Found at the heart of the US Foreign Account Tax Compliance Act (FATCA) are the information reporting and tax withholding systems, that is to say they require foreign financial institutions to report to the US Internal Revenue Service (IRS) information on the foreign accounts of US taxpayers or information on the financial accounts of foreign entities that have substantial US owners. Foreign financial institutions that fail to comply with their information reporting obligations will be assessed 30% withholding tax on certain income (stock dividends, interest, insurance premiums, etc.) sourced from the US.

The subjects of reporting specified by FATCA include such taxpayers as US citizens, US green card holders, holders of specific US visas, etc. Regardless of whether they are actually resident in the US, all such persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS to report their global income, including their foreign assets, foreign companies, foreign trusts and gifts. If there is at least one financial account outside the US in which a taxpayer has a financial interest, or over which he or she has signature authority, and if the total value of all of his or her foreign financial accounts exceeds US$10,000 at any time during the filing year, he or she is required to file an FBAR in accordance with regulations.

Under pressure from the IRS, United Bank of Switzerland (UBS) provided the names of more than 4,450 US customers in August 2009 and paid a fine of US$780 million, reaching an out-of-court settlement. Germany, Italy and other countries also applied pressure on UBS, demanding that it publish the names of suspected tax fraudsters.

Furthermore, the Organization for Economic Co-operation and Development (OECD) established the “automatic information exchange standard” as the new standard for the exchange of tax information. Influenced by FATCA, in January 2014 the OECD issued the Standard for Automatic Exchange of Financial Account Information, which has been adopted and is being promoted by the G20.

FATCA affects the compliance costs of Sino-American cross-border investment. A US investor in China is required to clarify the scope of the signature authority of the US taxpayers; pursuant to the co-operation plan, the American directors register and file with the IRS and file with the Chinese tax authority. The Chinese investor in the US then needs to consider FATCA withholding tax; pursuant to the co-operation plan, the IRS will report to China the US accounts and investments of the Chinese investor.

For example, in the past, Baidu invested US$300 million in Silicon Valley to establish a 200-employee research and development centre.

However, those Chinese employees who moved to California are required to pay US federal tax and state tax on their global income. Those Chinese employees are also required to file an FBAR for their own accounts, and those of the company, as well as for other financial assets (e.g., income sourced from real estate and the company). And if FATCA applies to amounts paid into China from the US, withholding tax may arise.

After the entry into effect of FATCA, the key points of the compliance practice of Chinese lawyers include:

(1) custody of accounts for US clients; (2) when the custodian is a US taxpayer, custody of accounts for non-US clients; (3) due diligence of the ultimate beneficiaries of trusts; (4) compliance of the bank accounts of US capital holding companies; (5) conduct of compliance investigations of the scope of authorization of the signature authority of American employees; (6) assisting clients in applying for FATCA participating financial institution global intermediary identification numbers; (7) assisting clients in paying attention to reasonable tax avoidance when business dealings occur with relevant American entities; (8) paying attention to avoiding causing illegal filing outcomes, e.g., using clients’ unreported funds to purchase immovable property; and (9) assisting US clients in investigating the details of their bank accounts opened outside the US.

INTERNATIONAL STANDARDS

FATCA has influenced the formation of the standards for balance of payments statistics, and the profound impact of China’s many years of opening to the outside world and globalization, and the large expansion in overseas investment has left China facing the heavy pressure of foreign account regulation. After many years of effort, China has made considerable progress in international co-ordination of tax regulation. To bring balance of payment statistics in line with new international standards, the State Council issued the Decision on Amending the Measures for Reporting Balance of Payments Statistics (Order No. 642) in January 2014.

Order No. 642 expressly states that, for Chinese residents and non-Chinese residents that engage in economic activities in China, tax reporting obligations are mandatory. In June of the same year, China and the US reached a preliminary agreement on the implementation of FATCA, with the parties agreeing to equal exchange of information.

In the amended reporting measures, the term “Chinese resident” means: someone who resides in China for at least one year; a Chinese person who goes abroad for a short period (residing abroad for less than one year); an enterprise or institution with legal personality established in China in accordance with the law (including foreign-invested enterprises and foreign-funded financial institutions); representative offices and establishments of foreign legal persons (excluding the offices of international organizations and consulates); and Chinese state agencies (including Chinese consulates abroad), and associations.

The scope of reporting of balance of payment statistics includes: (1) economic transactions between Chinese residents and non-Chinese residents; and (2) details of the foreign financial assets and liabilities of Chinese residents. Non-Chinese residents engaging in economic activities in China include: foreigners who purchase real estate in China; foreigners who invest in China; and foreigners who provide consulting services in China.

Dong Jinsong is a senior partner and Fan Xiaoliang is an associate at AllBright Law Offices