Just came back from watching Transformers: Age of Extinction, in which Hong Kong is decimated in some kind of incomprehensible battle amongst resident-aliens, non-resident aliens and rogue agents of the US government. Silly summer escapist fare, right? Then again:
Firms face Hong Kong and US penalties for failure to register for Fatca
Financial companies warned of double hit on fines if they do not register for US tax law
Toh Han Shih firstname.lastname@example.org
Hong Kong financial institutions that failed to register for the Foreign Account Tax Compliance Act (Fatca) by the July 1 deadline risk suffering not only US penalties but also penalties for violating Hong Kong regulations, which may include losing their licences, said Sharon Lam, a partner at Deloitte Touche Tohmatsu.
Under Fatca, financial companies around the world are required to report to the Internal Revenue Service (IRS) in Washington on accounts of United States taxpayers in order to prevent tax avoidance. Those that fail to do so face a 30 per cent withholding tax penalty on their US income.
As of July 2, some 2,008 financial institutions in Hong Kong have registered with Fatca, according to the IRS. This is a fraction of the tens of thousands of financial institutions operating in the city, Lam said.
“I think a significant number of Hong Kong financial institutions have not registered with Fatca by July 1,” she said.
Hong Kong came 15th in terms of the number of financial institutions registered with Fatca as of July 2, according to the IRS. The Cayman Islands had the most financial institutions registered with Fatca, at 17,207.
Britain was second with 6,994 and Switzerland third at 4,279. Singapore had 1,072 registered while mainland China had just 213.
After Hong Kong signs an intergovernmental agreement (IGA) with the United States on Fatca, Hong Kong law will require its financial institutions to comply with Fatca, said Lam. “If they don’t comply with Fatca, they will violate local Hong Kong laws,” she said.
Foreign institutions covered by Fatca include banks, trust companies, money lending companies and securities firms.
If a Hong Kong securities company violates the city’s laws by not complying with Fatca, it risks having its licence revoked by the Securities and Futures Commission (SFC), Lam said.
“Hopefully, we expect the Hong Kong IGA will be signed by the end of this year,” Lam said.
An IGA is an agreement between two jurisdictions to exchange information, said Florence Carr, Asia-Pacific Fatca Lead at Ernst & Young.
IGA allows financial institutions that have registered with the IRS on Fatca to have compliance requirements simplified compared with the full Fatca regulations, Carr said.
“The HKSAR has stated that financial institutions which are not exempt must register and comply if they do not want to suffer the punitive tax on US-sourced payments,” Carr said.
The SFC was unable to comment at the time of going to press.
Apparently the smaller firms have decided it’s cheaper, and safer to take the 30% hit and avoid FATCA.
The boneheads in DC perhaps didn’t factor in the possibility that smaller firms might defy the USG. So what’s DC going to do? Raise the 30% to 40% or even 50% to force compliance?
Is the HK Government going to start putting people out of work for the sake of the US Government? It’ll be interesting how this plays out.
Also smaller firms could pay the 30% in the short run while they seek opportunities out of the US dollar. There were some articles on the net discussing that point some time ago.
“Apparently the smaller firms have decided it’s cheaper, and safer to take the 30% hit and avoid FATCA.”
Or maybe they simply haven’t paid much attention yet to FATCA, if they know about it at all. This is probably true for tens or hundreds of thousands of other FFI’s worldwide. The IRS may have issued a temporary stay of execution, but eventually the financial world will be divided into a very stark binary system – either you are FATCA compliant or you aren’t. There will be no in-between.
All of this will surely hasten the demise of the US dollar as the world’s reserve currency as global investors en-masse begin to dump their T-bills, US stocks and negotiate more and more non-US currency swaps. I really think it’s time for the United States to placed on a 24-hour suicide watch.
Hong Kong is a Model 2 IGA state – am I missing something? What HK law would be broken by a FFI not signing up to FATCA?
There are simply no transactions – none – that cannot be reformulated to avoid FACTA taxes entirely. The problem is that the means of re-engineering legitimate transactions so as to avoid them will impose transaction costs. For example – if a small, non-compliant HK FFI named “X” wants to invest in US T bills directly via Bank of America, under FATCA, he cannot without having the 30% tax. Answer: enter into a swap transaction with HSBC locally, swapping HK dollars and interest rates for US$ and T bill rates. Cost – a few basis points. Annoying, yes. Likely to dissuade “X” from dealing in US $ unless absolutely necessary: certainly. But crippling? Not in a million years. If the cost of compliance for an FFI runs into the hundreds of thousands per year and their profits in US$ activity are negligeable, why on earth would they bother? As the marginal trading in US$ begins to fall away, the dominance of the US dollar fades away. Not overnight – but as the small fry FFI’s leave the field, the medium fry will find it is less and less “worth it” and do the same. On and on up the chain. The state-owned enterprise is another king-size exemption in the FATCA armory. All Bank of China – and every other state-owned financial enterprise – has to do is set up a clearing house internally for US$ trading. Allow Chinese banks to swap in their T-bonds on interest payment dates and charge a small “repo” fee for the service. It is child’s play to avoid the tax for anyone who spends ten minutes figuring it out. The only question is the cost of the service providers who provide the means of escape. Plenty can do it – over time, the market will get cheaper and more efficient and more and more will be tempted to throw over the “compliance condors” as people here like to call them and de-register.
