On 13 November 2014 Hong Kong and the United States signed an Intergovernmental Agreement (IGA) to facilitate compliance with the U.S. Foreign Account Tax Compliance Act (FATCA). The agreement can be downloaded here: FATCA-Agreement-Hong Kong-11-13-2014
There are two models of IGAs. A model 1 IGA essentially requires financial institutions outside the U.S. to report account information of U.S. taxpayers to their local tax authority, which will exchange this information with the IRS on an automatic basis. A model 2 IGA, which Hong Kong and the U.S. have concluded, essentially requires financial institutions (FIs) to report the relevant account information of U.S. taxpayers to the IRS directly.
The Hong Kong IGA reduces reporting burden and facilitates compliance with FATCA by financial institutions in Hong Kong as it specifies exemptions for financial institutions or products which present low risks for tax evasion. In addition the IGA also specifies the due diligence and reporting requirements under FATCA, which target specified U.S. taxpayers. Under the Hong Kong IGA, the first reporting will take place in March 2015.
FIs in Hong Kong should register as soon as possible, with a hard deadline of Dec 31st. Registration prevents 30% withholding tax. This tax is withheld at the source by USFIs dealing with Hong Kong FIs.
FIs in Hong Kong should also identify their business partners to assess if these partners are compliant. In addition some contractual changes may be necessary to prevent unexpected taxation of transactions. These changes should focus on the compliance tasks and their split between the FI and its business partners.
Last but not least, under the Model 2 IGA Hong Kong FIs must identify investors following the due diligence rules of the IGA and the FATCA Regulations. For most investors this needs to be finalized by 1 July 2015. This leaves no more than seven months to execute a complex set of instructions, register the results and initiate reporting to the U.S. IRS for identified U.S. accounts.