Hong Kong has been conspicuously absent from the list of early signatories of the Foreign Account Tax Compliance Act (FATCA). That ended last month with Hong Kong announcing its long-awaited entrance into a Model 2 IGA with the US government. Covered Hong Kong-based financial institutions must now enter into separate foreign financial agreements (FFAs) with the IRS. This new agreement could result in some painful lessons for US taxpayers who have failed to report or pay taxes on their international assets. The remainder of this post will analyze the IGA announced by US and Hong officials and some of the potential consequences of such an agreement.
What conditions does this IGA impose on Hong Kong Financial Institutions?
All foreign financial institutions falling under the purview of FATCA -- including investment entities, banks, insurance companies and custodial institutions - are required to register with the IRS. Aside from registration with the US taxing authority, the foreign financial institutions must comply with the terms of the IGA. Failure to adhere to these terms can result in a 30% withholding tax being imposed on relevant payments that originated in the United States.
According to the terms of the IGA (which is linked below), the IGA that Hong Kong negotiated and agreed to is a Model 2 IGA. There are two types of IGAs: Model 1 IGAs and Model 2 IGAs. Model 1 IGA is characterized by a process in which American account-holder information is turned over by the banks to the foreign taxing authority. The foreign taxing authority then turns that information over to the IRS. In contrast, a Model 2 IGA, such as this agreement, permits the direct transfer of information from the foreign bank or financial institution to the IRS. Article 2 also permits the IRS to make group requests regarding non-consenting accounts. A full accounting of foreign financial FATCA reporting requirements are set forth in Article 2 of the IGA.
Furthermore, according to the terms of the agreement, Article 3 sets forth stringent regulations for certain recalcitrant account holders. While foreign financial institutions must in some jurisdictions obtain the consent of account holders before exchanging information, penalties can still apply Under a Model 2 IGA, an individual must consent to reporting in order to open a new account. Furthermore, under this IGA model, the time period for a suspension of withholding due to account holder recalcitrance is limited. If the requested information has not been provided within six months after the information request is received, the withholding period will begin and the foreign financial institution will be required to withhold.
The IGA also contains provisions that permit foreign Hong Kong-based financial institutions to be treated as "exempt beneficial owners" or as "deemed-compliant foreign financial institutions". Exempt beneficial owners are typically exempt from the withholding and registration requirements imposed by FATCA. Government entities, qualifying international organizations, and the Hong Kong Central Bank are all entities that could be deemed non-reporting financial institutions. Furthermore relevant, qualifying accounts could also be excluded from the statutory definition of "Financial Accounts". Chiefly these accounts are "low risk" accounts. Other accounts that could receive similar treatment include a qualifying Hong Kong-based broad participation retirement fund, narrow participation retirement fund, the pension fund of an exempt beneficial owner, and financial institutions holding only low-value accounts. A broad array of additional account types and their factors to qualify for FATCA exemptions are set forth in Annex II of the IGA.
OVDP May Offer a Way Out of Tax Problems due to IGAs
Aside from information sharing agreements with foreign nations and financial institutions, there are also domestic US laws that require US residents to disclose their foreign financial accounts with a balance that exceeds $10,000 at any moment in the year. US residents who fail to comply with US tax law may find themselves the target of an IRS civil or criminal investigations.
The IRS has crafted the Offshore Voluntary Disclosure Program (OVDP) which may provide non-compliant US taxpayers with a means to correct their tax problems. There are a number of procedures that can be followed to apply for OVDP. One such procedure in the OVDP program is known as the "Streamlined Procedure". If you were to work with an experienced tax lawyer, he or she would likely make you aware that the Streamlined OVDP is fraught with legal pitfalls. This is chiefly because Streamlined OVDP requires a certification that that taxpayer's failures to report, pay taxes, and file FBAR were due to "non-willful" conduct. However, the IRS' definition of willful conduct is not the common definition. Rather, the IRS' concept of willful conduct is expansive and can be inferred by factors such as one's conduct in requesting delivery of foreign statements to a foreign address or meeting "in secret" with bank officials. If it appears that willful conduct is present, your matter may be referred for criminal prosecution.
Put our FATCA compliance experience to work for you
The experienced tax attorneys of the Brager Tax Law Group are dedicated to advocating for US taxpayers in order to correct their FATCA and other tax compliance issues. With years of experience handling tax issues involving foreign assets, our experienced attorneys can assist taxpayers with serious tax issues such as undeclared foreign bank accounts. Contact the Brager Tax Law Group today online or by calling 800-380-TAX LITIGATOR to discuss your legal options.