Financial trade groups in Hong Kong have taken aim at Fatca, the proposed legislation in the United States that is imposing harsh penalties on financial institutions deemed uncooperative in hunting down US tax evaders.
“Fatca has serious implications for the financial services industry in Hong Kong,” says Lau Ka-shi, chairman of the Hong Kong Trust Association, which jointly filed a submission to the US Treasury, along with the Hong Kong Investment Funds Association and the Hong Kong Federation of Insurers.
America’s proposed Foreign Account Tax Compliance Act would require intrusive disclosure among all financial institutions regarding investment services carried out on behalf of American taxpayers.
Those institutions not able or willing to comply with Fatca risk a 30% US withholding tax on payments that the US determines are to be made for American clients. This is true even for institutions that don’t think they have US clients or who don’t trade US securities; non-compliance could force US counterparties to stop dealing with them.
However, simply agreeing to disclose information about US clients is hardly a simple matter, as the joint submission by Hong Kong associations makes clear.
In the case of pension funds, local law makes it impossible, which sets up a possible showdown in which the Mandatory Provident Fund system becomes Fatca non-compliant. This will be an issue for many other countries as well.
Hong Kong’s representatives are urging the US Treasury, of which the Internal Revenue Service is a part, to broaden Fatca to accommodate the differing features of foreign retirement plans, particularly where the foreign government makes participation in a scheme mandatory, be it run by the state or a private provider.
The Hong Kong group suggests the Treasury add a category of compliant institutions (in jargon, a ‘certified deemed-compliant foreign financial institution’).
It further argues that the existing structure of MPF and private defined-benefit corporate plans in Hong Kong make highly unlikely tools for tax-evading Americans, and don’t need to undertake the detailed fact-checking that Fatca requires.
But the most problematic aspect is that Hong Kong law actually prohibits MPF or private pension-fund providers from disclosing the kind of information the IRS is demanding. Nor does Hong Kong law allow the government to require plan member to close accounts before they reach retirement age, even if they are US taxpayers.
The submission covers three other areas affected by Fatca: investment funds, insurance companies and investment trusts. Hong Kong’s investment funds industry is vulnerable to very high compliance risks because of the small size of the population relative to the huge size of its asset-management industry.
Moreover, most bank deposits and investments are US-dollar denominated, have US dollar share classes, or are directly invested in US equity, bond and money markets.
That means the industry is centred around cross-border offerings of investment products tied to US dollar investments. Fatca’s current drafting would treat these as ‘high risk’ products for US tax evasion. Fatca doesn’t recognise the reality that virtually all funds in Hong Kong have prohibited sales to US clients because of existing tax and legal barriers.
Fatca also finds distributors that operate cross-border fund sales are ‘high risk’, but that describes the great majority of banks selling funds in Hong and other small countries dependent upon foreign financial group activities.
Compliance for such institutions is extremely costly, to the extent that it could drive some out of business. The submission recommends some of these realities be recognised, and that requirements be eased or made more practical (such as shifting some of the burden of identifying US taxpayers to the IRS, or changing the definition of a US taxpayer).
Similarly, insurance companies should be low risks for US tax avoidance, but Fatca’s wording would make the distribution model of selling unit-linked products via tied agency forces a compliance breach.
Finally, the submission warns that, under Fatca’s current wording, the use of trusts outside the US, even where families have no US connection, could go out of business because of Fatca-related compliance costs.
Trusts are used by individuals to transfer assets among generations and other services. The submissions have made a number of recommendations to change Fatca so as to preserve the use of trusts.