Firms face Hong Kong and US penalties for failure to register for Fatca
Financial companies warned of double hit on fines if they do not register for US tax law
Hong Kong financial institutions that failed to register for the Foreign Account Tax Compliance Act (Fatca) by the July 1 deadline risk suffering not only US penalties but also penalties for violating Hong Kong regulations, which may include losing their licences, said Sharon Lam, a partner at Deloitte Touche Tohmatsu.
Under Fatca, financial companies around the world are required to report to the Internal Revenue Service (IRS) in Washington on accounts of United States taxpayers in order to prevent tax avoidance. Those that fail to do so face a 30 per cent withholding tax penalty on their US income.
As of July 2, some 2,008 financial institutions in Hong Kong have registered with Fatca, according to the IRS. This is a fraction of the tens of thousands of financial institutions operating in the city, Lam said.
"I think a significant number of Hong Kong financial institutions have not registered with Fatca by July 1," she said.
Hong Kong came 15th in terms of the number of financial institutions registered with Fatca as of July 2, according to the IRS. The Cayman Islands had the most financial institutions registered with Fatca, at 17,207.
Britain was second with 6,994 and Switzerland third at 4,279. Singapore had 1,072 registered while mainland China had just 213.
After Hong Kong signs an intergovernmental agreement (IGA) with the United States on Fatca, Hong Kong law will require its financial institutions to comply with Fatca, said Lam. "If they don't comply with Fatca, they will violate local Hong Kong laws," she said.
Foreign institutions covered by Fatca include banks, trust companies, money lending companies and securities firms.
If a Hong Kong securities company violates the city's laws by not complying with Fatca, it risks having its licence revoked by the Securities and Futures Commission (SFC), Lam said.
"Hopefully, we expect the Hong Kong IGA will be signed by the end of this year," Lam said.
An IGA is an agreement between two jurisdictions to exchange information, said Florence Carr, Asia-Pacific Fatca Lead at Ernst & Young.
IGA allows financial institutions that have registered with the IRS on Fatca to have compliance requirements simplified compared with the full Fatca regulations, Carr said.
"The HKSAR has stated that financial institutions which are not exempt must register and comply if they do not want to suffer the punitive tax on US-sourced payments," Carr said.
The SFC was unable to comment at the time of going to press.
