SWEEPING changes to United States tax law could result in big tax bills for Hong Kong residents who have set up trusts for the benefit of American citizens or residents, a tax partner of law firm Baker & McKenzie says.
Richard Weisman said: 'This is a revolution in the way that the US taxes its citizens and residents.' He warned those who had established 'grantor trusts' - under which distributions can be received free of US income tax - to consider restructuring their affairs.
The Clinton Administration has proposed a wide range of tax changes aimed at generating about US$4.6 billion in worldwide revenues over the next five years.
Under the current tax system, a Hong Kong citizen could establish an offshore trust and retain power over its assets.
US tax law requires taxation of the Hong Kong person and not the US citizen.
But because the trust is offshore and has no income source it means that the beneficiaries, often family members who have emigrated, can receive the income from the trust tax free.
According to Sandy Weiss, a tax director of KPMG Peat Marwick, the proposed amendments will restrict the trust's use to situations where the grantor - or the person setting up the trust - is a US citizen or corporation.
Mr Weisman added: 'Strict new information reporting requirements will also be introduced to enable the US Internal Revenue Service (IRS) to more easily enforce the new rules.
'Any US person receiving a gift from a non-US person, or more than a minimal amount, would be required to report the receipt of the gift to the IRS.
'Under previous law, there was no requirement to report such a gift.'