- Effective as of June 26, 2014, The Peoples’ Republic of China and the United States of America have committed to coordinating efforts through the signing of an Intergovernmental Agreement Model 1 (“IGA 1”) in order to collect financial information and exchange it on an automatic basis with the main purpose of improving international tax compliance and fight against tax evasion and corruption.
- Amicorp Netherlands B.V.
The US Government concluded this agreements with many partner countries to effectively implement their 2010 US Foreign Account Tax Compliance Act (FATCA) in their local jurisdictions.
FATCA is a US law that requires financial institutions around the world to provide information on US taxpayers to the US government. The Foreign Account Tax Compliance Act (FATCA) became effective on Tuesday, July 1st, 2014.
FATCA requires the Foreign Financial Institutions (FFI’s) to enter into an agreement with the IRS to report information of their clients’ financial accounts held by US. The two countries agreed on the terms of the IGA 1, but are examining the final draft before officially signing it.
This action helps the U.S. government’s efforts to put the complex regulatory plan into practice while avoiding disruptions in commercial transactions with other economies. The U.S. law requires foreign banks to start sharing information about U.S. owned accounts to the Internal Revenue Service (IRS).
The outcome for China is to benefit in the long term as there are more Chinese citizens in the United States holding US bank accounts than US citizens in China. With this agreement, China will obtain information on Chinese taxpayers in the US.
THE US-CHINA MODEL 1 (IGA 1) AGREEMENT
The agreement will remove the threat of blacklisting or penalties over Chinese financial institutions, including institutions in Hong Kong, the US and other subsidiaries in Mainland China.
The process is intended to force US financial accounts to report their taxes directly to the Chinese government, which will then file them into the IRS. Initially, the accounts were only required to be reported to the foreign country’s government.
Financial firms around the world are required to report to the IRS information on clients who are US taxpayers. Those that fail to do so would face a 30-percent withholding tax on their US income. The law’s definition of a “US person” includes green-card holders and anyone with a substantial connection to the country.
The U.S. Treasury Department will collect information regarding certain financial accounts and products held by Chinese residents in U.S. Financial Institutions and will exchange the same with the Chinese Ministry of Finance. In reciprocity, the Chinese authority will collect and provide equivalent levels of information about US residents holding accounts in China. As a result, both governments expect to increase their supervision capabilities and obtain higher levels of tax compliance.
The Challenges you face include:
- Navigation through the complex regulations of FATCA and IGAs to determine entity classification;
- Complying with verification and due diligence procedures to identify whether an account is maintained directly or indirectly by a US Person;
- Linking accounts of a US taxpayer across branches, subsidiaries and business units;
- Implementation of new client on-boarding systems to collect required information about new customers;
- Annual reporting of certain information of US reportable accounts, non-participating FFIs and/or recalcitrant account holders; and
- Updating for changing circumstances the status of all FFIs, NFFEs and financial account holders.
Our response to these challenges
As one of the largest global service providers, Amicorp is well positioned to provide the services and solutions as we continue to maintain vigilant tracking of FATCA regulations, recent IGA entries and current industry standards.
In response to the challenges, our experienced and well-connected professionals comprised of lawyers, accountants, bankers and financial advisors have built customized solutions for financial institutions to efficiently comply with FATCA regulations. These FATCA services and solutions are primarily focusing on trusts, foundations and private investment companies.