A United States law designed to fight tax evasion will have an impact on financial institutions around the world, including Hong Kong, analysts say.
The Foreign Account Tax Compliance Act (Fatca) comes at a time when the US and the European Union are raising the pressure on tax havens like the British Virgin Islands and Switzerland to become more transparent.
"In future, it will be much more difficult for Americans who wish to evade taxes to open financial accounts in Hong Kong," said Patrick Yip, deputy national mergers and acquisitions leader at financial firm Deloitte Touche Tohmatsu.
Candy Chan, Deloitte international tax director, agreed: "The US government will find it much easier to trace Americans who have been hiding their assets," Chan said.
Fatca is described on the website of the US Internal Revenue Service (IRS) as "an important development in US efforts to improve tax compliance involving foreign financial assets and offshore accounts". It will require foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by US taxpayers, or foreign companies in which US taxpayers hold substantial ownership.
The definition of a foreign financial institution was quite broad and was framed to include banks, insurance companies, mutual funds, venture capital firms, fund managers, trust companies, and stock brokerages, Chan said. Fatca became law in 2010 and its final regulations were released in January this year. The law would take effect on January 1 next year, Chan said.
HSBC fully supported the US efforts to promote the proper payment of taxes and was committed to full compliance with Fatca when in comes into force, an HSBC spokesman said.
Deloitte was helping a number of large financial institutions in Hong Kong, Taiwan, Singapore, Macau, and Japan, including banks, large investment funds, and insurance companies, to comply with Fatca, Yip said.
"One complaint we get from these financial institutions is: 'We have nothing to do with the US, why are we subject to US laws'. They feel that FFIs have been conscripted by the US to become policemen free of charge for the US government."
However, Chan said that if a foreign firm did not comply with Fatca, it would be subject to a 30 per cent withholding tax payable to the IRS on US-sourced income including interest, dividends and royalties.
Yip said: "The US government doesn't really want to collect this tax. It wants to force FFIs to comply with Fatca."
From January 1, 2017, the penalty for non-compliance would be harsher, as gross proceeds would also be subject to the 30 per cent withholding tax, Chan added. For example, if a person sold bonds or shares, the gross proceeds would be subject to the tax even if sold at a loss, she said.
For transactions between financial institutions, FFIs that take part in Fatca are obliged under US law to withhold 30 per cent from all US-sourced payments to foreign institutions that do not comply with the act, even if those payments are related to account holders who are not US citizens or permanent residents, said Yip. "The spirit behind this rule is to force non-participating FFIs to be participating FFIs," he said.
"From a bank's perspective, there is no way it will refuse to do this. It's like a virus that spreads. If you're not part of the Fatca club, we'll treat you like an alien. You don't want to be seen as not being part of the club because it will hurt your reputation."
Chan said: "Hong Kong FFIs need to get prepared to comply with Fatca. They need to do a lot of work and due diligence with respect to their account holders."
Under Fatca, if a bank has records of a person with a US place of birth, a US passport, or phone number, the account holder has to disclose other relevant information to the bank, which must take steps to verify such data, Chan said. These new requirements will be in place from January 1 next year for all foreign financial institutions taking part in Fatca.
Current account opening procedures with banks are not as stringent as those required under Fatca and the new system will raise costs for training and information technology, and from the annual reporting to the IRS, the Deloitte executives say.
"The feedback we got from some Hong Kong-based financial institutions is they probably will not pass the costs to their customers," Chan said.