China is expected to impose its own version of the new US tax law which requires financial institutions around the world to provide Washington with information on US taxpayers, analysts say.
On March 25, the Secretary for Financial Services and the Treasury Professor Chan Ka-keung signed an agreement with the US to allow Hong Kong officials to pass tax information of Americans working in Hong Kong to their US counterparts under the Foreign Account Tax Compliance Act (Fatca).
China, as a G20 member state, will probably follow suit, says Richard Weisman, a senior tax principal at the Hong Kong office of Baker & McKenzie, an international law firm. He said China will likely use a version of Fatca to collect tax information from Chinese citizens around the world including Hong Kong.
“Fatca is only the beginning of what will become a major new compliance obligation for financial institutions. The next major development with respect to Fatca will be the G20’s proposal to multi-lateralize Fatca. China, as a member of the G20, has endorsed this proposal. China can obtain tax information by joining the G20’s approach to Fatca. That is a likely scenario,” said Weisman.
At the G20 summit in St Petersburg last September, the leaders of 20 key economies declared that member states will start exchanging tax information automatically by the end of 2015.
If China goes ahead with its own version of Fatca and it applies to Hong Kong, it may affect Chinese nationals’ desire to park funds with Hong Kong financial institutions. But Hong Kong would be no worse than any other non-mainland jurisdictions as they are equally affected, said Patrick Yip, Greater China deputy tax managing partner of Deloitte Touche Tohmatsu.
Any new law would make it more difficult for corrupt Chinese officials, their relatives and associates to put their wealth in Hong Kong, Yip predicted.
Yip said that many financial institutions in Hong Kong are already finding compliance with Fatca costly and difficult. “Fatca is sending a clear signal to Americans about the seriousness with which the US government is pursuing tax evaders.”
Many banks in Hong Kong will not be ready when Fatca takes effect on July 1, said Gene Buttrill, a partner with US law firm Jones Day. “Perhaps they are hoping to bargain down their level of compliance. This is going to create a lot of work for US lawyers.”
Fatca will impact the private banking sector globally, with US and European banks in particular likely to be avoided by wealthy Asians banking in Hong Kong, said Buttrill. “It makes life much harder for my friends in private banking.”
Fatca will “have a great deal” of impact on Hong Kong people in general, added Buttrill. “In addition to wealthy individuals and green card holders, it affects the financial industry as a whole.”