On November 13, 2014, Hong Kong and the United States signed an inter-governmental agreement (IGA), which will require financial institutions in Hong Kong to comply with the US Foreign Account Tax Compliance Act (FATCA).
FATCA provides the Internal Revenue Service (IRS) with the tools it needs (not a scalpel but a chainsaw) to obtain information on financial accounts held at foreign financial institutions (FFIs) by US persons. An FFI’s failure to disclose information on their US clients hits it where it hurts the most: in their wallets. Very simply, it results in the withholding of 30 percent tax on payments of US-sourced income.
Model IGAs are creatures of the US Treasury and have been developed to overcome a common obstacle faced by FFIs: foreign laws that prohibit an FFI from complying with the terms of FATCA. Hong Kong and the U.S. have entered into a Model 2 IGA, in which FFIs in Hong Kong must report certain financial account information directly to the IRS. As such, financial institutions in Hong Kong must “register and conclude separate individual agreements with the IRS.”
Under this agreement, Hong Kong institutions must follow a procedure before disclosing account holder information to the IRS. In step one, the institutions must obtain consent from their US account holders to report their account information to the IRS annually. Even if US account holders withhold their consent, such information must still be disclosed to the IRS, albeit anonymously, through “aggregate reporting.” Finally, such reporting can result in the IRS making what’s called a “group request,” in which it makes a request for specific account holder information on an as-needed basis. Authority for group requests comes from a tax information exchange agreement that was signed between Hong Kong and the US back in March 2014.
Hong Kong’s institutions have been instructed to have “the appropriate procedures and systems in place to protect clients’ monies, investments, or other interests in financial instruments from withholding by third parties, and to avoid aiding clients to engage in tax evasion locally or overseas.”
As reported by Brian Mahany in his blog, “Hong Kong Signs FATCA Pact,” Hong Kong’s signing was a significant achievement for the IRS:
“There is a significant amount of cross border commerce and banking that goes between the US and Hong Kong. Although not as well known of a tax haven as the Cayman Islands, Switzerland or Monaco, there are billions of dollars belonging to Americans on deposit there.”
The first reporting under the IGA is scheduled to begin in March 2015.