SHANGHAI – China has reached an “in substance” intergovernmental agreement with the United States on cooperation with the Foreign Account Tax Compliance Act (FATCA), according to the U.S. Treasury Department. The move is widely expected to benefit the China-based subsidiaries of companies in the U.S., Hong Kong and elsewhere. In return, Chinese financial institutions will no longer be threatened with blacklisting and other penalties as stipulated by FATCA.
FATCA is a U.S. law designed to combat tax evasion and requires financial institutions based in cooperating nations to provide information on U.S. taxpayers to the U.S. government. In agreeing to FATCA compliance, Chinese authorities will similarly be able to obtain information on Chinese taxpayers based in the U.S. Non-compliant countries are subject to a 30-percent withholding tax on U.S.-related income channeled through their domestic financial institutions.
Previously, a July 1 deadline was set by the U.S. tax authorities for new clients of overseas financial institutions to begin reporting their U.S.-related income. However, as it became clear that smaller banks in many jurisdictions would be unable to meet this deadline, its terms were revised to “making efforts in good faith” toward compliance. A secondary deadline of January 1, 2015 remains in place for overseas banks to begin providing clients’ information to the U.S. government.
RELATED: China’s Relationship with the Contentious U.S. FATCA
“China’s agreement to FATCA compliance is important, as it was one of the last remaining significant countries to establish an IGA with the United States,” says Chris Devonshire-Ellis of Dezan Shira & Associates. “Beijing will also want data on Chinese taxpayers abroad, including information on corrupt Chinese officials.”
Under FATCA, the financial accounts and offshore assets of U.S. individual taxpayers must be reported on Form 8938 of an income tax return if the total asset value exceeds a certain reporting threshold. This threshold varies, but for overseas American nationals it is generally around the US$200,000 mark. Clarification on what this means for U.S. nationals in China can be found here.
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