Coincidentally, two separate news items which have the potential to collide in a very strange way came out on the same day here in Hong Kong. The bad news first:

Hong Kong and US sign tax information agreement

The Secretary for Financial Services and the Treasury, Professor K C Chan, signed today (March 25) in Hong Kong on behalf of the Hong Kong Special Administrative Region Government an agreement with the United States of America (US) for exchange of information (EoI) relating to taxes. The Consul-General of the US to Hong Kong and Macau, Mr Clifford A Hart, Jr, signed on behalf of his Government.

The South China Morning Post cuts through all the government euphemisms in its headline: “Hong Kong agrees to hand over financial details of Americans working in city to US tax authorities”. However, this is not as bad as it sounds, for reasons I’ll discuss after the jump; the very existence of this TIEA, rather than jumping straight ahead to a FATCA IGA, has some interesting implications for Hong Kong and Beijing’s larger strategy towards FATCA.

In addition, there’s another seed of hope for “U.S. Persons” here who have the crazy idea that they deserve the same rights as any other Hong Kong residents, even if the government doesn’t yet realise its implications:

The tax exchange information agreement

On the face of it, this TIEA looks like bad news for “U.S. Persons” in Hong Kong. The agreement signed by the Hong Kong government, available here on the Inland Revenue Department’s website, is far from containing “highly prudent safeguard measures to protect taxpayers’ privacy and the confidentiality of information exchanged”, as Secretary for Financial Services & the Treasury (and former U.S. Person) KC Chan so misleadingly described it. Instead, it’s a lightly-edited version of the OECD Model TIEA from 2002, right down to its removal of the requirement for double criminality for exchange of information, and its mention of words and structures like “Anstalten” which are foreign to both Hong Kong and Washington.

In Hong Kong, the legal framework for entering into stand-alone TIEAs (as opposed to information exchange under a comprehensive double-taxation treaty) is relatively new. Furthermore, as we pointed out last year, there is still no legal basis for the Hong Kong government to engage in automatic exchange of information of the type that the U.S. demands under FATCA. In a speech at the time, Starry Lee, a major pro-government legislator, expressed very negative attitudes about further broadening of information exchange, and also pointed out the obvious fact that any alleged “reciprocity” of a TIEA is in fact useless to Hong Kong:

As for the rationale behind this, everyone surely is quite clear, that Hong Kong has low taxes and few types of taxes, and under an information exchange framework, no doubt Hong Kong businesses will be continually requested to provide information, whereas the chances for Hong Kong to request others to provide information will be comparatively small.

Therefore, the DAB agrees with these suggested amendments proposed by the Government, and believes that they meet the minimum regulatory demands, including that they do not accept tax information demands relating to retrospective assessment of tax or overseas tax investigations. Aside from this, the Government should commit to disclosing relevant requested information only on the basis of international agreements and of Hong Kong law.

As the press release admits, the government needs the support of Lee and her fellow legislators in order to implement the new TIEA:

The TIEA will become effective after Hong Kong has completed the necessary legislative procedures for bringing the agreement into force. For this purpose, an order is required to be made by the Chief Executive in Council under the Inland Revenue Ordinance. The order is subject to negative vetting by the Legislative Council.

What’s more interesting about this agreement is what it reveals about Hong Kong’s future intentions towards FATCA. The government’s press release blandly states:

FATCA requires US persons, including those who live outside the US, to report to the US tax authorities their financial accounts held in other jurisdictions, and requires foreign financial institutions including those in Hong Kong to report the financial information in respect of their US clients. Subject to the completion of the ongoing discussions, Hong Kong intends to enter into an intergovernmental agreement with the US to lay down the arrangements which help facilitate compliance by the financial institutions in Hong Kong. As a complementary measure, the signing of a TIEA with the US will allow the US tax authorities to file a request to the IRD for EoI under specified conditions.

The question no one has asked yet: why is Hong Kong even bothering to sign a TIEA? Aside from Switzerland which was under heavy pressure from the U.S. to provide information about the activities of a few banks, plus Mauritius for reasons I can’t discern (thanks to Just Me for the correction), no other jurisdiction has signed a new TIEA along the way to a FATCA treaty (though Brazil did finally ratify an old one they’d had sitting around for the better part of a decade); in particular, other small tax havens like the Cayman Islands and Bermuda just went ahead with non-reciprocal Model 1B or Model 2 IGAs which do not require a pre-existing TIEA. Even Mauritius’ TIEA was not signed in advance of its IGA, but rather at the same time.