As has been said before by many – FATCA in the long run is simply going to torpedo the US economy. It won’t be an overnight thing, but the more the shots the US empties into its boots, the more likely they are to hit their foot and start bleeding.
@SteveKlaus – all an IGA does is permit a registered FFI to send data directly to local tax authorities instead of the IRS. The obligations are otherwise the same. All of the Canadian banks, for example, will have registered and will be incurring on-going compliance costs each year in addition to the millions spent so far. The intention of FATCA is to require people to exclude unregistered FFI’s ENTIRELY from their universe of trading partners, at least as regards US$ transactions. As I note above, this is virtually impossible to do and the world will very quickly sort out which institutions will act as intermediaries for the rest. The end result will be a concentrating and then a lessening of use of the US dollar, not an increase in compliance with US wishes. It will take time for equilibrium to re-establish itself though.
@Deckard1138 – Yes it could be ignorance on the part of smaller firms.
With regard to the US dollar, 9 major countries have signed currency swap deals with China, thereby bypassing the Greenback and counting.
You could take the view the China currency swap deals are the natural mirror reaction to FATCA. FATCA gives IGA countries EVEN more incentive to do these agreements to bypass the US dollar thereby weakening FATCA with each new country.
To memory I believe the UK, France, Germany, Japan, Germany, have all signed up with China.
Once the infrastructure is in place, it’ll be relatively easy to ramp it up.
The US is IGAing its way out of sole reserve currency status. Ironically China could someday demand its own version of FATCA on the US Government and when that point comes the US will just have to fall into line.
China won’t forget how the USG tried to force FATCA down their throats.
FWIW, here’s what should be a complete list of banks in HK (participants in the local interbank clearing system)
95% are also on the GIIN list. Most of the ones that aren’t are South Asian or Chinese banks — though, interestingly enough, the Canadian Imperial Bank of Commerce is also absent.
Many of the smaller firms probably don’t need to deal much in US dollars anyway. So instead of signing up for FATCA, they are probably just getting out of the dollar entirely or deciding not to deal with it if they were previously considering doing so.
Non-US banks are kicking out Americans abroad, so why wouldn’t they kick out the US dollar as well? Who wants to deal with a currency that can lose 30% at the whim of Uncle Sam? After all, the real problem for the banks isn’t with expats, its with using the US dollar for investments and making payments.
The botton line is that capital goes wherever it is most welcome. The US dollar officially “wore out its welcome” on 1 July 2014 and the chickens will come home to roost.
Carl Levin’s legacies: The destruction of the American diaspora and the end of the US dollar’s reserve status.
The era of competing reserve currencies has officially begun.
A good video clip.
A guy name Edward explains the Republicans Overseas legal challenge in the US amongst other things.
It was on a Swiss website.
Part of my personal response to FATCA was to divest myself and my family of all US investments– at the end of this, US dollars were sold, Canadian dollars were bought, and the former US investments were replaced with Canadian held investments. These changes were made to protect my hard earned savings from any potential confiscation by the Treasury. For me, this seemed to be a reasonable response to FATCA– eliminate the very small but real possibility of my retirement assets being frozen or seized by the US, now or in the future.
I suspect many of the 7M ex-pats with similarly thin ties to the US are restructuring their savings as I did– divest out of the US to protect ones’ financial future. Not good for the US. This is a reasonable man or woman’s response to FATCA though.
Non-US financial institutions and governments will react in the same way over time as they see companies burnt by the flame of the US government (eg, fines levied against BNP Paribas). The trend, I believe, will be away from US dollar assets and trades. FATCA will have expensive, unintended consequences.
I have said this before but, it was part of our families personal response to also divest out of anything related to the U.S. I had urged my spouse for decades to make sure some of his RRSP was invested in the U.S. since I was trying to be a “good American abroad” I felt it was part of my duty as an expat American. Imagine my surprise when the U.S. assumed people like me a criminal. My spouse had only invested in the U.S. to please me and had never been too sure he ought to go that way as he tends to invest in things which will not only help him to retire but, things which he finds morally acceptable. He wasn’t too sure about some of the U.S. holdings all along.
Upon learning about FATCA and I do mean that very day he told the very large Canadian company he works for to make sure not one penny was invested in any U.S. holdings. I can’t think that our family and B.C. Docs are the only ones who had this reaction all over the world.
The U.S. has recently invested a few billion dollars to address the immigrant problems at the southern border. They needed to do something and I’m not arguing that they should not. However, not one penny was spent doing a cost/benefit analysis on FATCA. There was zero concern for expat families and all were assumed criminals until proven otherwise. It is hard to swallow that they can so quickly move to solve problems involving people who are not even citizens while at the same time ignoring the collateral damages FATCA has caused to their own citizens abroad.
