On 17 January 2013, the US Department of Treasury and Internal Revenue Service (“IRS”) issued the final regulations for the Foreign Account Tax Compliance Act (“FATCA”). The purpose of the FATCA is to combat tax avoidance by US persons through investing in foreign financial institutions (“FFIs”). Generally speaking, FFIs would be subject to 30% withholding tax applicable to payments of US source income, gross proceeds of disposition of property that could produce US income and foreign passthru payments unless the FFIs comply with the FATCA. The definition of FFI is very broad and includes a foreign entity which is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities and could cover retirement schemes like an ORSO scheme and MPF scheme in Hong Kong.
Under the FATCA, a FFI would be subject to tax withholding unless it registers with the IRS and enters into an FFI agreement with the IRS and becomes a Participating Foreign Financial Institution; or the FFI is a resident of a country that signs an intergovernmental agreement (“IGA”) with the IRS; or the FFI finds an applicable exemption under the FATCA regulations.
Under the FFI agreement, the FFI will agree to obtain information on account holder to identify US accounts, and comply with verification and due diligence procedures in identifying these accounts; report certain information on US accounts to the IRS, and comply with requests by the IRS for additional information regarding these accounts and deduct and withhold 30% from certain withholdable payments made to a recalcitrant account holder starting from 1 January 2014. Recalcitrant account holder is any account holder that (i) fails to comply with reasonable requests for information necessary to determine if the account is a US account; (2) fails to provide the name, address, and TIN of each “specified United States person; or (3) fails to provide a waiver of any foreign law that would prevent a FFI from reporting information required under FATCA. While withholding will be required starting from 1 January 1 2014, withholding will not be required on gross proceeds (sales of stock and securities) or passthru payments until 1 January 2017.
On IGAs, there are two models of IGAs, namely Model 1 and Model 2. Under both models, the FFI would not be subject to FATCA withholding on US source income and the FFI will not be required to withhold payment to recalcitrant account holders. The FATCA partner will agree with the US government to pursue local legislation to require a FFI to comply with FATCA, to enable a FFI to conduct due diligence, reporting and withholding and transfer to the US government the required information. However, under Model 2, a FFI will still be required to register with the IRS and sign a FFI agreement. The reporting will be made to the IRS directly by the FFI whereas under Model 1, the local authority will be responsible for the reporting. Therefore, it can be seen that in case a Model 2 IGA will be entered into with the US government (which seems more likely to be the case of Hong Kong, if there will be any IGA at all), the FFIs (i.e. the ORSO and MPF schemes) will still be required to work on FATCA compliance (including due diligence, reporting, etc.)
Under local law regime, there are also issues under section 41 of the Mandatory Provident Fund Schemes Ordinance and section 77 of the Occupational Retirement Schemes Ordinance which prohibit the disclosure of information for purposes other than for performance under the said ordinances. There is an exception to such prohibition in case there is a court order, a rule of law or a requirement made under a rule of law. However, the HK authorities seem to take the position that foreign law (including US law) may not be excepted under these sections. In such case, if reporting will be required to be made to the IRS for FATCA compliance purposes, it is expected that appropriate amendments to the ordinances would need to be made.
Regarding the registration process, the IRS will set up a FATCA Registration Portal through which FFIs can interact with the IRS. It is expected that the portal will be set up no later than 15 July 2013. The last date to register with the IRS to ensure inclusion on the first FFI list is 25 October 2013. Whilst it remains to be seen as to whether any IGA will be entered into between the US and HK governments in relation to FATCA compliance, the various parties to the MPF schemes and ORSO schemes including the trustees, the employers and even the administrators and investment managers should start to make plans for FATCA compliance for the schemes including review of the data systems and procedures on data collection, due diligence, etc. and registration with the IRS if the IGA is not forthcoming.