|Financial institutions to comply with U.S. tax law
| Hong Kong is committed to enhancing tax transparency in the international arena.
Hong Kong and the United States have concluded discussions on an intergovernmental agreement (IGA) that will facilitate adherence to the U.S. Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong.
FATCA is an anti-tax evasion law enacted to detect U.S. taxpayers who use accounts with non-U.S. financial institutions to conceal income and assets from the IRS. FATCA requires financial institutions outside the U.S. to report account information of U.S. taxpayers to the IRS. Failing this, relevant institutions will face repercussions in the form of a withholding tax imposed by the IRS on relevant U.S.-sourced payments.
Following the discussions, Hong Kong and the U.S. are expected to sign a Model 2 IGA (refer to sidebar) later this year.
Under the IGA, financial institutions in Hong Kong will need to register and conclude separate individual agreements with the IRS. Under these agreements, these institutions will seek consent from account holders who are U.S. taxpayers for reporting account information to the IRS annually.
There are two models of IGAs:
- A Model 1 IGA essentially requires financial institutions outside the U.S. to report account information of U.S. taxpayers to their own government, leading to exchanging such information with the IRS on an automatic basis.
- A Model 2 IGA, which Hong Kong is pursuing, essentially requires financial institutions to report the relevant account information of U.S. taxpayers to the IRS directly, supplemented by group requests made by the IRS on a need basis.
“The IGA, which the two places have reached in substance, will reduce reporting burden and facilitate compliance with FATCA by financial institutions in Hong Kong. The IGA will cover exemptions for financial institutions or products which present low risks for tax evasion by U.S. taxpayers,” a representative for the Financial Services and the Treasury Bureau said.
“The IGA demonstrates Hong Kong’s commitments to enhancing tax transparency in the international arena,” the representative said. “It will lower overall compliance costs for the industry and safeguard the interests of these institutions and their clients.”
The representative added, “The due diligence and reporting requirements under FATCA will target specified U.S. taxpayers, including U.S. citizens, or U.S. resident individuals, or specified entities established in the U.S. or controlled by U.S. persons.”
An announcement will be made after the formal signing of the IGA between Hong Kong and the U.S. later this year.