China will not sit still for this treatment for long. Sure, they will sign an IGA but, I highly doubt that means they are going to be turning over very many people. That’s not the way things are done there. Going under the table is considered standard practice there and not that bad of a thing to do. It’s almost expected. Further they may as mentioned above see FATCA as a way to get a leg up on the U.S. dollar. During the primaries one candidate mentioned they were going to “get tough on China” to which the opponent replied “Have you ever tried to get tough with your banker?” This isn’t going to turn out well for the U.S. in the long run at all.
Does anyone know Russian? Does IRS translate into Russian KGB?
And for even more nails in the USD coffin…….
I don’t know where to place this, or if it’s been posted elsewhere on Brock, but according to a recent Federal Voting Assistance Program report, Asia and the rest of the world is seeing a surge in US citizens.
60% Surge in Total Overseas U.S. Citizen Population
“Our friends at the Federal Voting Assistance Program (FVAP) recently released a report, A Model for Developing Estimates of U.S. Citizens Abroad: Final Technical Report, that presents a new model for developing estimates of American citizens living overseas. Among the report’s most eye-catching results, “the number of U.S. citizens living overseas has grown steadily from 2000 to 2010, increasing 60% overall during that period,” equaling a robust average annual growth rate of nearly 5%.
This is an incredible growth trend and points to the need for increased voter assistance to civilians as well as military members overseas. OVF notes that no equivalent increase in the rate of overseas civilians voting has been experienced, despite the improvements in online services that has occurred…”
@Bubbles.. “OVF notes that no equivalent increase in the rate of overseas civilians voting has been experienced, despite the improvements in online services that has occurred”
That last quote is a hoot.
To me this looks like one of two explanations to explain growth of the “expat population” without in an increase in US voting.
1.) This quasi governmental entity is stuck with the mentality that they are defining who is and is not a US Citizen instead of actual people doing that. To put it bluntly there are likely millions of people outside the United States who do not think of themselves as US Citizens nor want to be considered same.
2.) People are relinquishing (undocumented) and just dropping off the radar. The US Passport warning pages I think makes clear that if you do certain things you lose your US Citizenship so guess what people are taking that seriously.
@Bubbles….. some more excerpts;
“Many, for example, initially go overseas to temporarily work in either a civilian or
military capacity, with some choosing to stay in the host country as a result of marrying a local or to
retire. Another example would be children born to immigrants in the United States whose parents
then subsequently return to their home country. These are just two examples of situations in which a
U.S. citizen could also have citizenship in the foreign country, and these individuals might not be
represented in counts of resident U.S. citizens made by foreign governments.”
“Therefore, the estimate should exclude U.S.-born individuals who migrated overseas and who, for whatever reason, are no longer U.S. citizens with the right to vote in U.S. elections.”
and chart on Page 39 and 77
@Bubbles…..one thing we did not think of.
Why is the United States so possessed that they feel they need to figure out the population of people that THEY consider US Citizens who are not in the homeland?
No other country on earth is so inclined to do this, none.
I have to admit that I haven’t and probably won’t read the technical report, but from what I’ve read of the overview, the OVF hopes that the report will get everyone more funding to encourage overseas voting.
“The new model is expected to help other federal and state agencies in allocation of funds and manpower for overseas citizen services. OVF is proud to continue to provide our voter services to and give a greater voice to overseas Americans, a powerful and growing voting bloc that FVAP estimates at more than 4.3 million as of 2010.”
Maybe they should instead be looking at other country’s emigrants to see if they care any more or less than we do about voting from abroad. Oops, I forgot – exceptional US doesn’t care about international norms or the fact that their citizens might want what the citizens of other countries want – to be left alone and not stalked by the homeland. Instead of spending piles of taxpayer’s money on outreach, they might do better to study what exactly the USG is doing to cause people to disengage. They can start with citizenship based taxation and the stalking the US government is doing there also.
HK’s Equal Opportunities Commission is continuing to discuss adding nationality & citizenship to the Race Discrimination Ordinance. (See previous post for a translation of an earlier article on this topic).
(IIRC the spark for this was behaviour by customers towards airline stewardesses, which couldn’t be prosecuted as sexual harassment. When Cathay Pacific complains, people pay attention. Remember what other problems Cathay was complaining about recently?). Anyway, back to the article:
FWIW, “new immigrants” doesn’t mean all immigrants, it’s just a politically correct euphemism for mainlanders. However, it sounds like they are planning to write the law in such a way that it would protect all residents from discrimination based on place of birth or legal status outside of Hong Kong. (Hopefully the finance sector does not realise the implications of this and try to get themselves an exception to conducting themselves by the same laws which apply to the rest of the community.)
The other problem is that this proposed legal amendment is likely to be very unpopular among members of the public in Hong Kong, because they’ll see it as an attempt by the government to exert a chilling effect against public protests of the government’s policy of allow high levels of mainland immigration & tourism.