A US law against tax evasion is likely to cost each financial institution in Hong Kong and on the mainland as much as US$100 million in compliance costs when it takes effect next year.
The Foreign Account Tax Compliance Act (FATCA), enacted in March 2010, seeks to prevent US citizens or permanent residents from evading their tax obligations using offshore accounts held at foreign financial institutions.
Last week the US released a new proposal on FATCA regulations.
Anthony Tong, a tax services partner at PricewaterhouseCoopers (PwC), said besides placing a huge compliance burden on non-US institutions 'to do the dirty work for the IRS [US Internal Revenue Service)', the US law had been making more Americans consider renouncing their citizenship or permanent residency.
'In the last few years, we noticed that there are more US citizens giving up their citizenship. We noticed that definitely in Hong Kong,' said Tong. 'With all this compliance burden, we think that the trend of US citizens at least thinking about giving up [their] citizenship ... will continue.'
Jeffrey Boyle, a PwC consulting partner, said such compliance costs were estimated at about US$30 million to US$100 million per institution.
'But the costs of not complying is even higher,' said Boyle, as the US has planned certain 'punishments'.
Using FATCA, Washington wants non-US institutions to help identify US account holders and non-US accounts that are held substantially by Americans, so that the IRS can check for tax evasions.
If non-US institutions choose to comply with FATCA, they will have to sign a contract with the US government next year.
Stephen Cheung, a PwC consulting partner, said: 'Time is quite tight, we are not talking about many more years. We are talking about not many months to get ready for compliance.'
Non-US financial institutions include banks, insurance firms, custodians, and investment funds.
The costs of non-compliance are high. Starting in January 2014, the US will apply a 30 per cent withholding tax on the gross proceeds, interest incomes and dividends that non-US institutions receive from US stocks and US securities.
And even if non-US institutions choose to divest themselves of all their US customers and US-related assets, they would still be affected by FATCA, said Angelica Kwan, a PwC tax services partner.
Under FATCA, compliant institutions should withhold 30 per cent of payments to non-compliant, non-US institutions - even if no US assets or clients are involved.
So theoretically, Company A in Hong Kong, which is FATCA-compliant, could withhold HK$30 million out of HK$100 million in payments to Company B in Hong Kong, which is not FATCA-compliant.
Instead, Company A will hand the US$30 million to the US taxman. This regulation will take effect in January 2017.
FATCA is expected to generate US$8 billion to US$9 billion in revenue for the US over the next 10 years.
'When the law was first passed, the attitude of a lot of the institutions in the region was 'hopefully this will go away',' said Tong. 'But with the issuance of the proposed regulation, FATCA is reality.'