Hong Kong, US Sign FATCA Agreement
On November 13, Hong Kong and the United States signed an inter-governmental agreement (IGA), the substantive terms of which were agreed in May this year, and which will facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong.
FATCA, which was enacted by the US Congress in 2010 and took 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 have now signed, financial institutions in Hong Kong will need to register and conclude separate individual agreements with the IRS.
Under these agreements, Hong Kong institutions will seek consent from their US account holders to report their account information to the IRS annually. However, the agreements will also be supplemented under the IGA by the exchange of information on relevant US taxpayers at government level on an as-needed basis and upon request, pursuant to a tax information exchange agreement signed between Hong Kong and the US in March 2014.
Hong Kong’s institutions have therefore been reminded to assess FATCA compliance implications for their operations and clientele and 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.”
The first reporting under the IGA will take place in March 2015.