foreign flagged vessels and aircraft on the high seas are considered foreign under most if not all areas of US law.
I guess one argument in this particular case is Cathay DOES have US nexus by flying into the US. Note: Foreign Airlines are considered “branches” under US tax law not subsidiaries like most foreign corporation do business in the US. Cathay already has to withholding on its full time ground staff at LAX, SFO, JFK etc. Additionally they must apply Chapter 3 NRA withholding to the paychecks of the NRA cabin crew in proportion to the time the spend flying in US territorial Airspace.
Overall I smell litigation in those whole airlines taxation area.
Not so much with Cathay but their is a lot of conflict in the US political system over “foreign” airlines flying to the US. Emirates Airlines along has more new aircraft on order than the entire US airlines industry. Many of the plane purchases are financed by low cost loans from the EX-IM bank. If you go to the PPRUNE or Airliners.net forums you see a LOT of infighting between homelander US citizen pilots and expat US citizen pilots that fly for Emirates and to a lesser extent Cathay and Singapore Airlines.
FYI, I have an email into former IRS attorney Steve Mopsick asking what his interpretation of this whole mess is from a legal perspective.
As I said on another topic, this error in judgement is a shot over the bow of the Chinese that the USSA means business and that these tactics will backfire and cause a worldwide pilots strike. Pilots stick together and IF they unite in action against the IRS every pilot in the world will support them. Most here know that ALL pilots from any country must use English in the cockpit. Personally I hope this explodes into massive strike action.
Here is a repost of someones comment this morning (Monday) on the SCMP article
“An outrage is an understatement. Cathy is under no obligation to comply with any foreign law, and why any employee would put up with such nonesense is beyond me. FATCA is bad for all, please see: ****americansabroad.org/issues/fatca/fatca-bad-america-why-it-should-be-repealed/ If you are a US citizen overseas, support ACA as they are doing a great job. And for those interested please sign the FATCA repeal petition both parties, Republic and Democrats abroad do not support FATCA, they are both against it. ****abolishfatca.com/live/.
The US has gone too far, but other countries seem to not care that their sovereignty is being violated.
If I were a pilot in CP right now, I would just walk out and let them scramble to hire new pilots, they can’t because it takes 3 yeas of training a new pilot and a year for current pilots. They’d be short handed. If CP tried to hold me to a contract I would sue them for contract violation as I never agreed to pay such tax when they hired me.
Stop the IRS abuse! Penalty abuse, support residency based taxation!”
@taxconfuzled “I think some are missing the point here. How can a foreign company impose foreign taxes on a citizen of another country? There is no logic here.”
Oh I thought I was the only one here that sees this 😉 Today we have some armchair tax experts lost in the details of IRS code doubletalk and who are missing the entire point that now all pilots are treated differently by their employer starting a second class of employees. If I was a pilot whose passport is French and I saw my good buddy being screwed by my employer by having his cash flow impaired I would walk into the HQ of Cathay Pacific and tell the President to ahem……*&%^ off. Among pilots it is NOT every man for himself. They will stick together and put enough pressure on the IRS to put an end to this persecution of Americans. Wouldn’t anyone here be pissed off if his friend or even co-pilot was not getting dinged for withholding the same way you are?
All this reminds me of this:
Pilot A: Has an apartment in LA but spends a lot of time in HK.
Pilot B: Has an apartment in HK but spends a lot of time in LA.
So tax lawyers, what would be fair in this situation? Who pays tax to whom? Seems like this is similar to the problem of taxing a multinational corporation.
I am very interested in that IRS ruling! Talk about extraterritoriality. Compliance could be very difficult for a company paying in a foreign currency that fluctuates dramatically against the dollar.
I take your point about the need for fairness between the two, although there doesn’t seem to be anything in the description of the IRS ruling that would imply that it applies only to industries where well-paid employees get to choose where they are based.
How can a country run it’s national budget when you might have the parasite US trying to skim off your tax base?
Unless we enter this utopian world of world government, with a world government budget, you can’t expect people to support FATCA.
At the end of the day, each country has its own agenda and can’t expect to be an agent for the IRS.
