The US promulgated the Foreign Account Tax Compliance Act (“FATCA“) in March 2010, in order to strengthen the taxation over offshore investment (such as offshore financial assets and offshore accounts) by US persons. Following that, the Internal Revenue Service (“IRS“) of the US published the corresponding Final Regulation and a series of implement timing arrangements.

Under FATCA, the participating Foreign Financial Institutions (“FFIs“) are required to register with IRS and fulfill the following obligations:

  • For pre-existing accounts, to search the account information, and to identify the reportable accounts hold by US persons or foreign entities owned by US persons (“Reportable US Account“);
  • For new accounts, to identify and verify Reportable US Accounts in due diligence procedures;
  • To report on an annual basis the relevant information with respect to Reportable US Accounts;
  • To deduct and withhold a tax equal to 30% of certain payments made to recalcitrant account holders or non-participating FFIs;
  • Upon request, to report additional information with respect to Reportable US Accounts; and
  • In any case where any foreign law would prevent the reporting of such information:
    1. to attempt to obtain a waiver from the account holder, or
    2. to close such account.

For non-participating FFIs, the counter measure is that when a US source payment is made to such non-participating FFIs by a payer who is a participating FFI, the payer will withhold 30% of the amount of such payment.

In accordance with §1471(d)(5) of FATCA and §1.1471-5(e) of the Final Regulation of FATCA, a Financial Institution, as referred to in the term “FFI”, refers to any entity that:

  • accepts deposits in the ordinary course of a banking or similar business (depository institution);
  • holds, as a substantial portion of its business, financial assets for the benefit of one or more other persons (custodial institution);
  • is an investment entity;
  • is an insurance company or a holding company that is a member of an expanded affiliated group that includes an insurance company, and the insurance company or holding company issues, or is obligated to make payments with respect to, a cash value insurance or annuity contract (specified insurance company); or
  • is an entity that is a holding company or treasury center with certain characteristics.

As far as the financial institutions in the PRC are concerned, the following entities may be classified as FFIs under FATCA:

  • Financial institutions in the banking sector, e.g. commercial banks (including domestic funded commercial banks and foreign funded commercial banks), rural banks, rural financial cooperatives and PRC branches of foreign banks;
  • Securities companies;
  • Investment funds and products, e.g. securities investment funds, collective investment trusts, collective asset management schemes of securities companies, asset management schemes for certain customers of fund management companies, asset management schemes of futures companies, and asset management schemes of asset management companies of insurance companies; and
  • Insurance companies, e.g. life insurance companies, property insurance companies, and re-insurance companies.

The key dates with respect to the implementation of FATCA, in accordance with the notice issued by IRS most recently on July 12, 2013 (Notice 2013-43) are as follows:

As FATCA is a US domestic law, an FFI’s participation in FATCA shall be within the legal framework of the place where such FFI is located. Therefore, the US government is keen to enter into intergovernmental agreements with other countries so as to facilitate the implementation of FATCA in such jurisdictions. As of July 12, 2013, the following countries have signed such agreements with the US government respectively: Denmark, Ireland, Mexico, Norway, UK, Germany, Spain, Switzerland and Japan.

According to the Release of Joint Outcomes of the Economic Track under the US-China Strategic and Economic Dialogue V (published on the official website of the Ministry of Foreign Affairs of the PRC on July 12, 2013), “the Chinese government and the US government agree that each government will exert its best effort to enter into an inter-governmental agreement (“IGA“) to implement FATCA before the deadline of January, 2014. In order to seek for a cooperation scheme for the implementation of FATCA, the US Treasury, IRS, Ministry of Finance of the PRC, State Administration of Taxation of the PRC and People’s Bank of China undertake that a discussion for the next round will be launched as early as possible in the summer of 2013?.

When the Sino-US IGA is signed, the relevant financial institutions in the PRC shall comply with and fulfill the due diligence and reporting obligations as set out in such IGA.

As it is not clear when China and the US will sign the IGA and the implementation dates of FATCA are coming near, the relevant financial institutions in the PRC would better get prepared in advance, and take certain measures so as to face the implementation of FATCA:

  • Determining whether it is an FFI regulated by FATCA;
  • Determining whether it is affected by the implementation of FATCA and the extent it may be affected;
  • To the extent permitted by the PRC law, preparing to register with IRS, establishing corresponding due diligence policies and procedures, and revising the standard documentation so as to collect the requisite information required for the due diligence procedure and to obtain authorization for information reporting; and

Assessing the legitimacy and compliance under the PRC law of the due diligence policies and procedures and the actual reporting of information.