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Hong Kong and the United States have substantially concluded discussions on an inter-governmental agreement (IGA) that will facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong.
FATCA is an anti-tax evasion regime enacted by the US to detect US taxpayers who use accounts with non-US financial institutions to conceal income and assets from the US Internal Revenue Service (IRS).
FATCA requires financial institutions outside the US to report financial account information of US taxpayers to the US IRS. Failing this, relevant institutions will face repercussions in the form of a withholding tax imposed by the US IRS on relevant US-sourced payments to them.
Following the completion of the substantive discussions, Hong Kong and the US are expected to sign a Model 2 IGA later this year (see Note).
Under the IGA, financial institutions in Hong Kong will need to register and conclude separate individual agreements with the US IRS. Under these agreements, these institutions will seek consent of their account holders who are US taxpayers for reporting their account information to the US IRS annually.
"The IGA, which the two places have reached in substance, will reduce reporting burden and facilitate compliance with FATCA by financial institutions in Hong Kong. The IGA will cover exemptions for financial institutions or products which present low risks for tax evasion by US taxpayers," a spokesperson for the Financial Services and the Treasury Bureau said.
"The IGA demonstrates Hong Kong's commitments to enhancing tax transparency in the international arena," the spokesperson said. "It will lower overall compliance costs for the industry and safeguard the interests of these institutions and their clients."
The spokesperson added, "The due diligence and reporting requirements under FATCA will target specified US taxpayers including US citizens, or US resident individuals, or specified entities established in the US or controlled by US persons."
The operation of the Model 2 IGA 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.
The Administration has been engaging the financial services industry intensively in the discussions with the US authorities. "We are grateful to relevant trade bodies in the financial markets for their input, especially for the exemptions required to facilitate their operation and compliance," the spokesperson said.
Financial institutions are reminded to assess their relevant FATCA compliance implications for their operation and clientele. They shall have the procedures and systems in place to protect clients' monies, investments or other interests in financial instruments from withholding by third parties; avoid aiding clients to engage in tax evasion locally or overseas; and promote the orderliness of market operation.
An announcement will be made after the formal signing of the IGA between Hong Kong and the US later this year.
Note: There are two models of IGAs. A model 1 IGA essentially requires financial institutions outside the US to report account information of US taxpayers to their own government, which will commit to exchanging such information at a government level with the US IRS on an automatic basis. A model 2 IGA, which Hong Kong is pursuing, essentially requires financial institutions to report the relevant account information of US taxpayers to the US IRS directly, supplemented by group requests made by the US IRS, on a need basis, for exchange of information on relevant US taxpayers at a government level.
Ends/Friday, May 9, 2014
Issued at HKT 17:15
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