So far there’s no IGA country I know about that is changing from RBT to CBT. Everyone attempting to tax everyone else, it won’t every work with IT or not.
The man in the street expects their elected officials to look after their interests, not the US because its broke.
@Publius: Found it. Rev. Rul. 92-106. See also the IRS layman’s summary, Federal Income Tax Withholding for Persons Employed by a Foreign Person. Of course, the IRS cannot actually be bothered to put this ruling online, and the Google Books version is restricted to snippets despite being a U.S. government publication (i.e. not under copyright), so you will have to trust the version which the kind folks at CharitablePlanning.com have put online. It’s even more obnoxious than average for the U.S. government:
Now, I can grok most of that because I’ve been speaking English nearly all my life and have additionally spent the last two years blogging about taxes here. What do you think will be the reaction of a Chinese-speaking employer who is confronted with this gobbledygook, does not have any spare revenue to hire a lawyer, but knows that his employee is a U.S. citizen and that he should be doing something about it because big employers like Cathay do so? Keep in mind that Hong Kong’s Race Discrimination Ordinance does not forbid discrimination based on citizenship.
I understand that this is a revenue ruling. But, this extends way beyond what the IRC is designed to do. This is obviously a blatant attempt to (once again) impose tax laws on persons outside the jurisdiction of the United States. It would be funny if it weren’t so pathetic.
I think this should be used for a separate post to warn every person to avoid U.S. persons and to avoid the U.S.
How about something like this:
@Eric thanks for the link, but where did the 30% come from? Just because of FATCA? That’s my guess.
@taxconfuzaled: yeah, it has nothing to do with FATCA, and the withholding would be at the actual U.S. income tax rate and not the 30% NRA rate, but Patrick Yip is the media’s usual go-to guy on tax issues and he’s a big FATCA cheerleader, so he probably took the chance to push his “everyone write a big check to Deloitte and we’ll help you Comply!” message, which made the poor reporter get the two issues mixed up.
@Eric If CX is really charging 30%, it seems awefully high if FATCA is not involved though. So basically the article has some mixed up stuff in it. For pilots it could actually be in the 30% tax bracket based on their salaries as I think most of them would be earning more than the foreign income credit.
The other thing that was not clear in the article is if the 30% was on the whole salary or on anything above the FEI credit of $93,000 or so. There’s a big difference!
The article is confusing and not well written. It seems like Cathay is afraid of the 30% FATCA withholding if they don’t comply with that other ruling.
See Article XV, Dependent Personal Services, of the US-Canada Tax Treaty: “3. Notwithstanding the provisions of paragraphs 1 and 2, remuneration derived by a resident of a Contracting State in respect of an employment regularly exercised in more than one State on a ship, aircraft, motor vehicle or train operated by a resident of that Contracting State shall be taxable only in that State.”
Article 14 of the US-China Tax Treaty seems to be of the same effect but according to IRS Pub. 901 the treaty does not apply to Hong Kong. Cathay Pacific may be registered as an employer in the USA and file forms 941. If so, there is no reason why its American citizen employees cannot file W4s and claim appropriate exemptions, including the Foreign Earned Income Exemption.
If you go to Airliners.net or PPrune forums you will see a LOT of fighting between “homelander” pilots and “expat” pilots. One issue is simply for a lot of pilots they have two choices work for minimum wage flying for US “regional” airline or go to Dubai, Singapore, or Hong Kong and have a starting salary of $85,000 plus benefits working for Cathay or Emirates.
@noone: I’m still not convinced this has anything to do with FATCA in the first place. Even if Cathay’s worried that they’re going to face 30% FATCA withholding because their financing subsidiaries are non-compliant or HK doesn’t sign an IGA or whatever, making nice with the IRS on such an unrelated issue like salaries withholding doesn’t really solve their problems. Instead I think this is backlash from problems with Cathay pilots playing games with tax authorities in two places to try to pretend to be resident in neither. E.g. here’s a case I remember from last year (see the portion starting at paragraph 61).
