US Foreign Account Tax Compliance Act Intergovernmental Agreement Frequently Asked Questions

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US Foreign Account Tax Compliance Act

Intergovernmental Agreement
Frequently Asked Questions

This document aims to provide background information regarding the


intergovernmental agreement (IGA) to be signed between Hong Kong
and the US for implementation of the US Foreign Account Tax Compliance
Act (FATCA). This document is not and should not be regarded as tax
advice for financial institutions and their clients. If in doubt, individual
institutions or clients should seek professional advice from their own tax or
legal advisers. Information provided in this document will be updated
according to the development regarding the signing of the IGA.

Q 1:

What is FATCA? Does this US tax legislation have any implication for
Hong Kong?

A 1:

FATCA was enacted by the US in March 2010 aiming to combat tax


evasion by US taxpayers. In brief, under FATCA, foreign financial
institutions (FFIs) 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% 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.

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Q 2:

What is an IGA under FATCA?

A 2:

The US Treasury announced in June 2012 its intention to sign 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 Model IGAs to simplify the implementation of
FATCA.
Model I establishes a framework of reporting account
information on US persons by financial institutions to the relevant
domestic authority which in turn provides the information to the US IRS.
As at 1 July 2014, 34 jurisdictions including Australia, Canada, France,
Germany and the United Kingdom have signed Model I IGA with the US.
Having regard to our tax legislation, Hong Kong has opted for a Model II
IGA with the US. Austria, Bermuda, Chile, Japan and Switzerland have
signed Model II IGAs with the US. Model II establishes a framework of
enabling relevant financial institutions in Hong Kong to seek consent for
disclosure from US clients, and to report relevant tax information of such
clients to the US IRS. This model of IGA will be supplemented by the
operation of a tax information exchange agreement.

Q 3:

Why does Hong Kong have to enter into an IGA with the US

A 3:

The purpose of FATCA is to combat tax evasion by US taxpayers using


offshore financial accounts. The compliance requirements of FATCA
have caused serious concerns in the financial markets. Moreover, FFIs
that do not comply with FATCA will be subject to a 30% withholding
tax on certain types of US-sourced payments. An IGA with the US
will provide additional exemptions and simplified reporting and due
diligence procedures to minimise the compliance burden of financial
institutions in Hong Kong.

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Q 4:

What are the obligations when a financial institution in Hong Kong


enters into a FFI agreement with the US IRS?

A 4:

According to the FFI Agreement published by the US IRS, financial


institutions in Hong Kong shall, when Hong Kong has reached an IGA in
substance with the US,
(a) use established due diligence (i.e. know-your-customer)
procedures under the prevailing anti-money laundering legislation to
identify US accounts and clients;
(b) obtain a consent of relevant US clients (including individuals and
entities) for reporting their relevant account balances, gross amounts
of relevant interest incomes, dividend incomes and withdrawals, and
identification details (e.g. name, address, the US federal taxpayer
identifying numbers, known as TIN) to the US IRS annually.
The first reporting deadline will be 31 March 2015 (in respect of the
year-end information in 2014); and
(c) report aggregate information of account balances, payment
amounts and number of non-consenting US accounts to the US IRS.
Based on such aggregate information, the US IRS may lodge to our
Inland Revenue Department, where necessary, requests for exchange
of information (EoI) on a group basis pursuant to the EoI
framework provided for under the tax information exchange
agreement that Hong Kong signed with the US on 25 March 2014.
Please refer to the relevant US IRS webpage for details:
http://www.irs.gov/Businesses/Corporations/Information-for-Foreign-Financial-Institutions

Q 5:

Are all financial institutions in Hong Kong obliged to comply with


FATCA even though some of them may not have any US client?

A 5:

All financial institutions meeting the criteria of FFIs under FATCA such
as banks, investment entities, insurance companies, custodial institutions,
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and unless otherwise exempt, must register with the US IRS and comply
with the terms of FFI agreement. Otherwise they will be subject to a
30% withholding tax on relevant US-sourced payments to them.
Q 6:

What kind of client information do financial institutions in Hong


Kong have to provide to US IRS in order to comply with FATCA?