However, a pre-existing TIEA does appear to be a precondition for any FATCA reciprocity, even the fake kind of “best effort” reciprocity the U.S. has offered to European countries under Model 1 IGAs. Our banker overlords would clearly prefer to jump straight ahead to a non-reciprocal FATCA IGA as soon as they can deal with outstanding issues like exemptions for Hong Kong retirement plans — their only goal is to get certainty ASAP that they will be able to dump as much as possible of the compliance costs onto the IRD and thus on Hong Kong taxpayers. So the fact that the Hong Kong government decided to spend its limited time and resources negotiating this seemingly-superfluous TIEA suggests quite strongly that the local banks are not the ones in control of Hong Kong’s policy towards FATCA, but that Beijing is.

I’ve previous expressed doubts that the Chinese government has any actual desire for tax & asset data which the U.S. might provide them under genuinely reciprocal automatic information exchange, and law firms like Dezan Shira have also voiced similar sentiments. Like Moscow, Beijing may be demanding more reciprocity than that provided by a Model 1 IGA simply as a matter of principle and equality of sovereign countries, or to put pressure on the U.S. government and force them to make commitments which will enrage domestic constituencies, or to use the U.S. government’s failure to meet those reciprocal commitments as justification for their own retaliatory actions.

Amending the anti-discrimination law

On a totally different topic, Hong Kong’s Race Discrimination Ordinance at present explicitly delineates citizenship as a permissible ground of discrimination:

(2) An act done on the ground of any matter specified in subsection (3) does not constitute an act done on the ground of the race, colour, descent or national or ethnic origin of a person; and section 4(1)(b) does not apply to a requirement or condition as to any matter specified in subsection (3).

(3) The matters specified in this subsection are …

(c) the length of residence in Hong Kong of the person; or
(d) the nationality, citizenship or resident status of the person under the law of any country or place concerning nationality, citizenship, resident status or naturalization of or in that country or place.

Hong Kong banks have already taken advantage of this loophole to discriminate against Hong Kong residents of certain nationalities, providing an obvious template for how they’ll treat Hong Kongers with U.S. passports if FATCA really comes to our city. As this 2010 article in HK Magazine described:

It’s something most of us take for granted, but for Bibi and her mother, the simple task of opening a bank account has proved a frustrating struggle. Bibi was born and raised in Hong Kong and her mother has lived here for more than 20 years. They both have permanent residency, and both Pakistani and British National (Overseas) passports. Two months ago, her mother got a new job and wanted to open a Hang Seng Bank account, but unlike average Chinese Hong Kongers, who only need to submit their ID card, proof of address and the required sum of money, the teller at Hang Seng Bank asked whether she was Indian or Pakistani. “Then the teller asked if my mother still holds a Pakistani passport,” recalls Bibi. “When my mom said yes, the member of staff told her that she was being rejected because ‘Pakistan is a terrorist country’ and they have to prevent cases of money laundering for terrorists.”

On the bright side, some bank tellers apparently tried to show a bit of humanity and help her get around this ridiculous policy by putting some fake data on the account-opening form:

Bibi herself was once told to just put “Chinese” as her nationality in order to speed up the process when opening a bank account a few years before …

Now, the Equal Opportunities Commission, concerned by a rising wave of anger against mainland Chinese tourists and immigrants in our city, has proposed broadening the protections offered by the Race Discrimination Ordinance. Mainlanders are not protected under the existing RDO because they are not defined by traditional racial categories, but rather by place of birth and legal status outside of Hong Kong, meaning that any amendments to protect them may also end up protecting “U.S. Persons” who are also defined by similar criteria. Even if not, the review and public consultation process will provide opportunities for members of other groups affected by discrimination to voice their concerns:

However, if you are not willing to rest your hopes on such a thin reed, or if you are politically uncomfortable with the idea that Hong Kong’s pro-Beijing camp is the source of all of these measures which might protect your right to lead a normal life as a U.S. citizen outside of the U.S. (while pan-Democratic camp members like Kenneth Leung — elected to a functional constituency seat by the votes of a few thousand accountants — raise their voices in support of every unreasonable demand by Washington), the safest course of action is simply to stop being a U.S. citizen, and then hope that the banks do not continue to discriminate against you based on your former citizenship status.