For Americans in China, the Taxman Cometh
The long arm of the American tax man has officially reached its way to Hong Kong. The question is, will it extend to the rest of China?
Hong Kong, a special administrative region of China, signed an agreement with the U.S. on Tuesday to share tax information about Americans who work or have assets in the southern Chinese city. The agreement is part of the U.S. government’s global campaign against tax evasion and an attempt to recover an estimated billions worth of lost revenue.
The information-sharing agreement is strictly that – the two tax authorities will trade files on an individual if one authority asks for it. Since Hong Kong doesn’t demand taxes from its residents who live abroad, it’s likely the information sharing will be a one-way exchange.
More importantly, the agreement is a precursor to an expected inter-governmental deal that will see the enforcement of the U.S. Foreign Account Tax Compliance Act, or FATCA, in Hong Kong. Under such an agreement, the U.S. government would require financial institutions to disclose details about American-held bank accounts to the U.S.
Initially slated to take force in January of this year, FATCA requires all U.S. citizens and green card holders who reside outside the U.S. to disclose their accounts and financial information. It’s triggered a substantial backlash: Many in Asia have given up their U.S. citizenship or green cards rather than put up with all the paperwork and additional tax liabilities. At the same time, many private banks in Hong Kong have begun refusing to take on the accounts of U.S. citizens and green card-holders, saying the cost of the tax-related paperwork is too great
Though FATCA has been in the works for years, its implementation has been delayed to July 1, partly because many countries haven’t yet signed agreements to abide by its rules. In Asia, only Japan has signed an intergovernmental deals to be fully FATCA-compliant. Hong Kong said on Tuesday a deal is in the works.
Now, all eyes are on China and how the rest of the country will deal with the FATCA.
“The general expectation is that that China will sign,” said Charles Kinsley, tax partner at KPMG in Hong Kong. “Many mainland financial institutions in China are already working on FATCA projects.” (Take note, rich Chinese investors looking for green cards in the U.S.)
What’s at risk if a country doesn’t sign on? A lot of headache for its banks. The U.S. has said that financial institutions from countries who don’t sign onto a FATCA agreement will be subject to a 30% withholding tax from any of its U.S.-related business. For that reason, many banks and other financial companies are hoping their home governments sign on.
“For Hong Kong’s financial institutions, this is a good thing,” said Mr. Kinsley of Hong Kong’s Tuesday announcement.
As for Americans who hope to avoid the IRS by stashing cash in foreign bank accounts? “They’re certainly going to be under pressure,” he said. “Banking secrecy is the thing of the past.”
Credit: Wall Street Journal