@5th Swiss: Chinese treaties don’t apply to HK unless specifically stated otherwise. From our side, the Basic Law says that treaties signed by Beijing can only extended to HK after consultation with the HK government. From the U.S. side, IRS outlines their specific basis in U.S. law for treating HK separately here. HK has no comprehensive tax treaty with the US, nor even an air services DTA, just a a shipping income DTA which specifically doesn’t apply to aircraft.
Here is a nice little blurb from ALPA(Airline Pilots Union) which is affiliated with the FATCA supporting AFL-CIO
WASHINGTON – The thousands of airline pilots who are furloughed or working overseas when they would prefer to fly for a U.S. airline and live in this country makes it clear that no shortage of trained and qualified airline pilots currently exists in the United States, according to the Air Line Pilots Association, Int’l (ALPA).
“There may be a shortage of qualified pilots who are willing to fly for U.S. airlines because of the industry’s recent history of instability, poor pay, and benefits,” said Capt. Lee Moak, president of ALPA, “But thousands of highly qualified and experienced U.S. airline pilots are either furloughed or working overseas and eager to return to U.S airline cockpits—under the right conditions.”
Furlough numbers show no shortage of pilots who are fully qualified to serve as flight crew members on U.S. airliners exists, ALPA pointed out:
•Some 1,154 ALPA members currently are furloughed from their airlines.
•Comair Airlines closed in 2012, furloughing more than 850 highly trained and experienced pilots, nearly all of whom are looking for jobs.
•ASTAR, Evergreen, and Ryan have shuttered their operations recently, putting approximately 800 pilots on the street.
In addition, thousands of U.S. pilots now fly for foreign airlines because those airlines’ stability, pay, and benefits are much greater than those offered by U.S airlines. For example,
•The average first officer (copilot) starting salary at 14 U.S. regional airlines is $21,285/year plus benefits; Delta and United start copilots at $61,000/year plus benefits.
•At Emirates Airlines, new-hire copilots receive $82,000/year plus a housing allowance and other extraordinary benefits. Similarly, Cathay Pacific pays new copilots $72,000/year plus a housing allowance and other extraordinary benefits.
Many expatriate U.S. pilots say they would return to the United States if airline industry conditions improve here.
Moreover, recent safety enhancements implemented in the United States—higher minimum qualifications for airline first officers (copilots) and science-driven, consensus-based rules to ensure that flight crew members receive the rest they need to fly safely—and have had minimal effect on pilot staffing. U.S. airlines have been active participants with ALPA, the FAA, and other industry stakeholders in crafting these safety enhancements and preparing for their implementation, which were first announced more than two years ago.
Capt. Moak asserted, “The real solution to preventing any future pilot shortage is for airlines to produce consistently profitable results. Congress can support this goal by implementing pro-growth aviation policies that reduce the tax burden on airlines and give the industry an opportunity to compete and prevail in the international marketplace.”
Founded in 1931, ALPA is the world’s largest pilot union, representing nearly 50,000 pilots at 31 airlines in the United States and Canada. Visit the ALPA website at http://www.alpa.org or follow us on twitter @WeAreALPA.
I still haven’t been able to find a good explanation but a couple of things I have heard as follows. For the past few years the IRS has been intensively auditing expat pilots and in many cases seeming to simply refuse all FEIE elections from expat pilots. However, after being challenged in most of these cases it appears that most of the time the IRS ended up losing or collecting very minimal amounts of additional tax given the exertion of resources undertaken by the IRS. So one possibly scenario is like on so many previous occasions the IRS simply trying to deputize foreign airlines in its service to get around the fact they have been unsuccessful in collecting additional tax through individual audits.
Do you think the USA might be blackmailing Cathay Pacifica by threatening to rescind its U.S. landing rights if it doesn’t withhold 30% from the U.S. pilots’ paycheques?
Virginia La Torre Jeker has an article up on Cathay’s withholding over on Angloinfo:
Here’s a new article “This job has the world’s worst tax return” which says American international pilots (also flight attendants, mariners, even cruise ship entertainers) have to keep track of time spent working (i.e. flying, sailing) in foreign countries, international waters and the USA. Total insanity! BTW, there is no foreign exemption for working in international waters so I guess the U.S. lays claim to all international waters too. U.S. hubris has no bounds.