Could China undermine America’s new controversial tax act?
It looks as though China is taking its time on signing an intergovernmental agreement (IGA) with the US over the implementation of FATCA, America’s new and hugely unpopular tax act. And should the People’s Republic ultimately rebuff it, other countries are likely to follow suit, and this would destabilise the project before it has even begun.
For the Foreign Account Tax Compliance Act to be effective it needs to have every financial institution in the world release information about their American clients directly to the US Treasury – and governments need to sign an IGA with the US in order to force their banks to comply.
China’s reluctance to sign an IGA with the US could be, I suspect, because it has realised that FATCA is extremely expensive to implement, overwhelmingly burdensome, that it contravenes local financial laws, and because it would benefit very little – if at all- from FATCA, because American banks are not subject to the same reporting requirements as their foreign counterparts, making the idea of it being ‘reciprocal’ utterly false.
In short, China appears to understand that it would end up paying a heavy price for the privilege of having its financial institutions act as spies for the US taxman.
The fact that this global superpower is holding out on putting its name to an IGA is, I think, positive news. The only way FATCA would work is for every nation to enforce it, and if China refuses to sign an IGA, then it’s highly likely they won’t be on their own in rejecting FATCA. No other countries in Asia have signed up to an IGA as yet, so it looks as though they’re waiting to see what China decides.
The entire FATCA project could ultimately come unstuck if China refuses to comply, and start a domino effect all over the world. If that were to happen, FATCA would become a farce, as it cannot effectively function without the agreement of every government all over the globe.
As such, I wouldn’t be surprised if there are some very anxious, behind the scenes attempts currently underway by the US to get China to sign up to a FATCA IGA as soon as possible.
Nigel Green deVere Group
blog written on 13th February