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Sunday 27 September 2009
US tax snoops zero in on Hong Kong
US tax authorities are spreading their global dragnet wider in an attempt to snare tax evaders, and the income of Americans in Hong Kong may be about to come under more scrutiny.
US tax authorities are spreading their global dragnet wider in an attempt to snare tax evaders, and the income of Americans in Hong Kong may be about to come under more scrutiny.
The United States Internal Revenue Service (IRS) is moving closer to being allowed to examine the tax liabilities of the 60,000-plus US citizens living in Hong Kong. Next month the Legislative Council will resume discussion on an amendment to the city’s tax laws that would allow tax authorities to gather information on expatriates’ tax liabilities and hand it over to their home countries.
The prospect of a global exchange of Hong Kong tax records has sent a chill down the spines of some US citizens. As one of the world’s toughest tax authorities, the IRS has a reputation for always getting their man, or woman.
On top of paying Hong Kong taxes, US citizens are required to declare their earnings to the IRS every year and are liable to pay taxes in their home country if they earn above a certain amount. They are allowed an exception of as much as US$91,400 in non-taxable income for 2009, but in order to claim it they must prove that they spent most of the year outside the US.
Additionally, Americans must submit a filing on their foreign bank accounts if their combined value exceeds US$10,000. And regardless of what their investment portfolio may include or how long they have been away from the US, American passport holders still pass on estate taxes to their beneficiaries upon their death.
“[The issue] is not so much the money as it is the difficulty in the reporting and the fact that the United States makes it so painful,” said Evan Blanco, who is the chairman of the taxation committee at the American Chamber of Commerce in Hong Kong and a partner at global accounting firm Deloitte.
The IRS announced on Monday that it was extending a deadline for voluntary disclosures of unreported income in offshore accounts until October 15 because of overwhelming interest from wealthy individuals.
“People are confused [about what this means] and they’re nervous and they come to us because they want to get their affairs in order and do the right thing,” said Kurt Rademacher, a Hong Kong-based partner at law firm Withers. “So a lot of what we are doing is educating people on which forms are required and when they are required.”
Disclosures have picked up sharply in the wake of a watershed agreement by Swiss bank UBS to avoid charges of assisting American clients with tax evasion. The bank agreed to pay US$780 million in fines and hand over a list of a couple of hundred clients who may have been involved in wrongdoing. The US has since pushed UBS to expand that list to over 4,000 names, according to reports.
“They are certainly going after people who live outside the United States and they are going after them in a determined way,” Rademacher said. “They are concerned about the corporate and trust structures that some Americans have been using to dodge taxes.”
Hong Kong has come under criticism from the US and Europe after it was implicated in harbouring, indirectly, dummy companies used by tax evaders. Two individuals in the UBS probe have admitted they used shell corporations in Hong Kong to stash cash beyond the oversight of the IRS. At a meeting in June of the Group of 20 leading developed and developing nations, Hong Kong was not recognised as meeting international tax standards.
The city still has on its books a 14-year-old law that limits its information-sharing to domestic- related tax issues; most Western countries have updated their tax codes to include a provision for an open exchange of tax records with their partners. The government has pledged to fall into line because doing so would put Hong Kong in a position to secure valuable economic treaties. Once it is on an equal footing with other developed markets, it will be able to sign more agreements on the avoidance of double taxation, which reduce the levies that companies and individuals have to pay.
“If you want to enter into double tax agreements, you need to be willing to meet [the other country] on its terms,” said AmCham’s Blanco. “And if you want Hong Kong to be an Asian financial centre and trading hub, then you need a wide series of double tax arrangements.”
Hong Kong has signed just five comprehensive double taxation agreements, while Singapore has already inked 60, according to the website of its Ministry of Finance.
Most industry consultants and lawyers support the amendment to update the Hong Kong tax code because the existing arrangements have caused the city to lag behind other financial centres such as Singapore. Around a dozen professional bodies have submitted documents to Legco endorsing the proposed changes to the law. But they have also called on the government to use discretion when choosing whether or not to exchange information with other tax jurisdictions.
