Amid fierce opposition to the US’s Foreign Account Tax Compliance Act (Fatca), there is widespread scepticism that China will comply with the rules. And yet there are reasons to believe the two countries might strike some kind of deal.

Fatca, due to come into effect in July, will require that entities in every jurisdiction disclose financial information about all their American account-holders. It will affect a huge number of firms – including banks and fund managers – which may have to comply if they wish to deal with other Fatca-compliant companies.

One major stumbling block in China is political. Detailing the assets of account-holders with assets invested abroad would be very sensitive for a country that imposes strict currency controls and where every individual faces a $50,000 annual ceiling on foreign-currency conversions.

“All of that information can be instantly transparent to the US,” says a lawyer, who declined to be named. “And that kind of transparency – unless you can control it – could be very dangerous to some people’s careers, political or otherwise.”

It’s perhaps not surprising, then, that there appears to be pressure on Chinese companies not to rush to fall in line. One lawyer says many industry service providers, including his own firm, had mainland-based asset managers approach them seeking legal advice on Fatca last year, only to see progress on it slow down or stop entirely.

“It seems some institutions have been told not to go ahead with compliance,” say sources, speculating that regulators or members of the government are trying to negotiate for an intergovernmental agreement (IGA).

(An IGA would address privacy concerns of foreign governments by requiring non-US financial institutions to report to their local government instead of directly to the US Internal Revenue Service.)

But some Fatca practitioners remain hopeful that an agreement between the two countries can be reached, especially given the high stakes at play. The US may be prepared to compromise if it is to cut a deal with China.

“For this law to be really effective against tax evasion, you effectively need to get all financial institutions globally to comply with it or you’re going to get arbitrage,” says Tim Clough, a partner at consulting firm PwC. “Therefore it is in the US’s interest to sign up as many countries as possible to IGAs, as that will mandate institutions in those countries to comply.”

The threat of a 30% withholding tax on US-sourced income for non-compliant asset managers may push Chinese tax authorities to the negotiating table.

It's likely that somewhere along the line an accountholder’s funds will be dealing with Fatca-compliant third-party administrators, custodians or stockbrokers, notes Patrick Yip, Hong Kong and China Fatca country leader at consulting firm Deloitte.

“[These service providers] would be very wary of any non-Fatca-compliant investment managers, and they would either say ‘we do not want your business’ or ‘we withhold [30%]’.”

Then there is the small matter of China’s massive holdings of US debt and other assets that will give it unique leverage to negotiate the terms, notes Karl Egbert of law firm Dechert in Hong Kong. “While a lot of Treasury debt is excluded from Fatca, you can imagine all the US assets currently held by China including some that are [regulated by] Fatca.”

These assets provide both sides with leverage when negotiating some form of IGA.

See the latest (April) issue of AsianInvestor magazine for a feature on this topic.