Americans in HK rush to beat this week's tax deadline

PUBLISHED : Monday, 12 October, 2009, 12:00am
UPDATED : Monday, 12 October, 2009, 12:00am

Americans living in Hong Kong are rushing to ensure their tax affairs are in order ahead of Thursday's deadline for them to voluntarily disclose unreported income in offshore accounts.

The US government is casting its shadow across the Pacific and stepping up efforts to catch tax cheats and expand overseas enforcement.

Kurt Rademacher, a Hong Kong-based partner at the law firm Withers, said he had received at least three or four inquiries a day in recent months about US tax compliance issues after previously getting just a few a year. 'We have seen a huge increase in the number of people coming forward to talk about these issues.'

The so-called amnesty scheme was initiated earlier this year by the US Internal Revenue Service (IRS) following a UBS settlement over allegations of abetting tax evasion.

The programme was designed to gather information that would widen an ongoing investigation into a suspected web of wealthy tax cheats. But many ordinary Americans have been caught out as well because they were either unaware of stringent US tax-filing requirements or completed them incorrectly.

In addition to paying local taxes, the 60,000-plus Americans living in Hong Kong must regularly declare their earnings to the IRS. They are allowed an exclusion of as much as US$91,400 in locally earned income for 2009 if they can prove they spent most of the year abroad. But they must complete a filing regardless of whether they are under the threshold or not.

US citizens must also report whether the combined value of their personal overseas bank accounts, or even those for which they have signatory power, has exceeded US$10,000 at any time in a given year.

Robert Keys, a partner at PricewaterhouseCoopers (Hong Kong) said: 'There is an incredible amount of additional complication that affects the tax filing for an American living abroad. The foreign issues on a return are much more complex than those for a typical guy sitting in San Francisco.'

Andrey Krahmal, a senior associate at international law firm Allen & Overy in London, said US citizens must still report their foreign earnings to the government or risk substantial fines or even criminal charges. Even though the compliance requirements can be so complex that they require the assistance of a tax lawyer or accountant, it is the responsibility of the taxpayer to ensure their affairs are in order.

'[And] those who received bad or no tax advice or believed the veil of banking secrecy to be impenetrable by the US tax authorities are now finding themselves in need of coming clean before the IRS,' Krahmal said.

This is because the IRS has pledged to tighten its enforcement of international taxation amid growing suspicions that wealthy Americans have been exploiting loopholes in foreign tax codes and been stashing cash overseas. Those fears were fanned in February when UBS struck a US$780 million settlement with the US government to avoid facing charges of assisting wealthy Americans with tax evasion.

Highlighting the gravity of the allegations, the Swiss bank also broke from the centuries-old banking tradition of guarding customer secrecy and identified some clients who may have been involved. The number of named clients has since reportedly expanded to more than 4,000.

At least six UBS clients have since pleaded guilty to tax evasion. And in a sign that Hong Kong could come under greater scrutiny, four of those individuals were said to have used dummy corporate structures in the city to facilitate their plans.

But the IRS' push to beef up its overseas presence is not just a reaction to recent events. It is also part of a long-term effort to adapt to an increasingly global business environment.

In its Strategic Plan 2009-2013 released in April, the IRS said some taxpayers may be dropping off the radar as more wealth shifted overseas. It estimated that the percentage of US citizens' income coming from abroad had doubled from 2001 to 2006 and that the number of multinational firms worldwide had increased by 20 times to 63,000 since 1990.

The IRS also published an announcement that month entitled 'Reaching out to Americans abroad'. It said there were 7 million US citizens living overseas and included information for them to learn more about tax requirements.

The growing reach of the IRS was something that Americans living abroad must take note of, said Richard Weisman, a tax partner at Baker & McKenzie in Hong Kong.

'While the basic US tax laws themselves have not materially changed, the tax enforcement climate in the US has totally changed in the last year or so,' Weisman said.

The US economy has been battered by the global downturn and is facing slower growth and mounting debts. Its budget deficit for the financial year climbed to a record US$1.38 trillion in August and unemployment has ballooned to a 26-year high.

Against this backdrop, the US government has eagerly pumped more resources into the IRS in the hope that it can collect more revenue to fill the coffers. US President Barack Obama outlined a plan in May which he said would recoup US$210 billion over the next decade in part by hiring 800 new IRS agents for overseas assignments.

The growing footprint of the US taxman has sparked consternation among Americans overseas given the IRS' harsh rhetoric in the wake of the UBS settlement.

Keys said: 'People don't want the IRS to put their financial affairs under a spotlight, whether they are completely compliant or not.'

Tax targets

The number of Americans in Hong Kong is estimated to be: 60,000