Hong Kong, US Wrapping Up FATCA Agreement
Hong Kong and the United States have substantially concluded discussions on an inter-governmental agreement (IGA) to simplify Hong Kong financial institutions’ compliance with the Foreign Account Tax Compliance Act.
The Financial Services and the Treasury Bureau (FSTB) said that the IGA “will reduce Hong Kong financial institutions’ reporting burden and facilitate their compliance with the act, and will include exemptions for financial institutions or products which present low risks for US taxpayers to evade paying tax.”
FATCA, enacted by the US Congress in 2010 and to take effect on July 1, 2014, is intended to ensure that the US Internal Revenue Service (IRS) obtains information on financial accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, the US Treasury has developed model IGAs. Under the terms of the Model 2 IGA, which Hong Kong and the US are expected to sign later this year, financial institutions in Hong Kong will need to register and conclude separate individual agreements with the IRS.
Under these agreements, institutions will seek consent from their US account holders to report their account information to the US IRS annually. However, the agreements will be supplemented by exchange of information on relevant US taxpayers at the government level on a need basis and upon request, pursuant to a tax information exchange agreement signed between Hong Kong and the US in March 2014. Hong Kong’s financial institutions have therefore been reminded by the FSTB to assess their relevant FATCA compliance implications for their operations and clientele. They should have the appropriate procedures and systems in place, it said.
The FSTB added that “the IGA demonstrates Hong Kong’s commitments to enhancing tax transparency in the international arena. It will lower overall compliance costs for the industry and safeguard the interests of these institutions and their clients.”