With Switzerland long dead as an offshore tax haven for US savers unwilling to fund Uncle Sam's central-planning machine (and who can blame them - isn't monetizing the deficit precisely what the Fed is for?) and with Cyprus banks, shall we say, compromised, many have been forced to look for greener tax-evading pastures, as far away as the Pacific Rim, especially that oasis of mega wealth creation, Hong Kong. Only this time the US is paying attention as SCMP reports that Hong Kong tax officials will soon be able to pass information about the finances of Americans working in Hong Kong to their US counterparts under an agreement signed yesterday as part of Washington's global crackdown on tax evasion. In other words, for tax purposes, Hong Kong is now effectively under IRS control.
Enter the FATCA: "The Financial Services and Treasury Bureau said the tax-information exchange agreement allowed the US to file a request to the Inland Revenue Department "under specified conditions". The Foreign Account Tax Compliance Act was passed in 2010. It takes effect in July. It requires foreign financial institutions such as banks to declare to the US tax authorities the foreign holdings of anyone liable under US tax rules."
The bureau said that provided the basis for a further agreement that would enable US tax authorities to seek information directly from local banks. Tax experts said the agreement was crucial for America's controversial anti-tax evasion law, which takes effect later this year.
If the institutions did not comply, the US tax authorities would withhold 30 per cent of their US-sourced income, according to Ivan Strunin, managing director of Deloitte's Asia Pacific International Core of Excellence (US Tax Service).
Without an intergovernmental agreement, financial institutions that provided the information might breach privacy laws.
Signed into law by President Barack Obama in 2010, the law was originally supposed to take effect on January 1 last year. That was postponed to January 1 this year and then to July 1.
Secretary for Financial Services and the Treasury Professor Chan Ka-keung said after signing the first agreement with US Consul General Clifford Hart that it demonstrated Hong Kong's continued commitment to fulfilling its international obligations.
"The [agreement] with the US has adopted highly prudent safeguard measures to protect taxpayers' privacy and the confidentiality of information exchanged," he said.
For the agreement to take effect, the Chief Executive in Council will have to make an order under the Inland Revenue Ordinance. The order will take effect unless the Legislative Council objects to it.
The Post reported earlier that Cathay Pacific planned to comply with the US law. Cathay pilots said they were concerned about privacy and were puzzled why companies in Hong Kong needed to comply with the regulations of a foreign country.
"How can Cathay give a foreign government our details without our permission? There is a good case [that this is] against Hong Kong [privacy] law," one American pilot said.
That said, Hong Kong falling under FATCA authority was long-expected, and we doubt many will be caught unaware. A bigger question is if the IRS will stretch its tax oversight tentacles as far as the real offshore bank haven, Singapore, a place that is far more near and dear to China as well. In a world in which the financial wealth tax is increasinglt becoming a reality, we are confident we will find out soon enough.