A 6:

With the consent of their US clients, financial institutions in Hong Kong


have to report to the US IRS their US clients identification details (e.g.
name, address, the US federal taxpayer identifying numbers, known as
TIN, and the prescribed type of entity if the client is an entity), 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 institution concerned
should report aggregate information of account balances, payment
amounts and number of non-consenting US accounts to the US IRS.
Based on such aggregate information, the US IRS may lodge to our Inland
Revenue Department, where necessary, requests for EoI on a group basis
pursuant to the EoI framework provided for under the tax information
exchange agreement that Hong Kong signed with the US on 25 March
2014.

Q 7:

FATAC requires financial institutions in Hong Kong to report their


US client information to the US IRS. How should financial
institutions protect the privacy of Hong Kong residents?

A 7:

Financial institutions in Hong Kong would only provide the relevant


account information of their US clients to the US 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 prescribed consent.

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Q 8:

How does an IGA between Hong Kong and the US help minimise the
compliance burden of FATCA ?

A 8:

According to the IGA reached in substance between Hong Kong and the
US (a) financial institutions in Hong Kong complying with the respective
FFI Agreements will not be subject to a 30% withholding tax in
respect of relevant US-sourced payments by institutions in the US or
other FFIs owing to their own FATCA obligations. This will
certainly help safeguard the interest of all depositors, insurance
policy holders, investors and other clients of Hong Kong financial
institutions in Hong Kong;
(b) the US 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 (i.e. accounts of
which the holders do not consent to FATCA reporting and disclosure
to the US IRS) or close those recalcitrant accounts;
(c) for group institutions with worldwide operations, their Hong Kong
operations shall continue to be treated as FATCA-compliant despite
any non-compliance of a related entity operated in a jurisdiction that
prevents its compliance with FATCA;
(d) financial institutions in Hong Kong may rely on a set of streamlined
due diligence procedures as stated in Annex I to the IGA to screen
and identify US indicia in order to locate US accounts and clients for
reporting purposes. This will minimise compliance burdens of
financial institutions in Hong Kong and inconvenience for other
account holders who are not the targets of FATCA; and
(e) 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
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with a predominately local clientele, shall be exempt under Annex II


to the IGA in view of the low risks of themselves being used by US
taxpayers for tax evasion.
Please refer to the Annexes I and II of standard Model II IGA template
promulgated at the relevant US Department of Treasury (US Treasury)
website for details of the standard streamlined due diligence procedures
and exemption arrangements:
http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx

Q 9:

Would a Hong Kong financial institution be affected if their related


entity abroad does not comply with FATCA?

A 9:

The FATCA compliant status of a Hong Kong financial institution would


not be affected despite any non-compliance of a related entity operated in
a jurisdiction that prevents its compliance with FATCA. However, a
financial institution in Hong Kong would be treated as non-compliant if
its related entity operated in other jurisdiction does not comply with
FATCA for other reasons.

Q 10:

Are all financial institutions in Hong Kong required to register with


the US IRS?

A 10:

Unless the financial institutions are exempt from registration under the
IGA, such as exempt beneficial owners and certified deemed-compliant
foreign financial institutions, all other financial institutions treated as FFIs
under the IGA have to register with the US IRS at the specified US IRS
website. A Global Intermediary Identification Number (GIIN) will be
assigned by the US IRS to a financial institution completing the
registration process for identification. The US IRS has provided a list of
all participating FFIs at a specified date at its website since 2 June 2014
and will update the list every month.
Please refer to the relevant US IRS website for details:
http://www.irs.gov/Businesses/Corporations/FATCA-Registration
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Q 11:

Is there any financial institution or product in Hong Kong exempt


from compliance with FATCA owning to the IGA? If so, are their due
diligence and reporting obligations under FATCA waived entirely?

A 11:

Annex II of an IGA contains 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 concerned to register with the US IRS for
reduced compliance requirements.
Please refer to the Annex II of Model II IGA template posted on the
relevant US Treasurys website:
http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx

According to the consensus reached by Hong Kong and the US, the
following entities, institutions and financial products would be exempt
from a wide range of or certain compliance obligations under the IGA to
be signed by Hong Kong and the US
(I)

Exemptions as exempt beneficial owners


(a) HKSAR Government and all statutory bodies;
(b) all Mandatory Provident Fund (MPF) schemes;
(c) certain retirement products that fall within the specified criteria;
(d) the Grant Schools Provident Fund and the Subsidized Schools
Provident Fund; and
(e) international organisations based in Hong Kong.

