The Foreign Account Tax Compliance Act (FATCA) could unravel if the U.S. and the People’s Republic of China fail to sign an intergovernmental agreement (IGA) giving the IRS the right to enforce the new tax compliance for foreign assets and offshore accounts, says Nigel Green, CEO and founder of the deVere Group, a global financial advisory firm.
Established in 2002, the deVere Group has more than 70,000 international investors and expatriates as clients in more than 100 countries worldwide, and has $9 billion dollars under its management and administration.
Q: Why would FATCA unravel if China doesn’t sign an IGA with the U.S.?
FATCA could, ultimately, unravel if China rejects the IGA because FATCA’s primary strength would come from all governments around the world forcing their financial institutions to become compliant with it.
Should the country which looks set to be the world’s dominant economic super power in a matter of decades rebuff FATCA, the project would be compromised and could, in the end, fail as such a stance would, many experts agree, prompt other countries to do the same.
Q: Why is China playing hardball with the U.S. over FATCA?
A: It appears that the People’s Republic of China (PRC) is playing hardball with the U.S. over FATCA because it seemingly understands that it will be extremely expensive and onerous for its financial institutions to become FATCA compliant.
In addition, should it adhere to FATCA’s regulations—of which there are hundreds of pages—it would contravene various local Chinese privacy laws, making it difficult to sign up to a FATCA agreement even it wanted to.
China has, it would seem, grasped that that it would benefit very little—if anything—in return for making its banks, and indeed all its other finance institutions, act as defacto snooping agents for the Internal Revenue Service.
Q: What changes would the U.S. have to make to get an IGA with China?
A: Naturally, it would be best to ask the Chinese authorities that question. However, I would imagine that to incentivize China, the US would need to make FATCA a truly reciprocal project.
Under current rules, American financial institutions would not be subject to the same reporting requirements as their foreign counterparts, making the notion—a notion the US Treasury is promoting—of the IGA being reciprocal a fantasy.
Q: Can Hong Kong act independently of the PRC or will it have to wait?
A: It’s currently unclear but there are signs that Hong Kong could indeed act independently from Beijing’s stance as there has been no reference to Hong Kong, a special administrative region (SAR), in any of the published material we’ve seen on the matter.
Additionally, James Jatras, of the Repeal FATCA campaign, informs us that, interestingly, like the People’s Republic of China, Hong Kong is not on the list of 50 countries the Treasury claims to be negotiating with.
Q: How much leverage does the U.S. have in this situation?
The FATCA project is politically important for the U.S. government, meaning a U-turn would be deeply humiliating for it on an international level.
Although it would be hard to bully a country with the might of China, I would imagine that the U.S. is engaging in some rather frantic behind-the-scenes negotiations with China on this issue.
Q: Should financial services firms put their FATCA-related IT infrastructure plans and changes to operations on hold until China makes its decision?
I and many others are hoping that FATCA will, ultimately, be repealed so I would suggest that financial services firms put their upgrading of FATCA-related infrastructure on hold until more countries, including China, sign an IGA with the U.S. to implement FATCA.
Attend FTF's FATCA Breakfast in New York
on March 6, 2013, to learn more about FATCA and IGAs.