Chinese wall might inspire other countries

At what stage are negotiations between Chinese and American authorities? Over the last 12 months, based on discussions I have had with regulators and banks in Beijing, there have been indications of planned talks between Chinese government officials, the American Department of the Treasury and the IRS, and one of the topics on the agenda was FATCA. However, to the best of my knowledge, the discussions have not taken place. During the last few weeks I have heard comments about discussions being held, but these have not been confirmed. It is therefore difficult to say with any degree of certainty what the Chinese position will be with regard to FATCA come January 1, 2013. Given the perceived legal constraints for Chinese banks wishing to comply with FATCA this is an issue. Absent discussions between China and the U.S., banks in China will not be able to comply with the FATCA requirements as we currently understand them. Why couldn&rsquo;t China-based FFIs comply with FATCA? FFI&rsquo;s in China who enter into an FFI agreement with the IRS are not expected to be able to share information with the IRS due to data transfer restrictions. The main obstacle is seen to be the law governing &ldquo;state secrets&rdquo; which can be very broadly defined and could include information required to be reported to the IRS. Is there a solution to this legal framework issue? There is already a tax treaty between China and the U.S., which allows for tax information to be shared between the two countries. Ideally, an agreement could be reached if the Chinese and U.S. authorities were willing to consider a government-to-government approach as is being considered by the US and five European countries [1] . This government-to-government approach also provides for a reciprocal exchange of data from the U.S. to the other government concerned. So this could be of interest to the SAT [2] . So there&rsquo;s an opportunity to reach an agreement thanks to the existing treaty? Exactly. However, one of the key issues is that China would have to implement domestic rules similar to FATCA. That would require banks in China to collect the information normally required under an FFI agreement [3] and to send it to the SAT as opposed to the IRS. The SAT would then forward the information to the IRS, which in return would send similar information, essentially on Chinese nationals investing in the U.S., back to the SAT. The problem is that a lot of Chinese banks are domestic-focused. They don&rsquo;t have international operations, and they don&rsquo;t really deal in the broader financial markets. To require them to comply with FATCA, where there is a very low risk of them being used by US persons for tax avoidance is likely to meet with strong resistance. Might the Chinese government seize the opportunity to optimize domestic tax collection? To the extent that the SAT believes there is tax avoidance by Chinese nationals investing abroad, this could help in the negotiations. What could be the impact on green card holders? Green card holders should be taxable in the U.S. on their world-wide income. There are a number of green card holders across Asia and there is a concern amongst banks in Asia that a number of green card holders resident outside of the U.S. may not be making the correct tax filings in the U.S. FATCA could require FATCA compliant banks to disclose such persons to the IRS if the banks are aware of the clients&rsquo; green card status. However, it is unlikely that most banks require disclosure of a client&rsquo;s green card status upon account opening. Further, recent reports indicate that the majority of applicants for investment visas into the U.S. are Chinese nationals [4] . Certain investment visas can allow one to become a green card holder [5] . As a consequence these individuals should be taxable in the U.S. on a worldwide basis. From recent press reports in China, it appears that a number of Chinese nationals who had obtained such visas were unaware of the U.S. tax implications of obtaining green card status. Is it correct to say that state-owned Chinese banks are exempt from FATCA? As you noted, this view has been expressed by ACA [6] and a number of different sources given the government ownership of all or a large percentage of a number of Chinese banks. My view is that the draft FATCA regulations exempt from FATCA foreign governments and central banks of issue when they are the beneficial owner of the income in question. As a consequence, it doesn&rsquo;t mean that a bank owned by the Chinese government is itself exempt. Ultimately, only U.S. sourced payments made by these banks to the Chinese government should be covered by the exemption. I therefore do not agree with the ACA statement. What are global Chinese banks doing to prepare for FATCA? Late last year, there was actually a meeting of a number of Chinese and foreign banks operating in China to discuss the impact of FATCA. Subsequent to that, I have spoken to some of the bigger Chinese banks. They generally have teams looking at FATCA to determine the impact on their organization and what they can / cannot do towards complying with FATCA. They recognize the current inability to do so within China. But they are still looking at strategies that they may adopt especially since they have international subsidiaries which are not subject to the same restrictions that they are in China. How do China-based international banks comply with FATCA? Most of the large international banks have subsidiaries in China. Given the definition of the expanded affiliated group in the draft FATCA regulations, if the Chinese subsidiaries do not comply, the group cannot comply. As they have generally taken a view that they will comply with FATCA, their Chinese subsidiaries will need to be compliant or fall under the transitional relief rules for the first 24 months. However, under the transitional relief rules, the entity claiming relief will be subject to 30% withholding on qualifying payments. Furthermore, what then happens after 24 months if the Chinese subsidiaries still cannot comply with FATCA remains a concern. Is there still time for the Chinese and US authorities to negotiate an agreement? As the draft government to government framework agreement is to still be issued, yes. However, as with any countries adopting the government to government framework, banks in those countries are likely to have back-up plans in case the government-to-government process is not finished in time and /or no extension of time to implement the framework agreement is granted. Can the US really implement FATCA without China? FATCA is designed to identify U.S. persons trying to avoid U.S. taxes. China should be seen as a low-risk country for U.S. tax avoidance purposes. So in theory FATCA could be served without China. The problem however is the influence China may have on others. A number of other countries are looking to China for a lead as to whether to allow banks in their country to comply with FATCA or not. Can other countries afford to ignore the U.S.? If FATCA compliant banks decide not to engage in business with those that are not FATCA compliant, this could have far broader implications for financial markets. 1 Germany, France, Italy, Spain, United Kingdom 2 SAT : State Administration of Taxation 3 Foreign Financial Agreement 4 Editor&rsquo;s note : In 2011, 70% of EB-5 visa holders were Chinese. Source : Association to invest in the USA, March 2012 5 Editor&rsquo;s note : For example, an EB-5 investment visa can enable foreign people to obtain permanent U.S. residency by investing between $500,000 and $1,000,000 into a government designated Regional Center investment visa program, to take any job and benefit from many advantages, as any US citizen. 6 ACA : American Citizens Abroad association

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Negotiations

Chinese wall might inspire other countries

The apparent Chinese reluctance to negociate an agreement with the US tax authorities makes international banks nervous. From 2016 the “extended affiliated group” notion could put them into the “NPFFI” category.

À retrouver dans la revue

[Web Only] Tarifs bancaires : les banques amortissent l’inflation

Les garanties bancaires sont d’excellents cas d’usage

« Paris est le centre de gravité pour tous les instruments financiers traités en euros »

Le droit de la responsabilité civile appliqué à des virements frauduleux en devises

Panorama réglementaire des actifs numériques

Sberbank : une valeur anéantie à zéro en fonds de portefeuille

La transformation repose sur des directions responsables et des équipes pluridisciplinaires

Les garanties bancaires
sont d’excellents cas d’usage

« Paris est le centre de gravité
pour tous les instruments financiers traités en euros »