FATCA Making Hong Kong A Costly Route To Mainland China

Published on 30 Sep, 2015

Hong Kong Business Analysis

Hong Kong has forever been a famous entry route to China for foreign businesses due to its proximity to mainland China. Additionally, Hong Kong has a modern, friendly banking environment and a transparent legal system. US citizens particularly have favored the region as a platform to expand operations into the mainland. However, since the enactment of FATCA, many Hong Kong-based banks have been refusing to open accounts for, and are instead closing existing accounts of, US individuals and corporations.

Hong Kong has fully implemented FATCA since the signing of its IGA with the US in November 2014. However, besides the 30% withholding tax, financial institutions in Hong Kong are subject to penalties from local authorities. Hong Kong-based banks are encountering hurdles in identifying US accounts and, therefore, significantly changing their processes and technologies.

Read: Aranca’s Special Report on FATCA – High Cost Initiative to Curb Tax Evasion

According to reports, a major Hong Kong bank has revealed that the costs of locating, monitoring, and reporting on a US-held or -controlled account is at least USD 7,000 a month.

According to sources, once the costs and benefits of catering to clients are weighed, only accounts with about USD 3 million as balance are worth a bank’s time. Thus, it is easier and more cost-effective for Hong Kong institutions to simply close the accounts of, or reject applications from, US clients instead of incurring high compliance costs or paying penalties.

Excluding green card holders, nearly 50,000 US citizens reside in Hong Kong; they are required to file US tax returns. Law firms in the region have received a record number of enquiries for renouncing US citizenship or green card status.

All of these factors have implications for Hong Kong’s future as the preferred gateway to China. Singapore has already replaced Mauritius as the leading source of foreign direct investment into India. Investors have long been comparing the advantages of the city state, its independence from China’s regulatory regime, and political stability against Hong Kong’s proximity to and strong trade links with the mainland. FATCA could tilt the scales toward Singapore as the preferred entry route to the mainland.

* This write-up is an excerpt from the Aranca Special Report: FATCA – High Cost Initiative to Curb Tax Evasion.
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