If anyone had any guess China would go along with FATCA, forget it.
As noted in Risk.net, China has little incentive to comply with FATCA (the Foreign Account Tax Compliance Act) or to sign an intergovernmental agreement (IGA) with the U.S. In fact, Beijing has every incentive – and ability – to tell Washington to get lost.
Even if other governments are deluding themselves (or trying to delude their citizens), Chinese authorities have figured out that FATCA and IGAs are a bad deal for the so-called “Partner” non-U.S. country:
"In Hong Kong there is a lot of misinformation about IGAs among financial institutions. Because so many countries are looking at this issue, some institutions believe that if Hong Kong signed an IGA, it would save them from having to comply with Fatca. This is not the case. While it may make Fatca easier to comply with under an IGA, it is still essentially the same framework," she [PwC US tax partner Angelica Kwan] said.
Kwan said it would be prudent for jurisdictions to weigh up the pros and cons of an IGA.
"One of the results of an IGA is that a financial institution can no longer choose not to comply with Fatca. The jurisdiction signing an IGA will require under local laws that all financial institutions comply. We do not anticipate that any IGAs could significantly reduce the burden of Fatca compliance for Chinese and Hong Kong financial institutions," she said.
This point is not well understood by FFIs: Not only does an IGA not save them much money, if any, it deprives them of the business decision of not complying with FATCA, presumably by pulling their assets out of the U.S. to avoid the 30% withholding. Granted, some FFIs can’t disengage from the U.S., but others can. In the case of the latter, however, if their government signs an IGA they would be forced to comply under their own domestic law, contrary to their own business interests.
Add to that the fact that virtually any concession FFIs and the non-U.S. “Partner” may think they can secure in an IGA can be changed virtually at will by the U.S. side.
For Fatca to be effective against tax evasion, it needs to be implemented worldwide, said Tim Clough, risk and assurance partner at PwC, at the same briefing.
"Fatca needs to be established globally and with all financial institutions, otherwise there will be arbitrage. Therefore it is in the US's interest so sign up as many countries as possible to IGAs as it will mandate institutions in that country to comply," Clough said.
Aside from the fact that FATCA has nothing really to do with policing actual tax evasion, the main point is clear: IGAs are not optional for the US but essential to FATCA’s survival. As RepealFATCA.com been saying: No IGAs, No FATCA!
Some governments (pressed by their terrified FFIs), as Andrew Quinlan observes, still seem not to have figured this out:
No country in Asia has yet signed up to an IGA. Japan is in the process of finalising its agreement while Australia, New Zealand, Malaysia, Singapore, India and Korea are believed to be actively engaged with the US Treasury over this issue.
Or maybe they’re just slow-rolling the process to stall the Americans, while they wait to see what happens? In any case, by even considering IGAs with the U.S., governments of these are other jurisdictions are acting to save this bad law. Instead, they would do well to heed the Chinese example and just say NO to FATCA. And FFIs, instead of urging IGAs on their governments would be better served by helping the repeal effort here in the U.S. – and getting rid of FATCA entirely.
James George Jatras