G20 tax push to hit hard in finance sector
With the US Fatca law effectively going global, compliance costs for data-sharing initiative will be heavy for financial institutions, analysts say
The G20 plan to combat tax evasion will enable the member states, including China, to have their own version of the United States' Foreign Account Tax Compliance Act (Fatca) that shines a spotlight on US tax dodgers around the world, say analysts.
The plan by the Group of 20 nations will create huge burdens of compliance for financial institutions around the world, including Hong Kong's financial sector, analysts predict.
At the G20 summit in St Petersburg this month, the leaders of 20 key economies declared member states will start exchanging tax information automatically by the end of 2015.
If this plan was successfully implemented, G20 governments could obtain information about the investment income of their taxpayers overseas, similar to the Fatca provisions, said Richard Weisman, a registered foreign lawyer of Baker & McKenzie, an international law firm. "The G20 tax proposal is like the application of Fatca internationally."
Fatca requires financial institutions around the world to give information on US taxpayers to Washington, making it harder for US taxpayers to evade taxes.
"For China to have its own Fatca means it would want to know about financial assets kept and income received by Chinese nationals outside China," said Patrick Yip, a deputy tax managing partner of Deloitte Touche Tohmatsu.
Weisman said: "The G20 is calling on other governments to join its tax plan. Many governments will like this plan. It means more tax revenue. The G20 tax plan is significant in many respects."
For individuals who earn income through foreign financial institutions, information on that income will be provided to their home governments automatically, Weisman said.
"The financial services industry, which is a huge part of the Hong Kong economy, will be hugely affected by the G20 tax plan, as this will result in far-reaching compliance obligations," he said. "These will be costs in time and money. Hong Kong's financial services industry will have to prepare for the new reality."
In July, Hong Kong acted to allow a more liberal exchange of tax information, but not automatic exchange of tax information. In order to implement the G20 tax plan - which is targeted to be in place within two years - the city would need to again amend its laws relating to data sharing.
Weisman said it would not be commercially feasible for financial institutions to refuse to comply with the G20 tax plan, because the penalties would be too great.
For most countries, if a citizen takes up residence in Hong Kong, that will terminate his tax residency status in his own country, even if he retains citizenship of that country. The US is an exception.
With the G20 plan, there would be incentives for rich people to migrate to lower-tax havens, given that tax cheating would be more difficult post-Fatca, Yip said. "However, this incentive would be diminished for citizens of countries which have a worldwide taxation system, such as the US and China. Why move if you are still subject to the same high tax?"