Plans by well-known corporate havens such as the British Virgin Islands (BVI) and Cayman Islands to comply with a US law to fight tax evasion will have a significant impact on Hong Kong and the mainland, say tax analysts.
"If the BVI and Caymans comply with the FATCA [Foreign Account Tax Compliance Act], this speaks volumes about the importance of this legislation to the world at large, let alone China and Hong Kong," said Patrick Yip, deputy national mergers and acquisitions leader at Deloitte Touche Tohmatsu.
"China and Hong Kong financial firms that think by putting assets and income into BVI and Cayman companies they can avoid the reach of FATCA, they need to think again."
Most of Hong Kong's offshore business is conducted through the BVI and Caymans, while many mainland firms use BVI and Cayman companies for secrecy. More than 40 per cent of the BVI's financial services business came from Asia-Pacific, said BVI Premier and Finance Minister Orlando Smith.
On August 20, Smith said the BVI had started talks with the US Treasury to create an intergovernmental agreement to exchange information on US taxpayers under FATCA. Earlier this month, the Cayman government said it had concluded a similar agreement with the United States.
Although a US law, FATCA applies worldwide to every financial institution that receives payments from US sources.
The act would require disclosure from financial institutions where accounts were maintained by US taxpayers to individuals or companies where a US person owned more than a 10 per cent interest in the institution, said Scott Michel, president of US law firm Caplin & Drysdale. It compelled financial institutions to disclose information on US taxpayers to the government, on pain of a 30 per cent withholding tax on US-sourced investment income and proceeds from asset sales, he said.
It was a misconception to think faraway places like the BVI complying with FATCA was irrelevant to Hong Kong, warned Yip. The pressure on financial institutions to comply arose from the fact that other financial institutions would be loath to do business with a non-compliant firm and customers would shun non-compliant financial institutions due to the withholding tax, he said. "Any non-compliant financial institution would be viewed like a pariah."
Hong Kong banks like HSBC have said they plan to comply with FATCA. But only if Hong Kong and the mainland signed intergovernmental agreements with the US would all financial institutions in these territories be compliant with the act, Yip said.
If the mainland and Hong Kong did not comply quickly, Hong Kong would lose its competitive edge in attracting capital as international investors would be worried about their assets and income, which might be subject to a withholding tax if Hong Kong was not compliant, Yip said. The mainland and Hong Kong should sign the agreements with the US to soothe their worries, he urged. "It would be a brand-enhancing move for the mainland and Hong Kong from the perspective of competing for cross-border capital flows," he said.
The mainland and Hong Kong did not have such agreements with the US now, but talks were continuing, Yip said.