“Although we support in principle this provision, we believe that there should be more safeguards on privacy and the confidentiality of the information exchanged,” said Davy Yun, tax director of Deloitte China.
Yun said the government should consult the public to decide which safeguards were needed and how they could be implemented. He suggested adding a provision to create an independent tribunal that would provide a forum for individuals to contest information gathered by tax authorities for exchange with other countries. Others called on the government to exchange data only in cases where substantial evidence of wrongdoing already exists, so that foreign tax enforcers would not be able to go fishing for information.
If the amendment is passed, Hong Kong would only be required to exchange information with those countries it has an agreement with, so there is not expected to be much dissemination of data in the near term. AmCham’s Blanco said that even if the government secured a comprehensive tax agreement with the US in the future, the new oversight was not expected to have any impact on most of the city’s US residents since they were already required to file regular tax returns to the IRS.
“Some people are always going to have some suspicion of the government when its nose is in their business,” Blanco said. “But if you are an American and are properly reporting your taxes and financial accounts, the IRS probably knows most of [your financial data] anyway.”
The US would be more likely to seek data on a minority of individuals coming to Hong Kong from other countries in an attempt to exploit the city’s financial system and deliberately hide their earnings, he said.
The cases of the two UBS clients using shell companies in Hong Kong to hide their earnings have brought increased scrutiny of the city’s tax system. Hong Kong has even been characterised as a tax haven because of its low taxes, lack of duties on capital gains and non-disclosure stance under the current tax code. But the government has consistently upheld the system as transparent and one with strong enforcement.
Richard Cullen, a visiting professor in the faculty of law at the University of Hong Kong, praised the efficiency of the Hong Kong tax system and said it had been unfairly characterised by related events.
“A real tax haven that has maximum bank secrecy with practices that make it easier to hide income is not what is going on here in Hong Kong,” Cullen said.
The real concern for most of the Americans in the city is that they must keep up with the extensive IRS regulations.
The celebrated 18th century US thinker Benjamin Franklin once quipped that, “In this world nothing is certain but death and taxes.” If he were alive today and in Hong Kong, he might also have mentioned lengthy disclosure forms.
3 comments:
US tax snoops zero in on Hong Kong
American expats face more financial scrutiny
Nick Westra
27 September 2009
US tax authorities are spreading their global dragnet wider in an attempt to snare tax evaders, and the income of Americans in Hong Kong may be about to come under more scrutiny.
The United States Internal Revenue Service (IRS) is moving closer to being allowed to examine the tax liabilities of the 60,000-plus US citizens living in Hong Kong. Next month the Legislative Council will resume discussion on an amendment to the city’s tax laws that would allow tax authorities to gather information on expatriates’ tax liabilities and hand it over to their home countries.
The prospect of a global exchange of Hong Kong tax records has sent a chill down the spines of some US citizens. As one of the world’s toughest tax authorities, the IRS has a reputation for always getting their man, or woman.
On top of paying Hong Kong taxes, US citizens are required to declare their earnings to the IRS every year and are liable to pay taxes in their home country if they earn above a certain amount. They are allowed an exception of as much as US$91,400 in non-taxable income for 2009, but in order to claim it they must prove that they spent most of the year outside the US.
Additionally, Americans must submit a filing on their foreign bank accounts if their combined value exceeds US$10,000. And regardless of what their investment portfolio may include or how long they have been away from the US, American passport holders still pass on estate taxes to their beneficiaries upon their death.
“[The issue] is not so much the money as it is the difficulty in the reporting and the fact that the United States makes it so painful,” said Evan Blanco, who is the chairman of the taxation committee at the American Chamber of Commerce in Hong Kong and a partner at global accounting firm Deloitte.
The IRS announced on Monday that it was extending a deadline for voluntary disclosures of unreported income in offshore accounts until October 15 because of overwhelming interest from wealthy individuals.
“People are confused [about what this means] and they’re nervous and they come to us because they want to get their affairs in order and do the right thing,” said Kurt Rademacher, a Hong Kong-based partner at law firm Withers. “So a lot of what we are doing is educating people on which forms are required and when they are required.”
