The Hong Kong Financial Services and the Treasury Bureau provides answers to a number of frequently asked questions regarding the implementation of the US Foreign Account Tax Compliance Act (FATCA) – a law requiring foreign financial institutions to identify and disclose information about their US clients – and how the intergovernmental agreement (IGA) signed between Hong Kong and the US can facilitate due diligence and disclosure requirements
By Kenny Lau
Q: What is FATCA’s implication for Hong Kong?
A: Under FATCA, foreign financial institutions (FFIs), including those of Hong Kong, are required to sign agreements with the US Internal Revenue Service (IRS) to identify and disclose detail regarding their US account holders. These financial institutions will be required to withhold tax for relevant US account holders who do not give consent to such disclosures, or to close such accounts.
An FFI which does not sign or is not otherwise exempt will face a punitive 30 percent withholding tax on all “withholdable payments” derived from US sources, initially including dividends, interest and certain derivative payments. In addition, starting from 2017, gross proceeds such as sales proceeds and returns of principal derived from stocks and debt obligations generating US source dividends or interest will be treated as “withholdable payments.”
Q: What is an IGA under FATCA?
A: The US Treasury announced in June 2012 its intention to sign Intergovernmental Agreements (IGAs) under FATCA with other jurisdictions in order to simplify due diligence and disclosure requirements, reduce or eliminate conflicts with local legislation, and eliminate certain withholding requirements.
The US has developed two models of IGAs to simplify the implementation of FATCA. Model 1 establishes a framework of reporting account information on US persons by financial institutions to their domestic authority which in turn provides the information to the IRS. As of September 2015, 68 jurisdictions including Australia, Canada, France, Germany and the United Kingdom have signed Model 1 IGAs with the US.
Hong Kong has opted for a Model 2 IGA with the US. It establishes a framework of enabling relevant financial institutions in Hong Kong to seek consent for disclosure from US clients and then to report relevant tax information to the IRS, supplemented by the operation of a tax information exchange agreement. Austria, Bermuda, Chile, Japan, Moldova and Switzerland have also signed Model 2 IGAs.
Q: How does the IGA between Hong Kong and the US help minimize the compliance burden?
A: Firstly, financial institutions complying with FFI Agreements will not be subject to a 30 percent withholding tax on US-sourced payments by institutions in the US or other FFIs owing to their own FATCA obligations. Secondly, the IRS will waive the requirements under the relevant US Internal Revenue Code for financial institutions in Hong Kong to withhold tax on payments to recalcitrant accounts (accounts of which the holders do not consent to FATCA reporting and disclosure) or close those recalcitrant accounts.
Thirdly, they may rely on a set of streamlined due diligence procedures to screen and identify US indicia in order to locate US accounts and clients for reporting purposes, thereby reducing inconvenience for other account holders who are not the targets of FATCA. Moreover, for group institutions with worldwide operations, their Hong Kong operations shall continue to be treated as FATCA-compliant despite any noncompliance of a related entity operated in a jurisdiction that prevents its compliance with FATCA.
Lastly, a wide range of entities, financial institutions and products including, among others, mandatory provident fund schemes, other retirement products that fall within the specified criteria, institutions with a predominately local clientele, shall be exempt in view of the low risks of themselves being used by US taxpayers for tax evasion.
Q: Are there any exemptions from compliance with FATCA owning to the IGA?
A: There is a list of exemptions for entities, financial institutions and financial products which otherwise may fall within FATCA reporting and withholding rules. Some exemptions are waiving a wide range of compliance obligations. Some are partial exemptions requiring the institutions to register with the IRS for reduced compliance requirements.
Exemptions as “exempt beneficial owners” include HKSAR Government and all statutory bodies, all Mandatory Provident Fund (MPF) schemes as well as certain retirement products that fall within the specified criteria, the Grant Schools Provident Fund and the Subsidized Schools Provident Fund, and international organizations based in Hong Kong.
Partial exemptions as “registered deemed-compliant FFIs” or “certified deemed-compliant FFIs” can be granted to financial institutions licensed and regulated under the laws of Hong Kong with no fixed place of business outside of Hong Kong and Mainland China, and with a client base comprising predominantly residents of Hong Kong or the Mainland. Certain credit union, credit card issuers, regulated collective investment schemes as well as investment advisers and investment managers are also included.
Exemptions of financial products from being “financial accounts” for the purpose of FATCA include certain term life insurance contracts which have no contract value that any person can access without terminating the contracts, and certain employee incentive share schemes such as share option schemes, share award schemes, employee share purchase schemes, share appreciation rights schemes, usually established by listed corporations.
Q: What are the obligations when a financial institution in Hong Kong enters into a FFI agreement with the IRS?
A: Financial institutions in Hong Kong will be required to use established due diligence (know-your-customer) procedures under the prevailing anti-money laundering legislation to identify US accounts and clients. They will need to obtain a consent of relevant US clients – individuals and entities – for reporting their relevant account balances, gross amounts of relevant interest incomes, dividend incomes and withdrawals, and identification details to the IRS annually starting from 2015.
They are also to report “aggregate information” of account balances, payment amounts and number of non-consenting US accounts to the IRS. The IRS, based on such aggregate information, may request an exchange of information (EoI) with the Inland Revenue Department on a group basis under the tax information exchange agreement signed between Hong Kong and the US in March 2014.
Q: What kind of client information do financial institutions in Hong Kong have to provide to the IRS? A: With the consent of their US clients, financial institutions in Hong Kong have to report to the US IRS their US clients’ identification details, such as name, address, US federal taxpayer identifying numbers known as “TINs,” and the prescribed type of entity if the client is an entity. They also have to report the relevant account balances, gross amounts of relevant interest incomes, dividend incomes and withdrawals.
If their US clients refuse to give any consent to report their account information, financial institutions should report “aggregate information” of account balances, payment amounts and number of non-consenting US accounts to the IRS.
Q: How would financial institutions protect the privacy of Hong Kong residents?
A: Financial institutions in Hong Kong would only provide the relevant account information of their US clients to the IRS with their clients’ prescribed consent.
The majority of Hong Kong residents are not US taxpayers. Their personal data is not subject to reporting under FATCA. In any circumstances, financial institutions in Hong Kong cannot provide their clients’ information to any unauthorized third party without their clients’ consent.
Q: How can people in Hong Kong verify whether a financial institution has complied with FATCA?
A: Unless they are exempt from registration as specified in the IGA, all financial institutions treated as FFIs under the IGA have to register with the IRS and be assigned a Global Intermediary Identification Number (GIIN). The IRS has provided a list of all participating FFIs, which is updated regularly, and tools for searching and identifying participating FFIs and their GIINs from the list at its website.
According to the list published by the IRS, more than 2,800 financial institutions in Hong Kong have already registered. Depositors, investors and financial institutions in Hong Kong can enquire about financial institutions regarding their compliance with FATCA. They can also verify the participation status of the related financial institutions at the IRS website.