Despite a declaration that China would have nothing to do with a controversial US law, FATCA, which will reveal the financial assets of American citizens abroad, it looks like China is at the negotiating table.
The Foreign Account Tax Compliance Act (FATCA) comes into effect later this year and it compels foreign banks and financial institutions to register with US tax authorities and to disclose details of their American clients.
Failure to comply will see a 30% withholding charge against all transactions between the US and the financial institution concerned.
Increasingly, countries are opting to sign an intergovernmental agreement (IGA) which would enable their banks and financial institutions to comply with the law without breaking internal bank privacy and data protection laws.
FATCA is becoming increasingly controversial, particularly around the costs of implementation, and many of those countries in negotiations are looking for a reciprocal arrangement.
No comment from China
Among the countries which have so far steadfastly refused to even entertain the idea of introducing FATCA is China.
Chinese authorities have said it would be legally impossible for them to implement the law as it would contravene their own bankruptcy and banking rules.
However, Chinese government and tax authority officials have stopped answering questions about FATCA and its implementation.
Even in Hong Kong, a major money centre, officials there have also become silent on FATCA negotiations.
China is the world’s second largest economy and holds a significant amount of US debt and, it is rumoured, the US is preparing to make compromises over FATCA to bring China on board.
Financial market lock-out
Tim Clough, a partner at consulting firm PwC, said: “For FATCA to be effective against tax evasion, the US needs to get all global financial institutions to comply so it’s in their interest to sign up as many countries as they can to IGAs which will mandate institutions to comply.”
It is the threat of withholding 30% of transactions which has made fund managers in particular sit up and take notice since many of those based in China and Hong Kong will have to deal, at some point, with FATCA-compliant administrators and stockbrokers.
That could mean that a large number of Chinese firms being locked out of financial and currency markets because other firms will not want to deal with them for fear of contravening their own FATCA IGA.
In addition, there is the issue of US debt and assets being held by China.
Karl Egbert, of Hong Kong law firm Dechert, said: “A lot of US Treasury debt will be excluded from FATCA but I can imagine that some of it will be regulated by FATCA which gives both sides leverage in negotiations.”