Disclosures have picked up sharply in the wake of a watershed agreement by Swiss bank UBS to avoid charges of assisting American clients with tax evasion. The bank agreed to pay US$780 million in fines and hand over a list of a couple of hundred clients who may have been involved in wrongdoing. The US has since pushed UBS to expand that list to over 4,000 names, according to reports.
“They are certainly going after people who live outside the United States and they are going after them in a determined way,” Rademacher said. “They are concerned about the corporate and trust structures that some Americans have been using to dodge taxes.”
Hong Kong has come under criticism from the US and Europe after it was implicated in harbouring, indirectly, dummy companies used by tax evaders. Two individuals in the UBS probe have admitted they used shell corporations in Hong Kong to stash cash beyond the oversight of the IRS. At a meeting in June of the Group of 20 leading developed and developing nations, Hong Kong was not recognised as meeting international tax standards.
The city still has on its books a 14-year-old law that limits its information-sharing to domestic- related tax issues; most Western countries have updated their tax codes to include a provision for an open exchange of tax records with their partners. The government has pledged to fall into line because doing so would put Hong Kong in a position to secure valuable economic treaties. Once it is on an equal footing with other developed markets, it will be able to sign more agreements on the avoidance of double taxation, which reduce the levies that companies and individuals have to pay.
“If you want to enter into double tax agreements, you need to be willing to meet [the other country] on its terms,” said AmCham’s Blanco. “And if you want Hong Kong to be an Asian financial centre and trading hub, then you need a wide series of double tax arrangements.”
Hong Kong has signed just five comprehensive double taxation agreements, while Singapore has already inked 60, according to the website of its Ministry of Finance.
Most industry consultants and lawyers support the amendment to update the Hong Kong tax code because the existing arrangements have caused the city to lag behind other financial centres such as Singapore. Around a dozen professional bodies have submitted documents to Legco endorsing the proposed changes to the law. But they have also called on the government to use discretion when choosing whether or not to exchange information with other tax jurisdictions.
“Although we support in principle this provision, we believe that there should be more safeguards on privacy and the confidentiality of the information exchanged,” said Davy Yun, tax director of Deloitte China.
Yun said the government should consult the public to decide which safeguards were needed and how they could be implemented. He suggested adding a provision to create an independent tribunal that would provide a forum for individuals to contest information gathered by tax authorities for exchange with other countries. Others called on the government to exchange data only in cases where substantial evidence of wrongdoing already exists, so that foreign tax enforcers would not be able to go fishing for information.
If the amendment is passed, Hong Kong would only be required to exchange information with those countries it has an agreement with, so there is not expected to be much dissemination of data in the near term. AmCham’s Blanco said that even if the government secured a comprehensive tax agreement with the US in the future, the new oversight was not expected to have any impact on most of the city’s US residents since they were already required to file regular tax returns to the IRS.
“Some people are always going to have some suspicion of the government when its nose is in their business,” Blanco said. “But if you are an American and are properly reporting your taxes and financial accounts, the IRS probably knows most of [your financial data] anyway.”
The US would be more likely to seek data on a minority of individuals coming to Hong Kong from other countries in an attempt to exploit the city’s financial system and deliberately hide their earnings, he said.
The cases of the two UBS clients using shell companies in Hong Kong to hide their earnings have brought increased scrutiny of the city’s tax system. Hong Kong has even been characterised as a tax haven because of its low taxes, lack of duties on capital gains and non-disclosure stance under the current tax code. But the government has consistently upheld the system as transparent and one with strong enforcement.
Richard Cullen, a visiting professor in the faculty of law at the University of Hong Kong, praised the efficiency of the Hong Kong tax system and said it had been unfairly characterised by related events.
“A real tax haven that has maximum bank secrecy with practices that make it easier to hide income is not what is going on here in Hong Kong,” Cullen said.
The real concern for most of the Americans in the city is that they must keep up with the extensive IRS regulations.
The celebrated 18th century US thinker Benjamin Franklin once quipped that, “In this world nothing is certain but death and taxes.” If he were alive today and in Hong Kong, he might also have mentioned lengthy disclosure forms.
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