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.
For the pilots that are dual citizens, it looks like the US could have more blue books thrown back in its face soon. Pilots are a pretty mobile bunch, do they really need a US passport? If they have a visa waiver passport they’ll survive.
The only use that little blue book has for pilots is in case they need some extra toilet paper.
@ Joe Blow
Easy to say if those pilots already have a second passport, but how many actually do?
This will pretty much close off all chances of *US Person* to get a good paying job in another country unless they have a skill set that is unique, they will have to get rid of the US taint. Lets not even go into starting or having a business of your own with the US taint elsewhere… More & more stories of what is to about come will show up. So all those govts willing to sign on so easily…. lets watch your tax basis start to bleed… U signed something that made people in your country, *second class* & got totally nothing in return now as your special treat… money will flow out of your country. If u think the black market before was bad… now it will be worse.. lots of luck in tracking those funds…
Wait, what the heck is this? This is something in addition to FATCA?
The income threshold sounds like the Foreign Earned Income Exclusion level…
So the US is expecting non-US employers to withhold taxes from paychecks???
Surreal.
Being eligible for a second passport is more common than you would believe. Do you know how many US citizens have a foreign born parent or grandparent? Loads, as Homelanders they don’t take advantage of their circumstances.
Of the top of my head I could give you 20+ names of Americans who could get second passports but don’t bother.
The figure must be in the tens of millions in the US nationally.
One situation I came across was a lady in a visa waiver country who fulfilled the residency requirements, didn’t go through the process, went back to the US for a short period of time, and returned, and now working her way through the residency period once again.
There are some Americans who think a second passport is a betrayal or has potential unknown obligations (like CBT wasn’t enough), while others like me see it as all benefit no down side. (excepting military service in some instances, but even that usually disappears if you apply after a certain age in many cases).
Oddly enough FATCA may increase the number of Americans using their family lineage to apply for second passports so they know they have that ‘exit door’ from FATCA / CBT if required.
I wonder has there been a sudden increase the other way around at foreign embassies of Americans applying for citizenship of other countries through lineage?
Please remember the US won’t approve your renunciation if don’t have a second passport already in hand.
How very bizarre. I wonder where Cathay Pacific sees a requirement to do not just reporting but withholding? I thought FATCA was about information reporting of passive income and account balances. Is the US threatening to impound an airplane the next time it touches down in the US? Is the US thinking that FATCA was so wildly popular in bringing the joys of 1099 reporting to the rest of the world that they want to try W-2 reporting also?
As an aside, pilots and flight crew who travel with the plane and who are US persons based abroad will find the FEIE of limited value if they travel to/from the US and/or spend lots of time over international waters. http://www.aicpa.org/interestareas/tax/newsandpublications/taxnews/pages/20130314.aspx
@Don
I have heard of it before & I know some people who did do this. I see nothing wrong with it… gives u more options & u are not dis-loyal to any country… u are just doing what is best for u. Hmm… I wonder if this will have any effect with Air Canada or any other airlines also… if it will… man… new can of worms…
@Don
I met a US person not too long ago from California who applied for and received Polish nationality through a parent and then used it to become a local hire here in the UK. Saves the trouble (and expense) of the employer (in her case a UK government agency) trying to get a work permit (and subsequent renewals). It also has the benefit of not having your ability to live in the country tied to your employment with your employer.
@Edelweiss – That’s exactly what I did just not Polish in my case another EU country. Never had any regrets.
The only question is whether Congress is going to force people to choose either (US / CBT / FATCA), or keep living in the shadows unless life becomes untenable then renounce.
The US may also find people just going for Green Cards, make a quick buck, then leave the US knowing they avoided the CBT trap. The US must think people are stupid. They’re not stupid, they just won’t make a total commitment to the US and keep their overseas financial freedom.
@Edelweiss
There is some dispute among members of the ABA Tax Section as to the usefulness of the FEIE. I would say it is more useful for individuals working for foreign airlines than those working for domestic airlines but living outside the US. I think at some point the courts will have decide whether a foreign aircraft or ship in international waters a “foreign” territory for the purposes of US law. This is probably an issue that will have to be decided by SCOTUS.
