Fatca rules still a pain for Hong Kong firms despite tax deal
Upcoming agreement with the US helps reduce reporting burden on some financial companies
Hong Kong financial firms ranging from banks to brokers continue to be haunted by the soon-to-be-implemented Foreign Account Tax Compliance Act (Fatca) even though the United States and Hong Kong governments will sign a tax agreement later this year that would somewhat reduce their burden.
Under Fatca, financial firms around the world are required to report to the Internal Revenue Service (IRS) in Washington on the accounts of clients who are US citizens or permanent residents in a move to prevent tax avoidance. Those that fail to do so face a 30 per cent withholding tax penalty on their US income.
The law has been widely criticised because it effectively turns financial firms into arms of the US tax agency. Many firms are getting around the problem by avoiding taking on US clients.
After much lobbying from industry bodies and government officials, including Secretary for Financial Services and the Treasury Chan Ka-keung, over the past two years, the US finally agreed last week to sign a deal with Hong Kong later this year that will exempt some products, such as pension fund and Mandatory Provident Fund (MPF) products, which are unlikely to be used for tax avoidance, from the reporting requirements.
Eric Roose, a partner at legal firm Morrison & Foerster who specialises in international tax planning, said the tax agreement between Hong Kong and the US helped remove uncertainties related to Fatca.
"However, it won't remove the reporting burden for all companies," he said. "Hong Kong financial firms would need to be aware of their reporting duties under the agreement."