(II)

Partial exemptions as registered deemed-compliant FFIs or


certified deemed-compliant FFIs
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(a) financial institutions licensed and regulated under the laws of


the HKSAR with no fixed place of business outside of Hong
Kong and the Mainland, and with a client base comprising
predominantly residents of Hong Kong or the Mainland (by
applying a threshold of 98% of financial accounts by value);
(b) all credit unions, as well as certain depository institutions (e.g
deposit-taking companies) with an asset value of less than
US$175 million on their own balance sheet;
(c) certain credit card issuers that impose restrictions on clients
keeping a debit (deposit) balance on the accounts;
(d) certain regulated collective investment schemes; and
(e) investment advisers and investment managers.
(III) Exemptions of financial products from being financial accounts
(a) certain term life insurance contracts which have no contract
value that any person can access without terminating the
contracts; and
(b) 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 12:

My company operates an occupational retirement scheme under the


Occupational Retirement Schemes Ordinance (ORSO). Would
the companys occupational retirement scheme be exempt from
registration and reporting obligation under the IGA?

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A 12:

Apart from MPF schemes, certain retirement funds are exempt from
registration and reporting obligation under the IGA. These retirement
products include all ORSO schemes that are registered with the
Mandatory Provident Fund Schemes Authority (MPFA) in accordance
with the ORSO (i.e. the ORSO registered schemes) and satisfy certain
specified criteria.
The specified criteria, in essence, include

An ORSO registered scheme that does not have a single beneficiary


with a right to more than five percent of the schemes assets; or

An ORSO registered scheme with a limited size that satisfies the


following criteria:
(a) the scheme has fewer than 50 participants;
(b) the scheme is sponsored by one or more employers that are not
investment entities or passive non-financial entity under
FATCA;
(c) the employee and employer contributions to the fund are limited
by reference to earned income and compensation of the
employees; and
(d) participants that are not residents of the HKSAR are not entitled to
more than 20 percent of the funds assets.

All other ORSO schemes that could not satisfy the said criteria including
ORSO exempted schemes, i.e. ORSO schemes which are granted
exemption certificates by MPFA, would not be exempt from FATCA
registration and reporting. (For information regarding registration with
the relevant authority of the US, please see Q.10)
Q 13:

How can Hong Kong residents and financial institution verify


whether a Hong Kong or foreign financial institution has complied
with FATCA to avoid unnecessary withholding on their US-sourced
payments?
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A 13:

Unless the financial institutions are exempt from registration under the
IGA, such as exempt beneficial owners and certified deemed-compliant
foreign financial institutions, all other financial institutions treated as FFIs
under the IGA have to register with the US IRS at the specified US IRS
website. A GIIN will be assigned by the US IRS to a financial institution
after completing the registration process for identification. The US IRS
has provided a list of all participating FFIs at a specified date and tools for
searching and identifying participating FFIs and their GIINs from the list
at its website since 2 June 2014. The US IRS said that the list will be
updated every month.
Please refer to the relevant US IRS webpage for details:
http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-ListSearch-and-Download-Tool

Depositors, investors and financial institutions in Hong Kong can enquire


their related financial institutions regarding their compliance with
FATCA. They can also verify the participation status of the related
financial institutions at the relevant US IRS website.
Q 14:

When does the Government expect to announce the signing of an IGA


with the US

A 14:

Hong Kong and the US have reached consensus on the substance of an


IGA. We will sign the IGA with the US when the US completes its
relevant due process. We will then make appropriate announcement
after signing, and remind financial institutions through our financial
regulators to prepare for FATCA compliance and register with the US IRS
timely.

Q 15:

What is the progress of the US in signing IGAs with other


jurisdictions?

A 15:

As at 1 July 2014, 39 jurisdictions have signed IGAs with the US


including 34 on Model I and 5 on Model II. In early April 2014, the US
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Government announced that jurisdictions that had reached agreements in


substance with the US on the terms of IGAs before 1 July 2014 could be
treated as having IGAs in effect until the end of 2014 providing that the
jurisdictions consent to having their status of agreement disclosed. In
addition to Hong Kong, more than 50 jurisdictions are treated as having
IGAs in effect with the US.
Please refer to the relevant US Treasury webpage for details:
http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx

Financial Services and the Treasury Bureau


3 July 2014

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