Hong Kong retirement funds may be exempt from Fatca

The largest pension schemes in Hong Kong can potentially escape from Fatca after being judged by the US to be low risk for tax evasion

Final Fatca regulations released on January 17, 2013 include concessions that will mean Hong Kong retirement funds – Mandatory Provident Funds (MPF) and Occupational Retirement Schemes Ordinance (Orso) funds – may well be exempted from having to comply with the rules, say market participants.

Fatca – the Foreign Account Tax Compliance Act – requires foreign financial institutions to identify any US account holders they may have, and disclose their account details to the US Internal Revenue Service (IRS), if the foreign financial assets are worth $50,000 or more.

Should they fail to do so, the institution will be deemed non-compliant and be subject to a 30% withholding tax on US-sourced income, such as dividend or interest payments from US assets, in addition to 30% of the gross sale proceeds of any US asset.

The fear was that financial institutions that have no US nexus or pose a low risk of tax evasion by US persons would be forced to comply with Fatca, based on the draft regulations released in February last year.

However, final regulations by the US Treasury have included amendments that mean that Hong Kong retirement funds may fall outside the scope of Fatca, says Sally Wong, chief executive of the Hong Kong Investment Funds Association (HKIFA).

“There are further relaxations for retirement funds/pensions funds. Certain retirement funds may now fall under the broad category of ‘payments owned by exempt beneficial owners’. There has been an addition of new categories such as ‘investment vehicles exclusively for retirement funds’, which allow for retirement funds to be exempted,” says Wong.

Florence Carr, senior manager, advisory services at Ernst & Young in Hong Kong, agrees the IRS has taken on board comments and concerns raised by industry bodies and looked to broaden the range of exempt accounts.

“The final regulations have expanded the exceptions from financial account status for certain savings accounts, including retirement and pension accounts. The US Treasury and the IRS generally intend for these types of pension funds to qualify as exempt beneficial owners. However, each pension fund will need to be reviewed on a case-by-case basis,” she says.

Wong says the HKIFA is also in the process of determining whether the underlying funds used for MPF/Orso schemes would also be exempt from Fatca.

“We are exploring with our legal counsel whether these amendments can accommodate the underlying funds that are approved pooled investment funds (Apifs), as these are primarily designed and structured for retirement purposes. If both the retirement schemes and Apifs are able to be classified under the broad category of ‘exempt beneficial owners’, then it probably would help to alleviate the compliance burdens. Ultimately, pension and retirement schemes present low risk of tax evasion,” she says.

Wong also called for the Hong Kong government to sign an intergovernmental agreement (IGA) with the US to provide further clarity.

“We hope the Hong Kong government will sign an IGA with the US government, and included in the annex to the IGA will be a list of exempt institutions/products such as MPF and Apifs,” she says.

As of today, no country in Asia has yet signed an IGA. Japan is finalising its agreement while Malaysia, Australia, New Zealand, Singapore and Korea are believed to be actively engaged with the US Treasury in discussions to do so.


This article was first published on Risk

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