Tim
Well, let me be the first enthusiastic poster here. I’ve just forwarded this article to 5 of my “homelander” family telling them that I hope their children have no intention of working overseas during their lifetime, as they would be at a huge disadvantage vis a vis nationals of any other country.
This put a HUGE smile on my face.
🙂 It’s Cathay Pacific not Cathy Pacific but I guess everyone noticed that, right?
No, not me. Thanks, Em. Updated.
Well that was fast. The thread title changed to Cathay but the URL remains as Cathy. I realize the URLs aren’t so fixable.
Will that include all those workers (like returning war-torn vets) being encouraged to come work in the Canadian oilpatch? The ones who probably get no warning of their US tax and FBAR responsibilities in addition to the required returns for the country in which they actually “reside” and work? Or do they now? Their net wages for their paycheque will have had withholding taxes taken by both Canada and the US?
Is that so it is a US tax (and Canadian or other country) tax compliance guarantee: if you want to claim back those taxes withheld, you must file those tax returns — and reports.
Calgary 411: Re: the oil patch workers, I certainly hope so. The faster the news spreads, the sooner this crap will get fixed.
@Tim
Assuming, of course, that those working for foreign airlines are also based outside the US, I would agree that the FEIE would be more attractive to them than to someone working for a US airline and based outside the US.
As I understood the case, the time in the US and the time spent over international waters were not able to be excluded under the FEIE. Given that US airlines can only fly between the US and a foreign country (and not foreign country to foreign country), there is likely to be a greater proportion of “foreign” source income if working for a non-US airline. Theoretically, they could spend all their time flying domestically within a foreign country. Or, flying between two foreign countries in which case only the time spent over international waters is not excludable.
Hong Kong is a particularly interesting case because it has one of the lowest income tax rates. It makes it a horrible place to be a US person.
New fraud for the IRS, crime gangs fraudulently putting in IRS returns for refund of 30% withholding money by stealing ‘US persons’ data from FFIs or some other variation.
I’m sure there’s potential in it.
There is an argument that has been made by some high level US tax lawyers that a “Foreign” ship or airplane in international waters must be considered “foreign” under the plain reading of the statute and maritime law unlike say a US ship or airplane in international waters that could be considered part of the US still. This is probably the type of issue the US supreme court would have to decide. I will note the recent tax courts cases where the US has successfully argued against the validity of the FEIE in or over international waters all dealt with the US flagged airlines and ships with US citizen crewmembers residing outside the US.
Again this outside my area of expertise but there implication from the US Supreme Court decision in Morrison. In general the US tax court is not necessarily the best body to be the final arbiter of these issues.
@Edelweiss
HK has the lowest tax rate because they encourage everyone to work hard, save, & invest back into HK. Because of fatca… HK is slowly taxing on things they didn’t before. I am not sure but I think there is now a new tax… if u buy property not as a HK citizen… there is a tax put on it… sort of a luxury tax… they didn’t do that before. HK is expensive as heck.. no one talks about… how many bedrooms… they chat about square footage…
@Don
Do not take a Green card… treated the same as a citizen without rights, voice, or votes but u are on the hook for CBT until u pay an exit tax or pay to give it back after paying whatever they demand.. Not sure… Better on a visa… once done… just wave… see yeah plus if u overstay your visa… u can still work.. until u are caught
@Tim
I hadn’t appreciated the added distinction between a US airline and a foreign airline.
While trying to find the case of the flight attendant and the FEIE I saw an article saying that Antarctica isn’t considered “foreign” by the IRS (because it’s not controlled by a foreign government) and as such a US person scientist (for instance) wouldn’t get any FEIE.
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.
This has absolutely nothing to do with FATCA and Patrick Yip should know that. Virginia La Torre-Jeker wrote a piece about the real issue last year, which is even more obnoxious than FATCA:
http://blogs.angloinfo.com/us-tax/2013/08/26/tax-shock-for-foreign-employer-with-us-employees-learn-your-withholding-duties/
I’m trying to find the actual revenue ruling.