China tipped to sign Fatca agreement by July

Despite initial pushback, China would seem to have little choice but to comply with the US’s far-reaching tax laws come next summer, say industry observers.
China tipped to sign Fatca agreement by July

China is thought to be ready to sign an agreement under the US’s Foreign Account Tax Compliance Act (Fatca) after an initial backlash from mainland authorities.

By the time the far-reaching rules come into effect in July, China will be on board, says Jim Calvin, Asia-Pacific Fatca leader at consultancy Deloitte. And other industry observers AsianInvestor spoke to take the same view.

Speaking at the International Transfer Agency Summit in Hong Kong yesterday, Calvin argued that China’s initial backlash to the new law was no different from other countries’ reactions.

Fatca will require entities in every jurisdiction to disclose financial information about all their American account holders. It will affect a huge number of firms, including banks and fund managers.

China has made significant progress recently to ensure it is compliant with Fatca, Calvin says, noting that he expects mainland authorities to adopt a model 1 intergovernmental agreement (IGA), as opposed to the model 2 IGA.

The IGA model 1 requires firms to report to local authorities, which in turn transmit the information to the US Internal Revenue Service. Under a model 2 IGA, non-US financial institutions must report directly to the IRS.

“I worked with [China’s State Administration of Taxation] and advised them on model 1,” says Calvin, who is based in Singapore. After comparing the two models, the SAT recommended that the People’s Bank of China and the regulatory agencies go with model 1, he notes.

Even for an economy as large and powerful as China, it makes sense to comply with Fatca, argues Karl Egbert, Hong Kong-based partner at law firm Dechert.

“The alternative is operating in an independent financial system,” Egbert tells AsianInvestor. “Because if you can’t sign up for Fatca, it becomes very difficult to interface with other banks and jump into the payments system throughout the world.

“China does have its own very large and competent banking [system] and its own very own extensive payment systems,” he adds. “It can give it a go [running independently from others], but I don’t think they ever want to.”

By contrast, Hong Kong is expected to enter into a model 2 agreement, likely because the local tax authorities do not have withholding mechanisms in place, Egbert says.

“The first approach makes the most sense for countries that already have a massive withholding infrastructure,” he notes. Not having such an infrastructure makes it more difficult to coordinate making the relevant payments to the US.

Hong Kong’s Inland Revenue Department has made it clear it is not eager to get involved with foreign countries’ tax withholding practices, Egbert adds.

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