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FATCA Treasury Regulations: Compliance Crucial for Hong Kong Financial Institutions

In a move to combat tax evasion and enhance transparency, the US Foreign Account Tax Compliance Act (FATCA) has introduced a range of regulations that require financial institutions worldwide to disclose information about their customers with US connections. Failure to comply with these regulations can result in severe penalties.

Consequences of Non-Compliance

  • A 30% withholding tax applied to withholdable payments received by the Financial Institution (FFI)
  • Applies not only to the FFI’s own assets but also assets held for customers
  • Withholdable payments include:
    • US dividend income and interest income paid after June 30, 2014
    • Gross proceeds from sales of US securities occurring after December 31, 2018

Responsible Officer (RO)

The RO is responsible for the FATCA compliance program of an FFI and certifying its compliance to the IRS. The person appointed as RO should have sufficient authority to fulfill these duties. Major responsibilities include:

  • Certification of FATCA compliance
  • Implementation of a FATCA compliance program
  • Notification of significant non-compliance with FATCA requirements

Indicia of US Status

If an account has indicia of US status, such as identification as a US citizen or resident, a US place of birth, or a current US residence address, the FFI may need to obtain additional documentation to confirm the account holder’s status. Failure to obtain this documentation can result in reporting the account to the IRS.

Hong Kong Exchanges and Clearing Limited (HKEX)

As a Reporting Financial Institution under a Model 2 Intergovernmental Agreement, HKEX’s clearing houses are subject to FATCA regulations. The group recommends that participants assess the potential implications of FATCA on their business operations and clients and comply with the regulations.

Stocks Cleared by HKSCC

According to HKSCC, certain stocks cleared and settled by the exchange generate US source dividend income. These include:

  • Amgen Inc
  • Cisco Systems Inc
  • Intel Corporation
  • Applied Materials Inc
  • Starbucks Corporation
  • Microsoft Corporation
  • Frontage Holdings Corporation
  • Yum China Holdings, Inc

Avoiding FATCA

No, it is not possible to avoid FATCA by not participating in US securities markets. Under FATCA, US stock includes shares issued by US-formed companies traded worldwide, regardless of listing location. Moreover, Hong Kong financial institutions are directed to comply with FATCA under a Hong Kong IGA.

Disclaimer

While care has been taken regarding the accuracy of information provided, nothing in this FAQ is intended to be, or should be construed to constitute, legal or tax advice. Participants should consult their own professional advisors on the implications of FATCA.