Cathay to withhold US pilots’ wages for taxes.
Airline says new laws are forcing it to hand over 30 per cent of salaries to American authorities
Cathay Pacific Airways is to start withholding about 30 per cent of its American pilots’ salary every month and pass the money to the US tax authorities together with the pilots’ personal information this year.
“The US Internal Revenue Service is actively seeking airlines flying into the US to ensure they are fully compliant with all US income tax requirements,” Cathay said. “As an international airline flying into the US, we are working with the IRS on this compliance.”
Yip, an expert on FATCA, said that if Cathay did not comply, the US tax authorities would withhold 30 per cent of its US-source income.
A recently signed tax information sharing agreement between the Hong Kong and U.S. governments is an important first step towards a formal, comprehensive intergovernmental agreement (IGA) under the U.S. Foreign Account Tax Compliance Act ( FATCA), said lawyers.
FATCA requires U.S. persons, including those living overseas, to report details of their financial accounts held in other jurisdictions to U.S. tax authorities.
Additionally, foreign financial institutions (FFIs) must report the financial information of their U.S. clients to the Internal Revenue Service (IRS) or face steep penalties.
Last July, the Hong Kong Legislative Council moved to enable Hong Kong to enter into stand-alone Tax Information Exchange Agreements and, more importantly for U.S. persons who have financial accounts there, to sign an “intergovernmental agreement” (IGA) with the U.S. for implementation of the Foreign Account Tax Compliance Act (FATCA).
FATCA reaches U.S. citizens or residents and entities, such as a corporation or a partnership, in which a U.S. person owns more than a 10% interest.
Beyond the obvious, the reportable accounts include those held in trusts, insurance policies, retirement and stock option plans, and other related foreign structures.
The implications of FATCA, and in particular its withholding and reporting regimes, are wide-ranging for financial institutions, investment entities, and many other global organisations.
— reporting and payment of tax on worldwide income, including investment income earned on financial accounts located outside the U.S.
— disclosure of foreign accounts on tax returns and “FBAR” forms, and of foreign assets on the new Form 8938
— reporting of gifts or bequests from non-U.S. sources, and distributions from and relationships with foreign trusts, as well as interests and certain transactions with foreign corporations and partnerships.
The failure to comply with these requirements can have significant, even potentially catastrophic consequences, including potential criminal prosecution for willful violations and substantial civil money penalties.
A willful FBAR violation can result in a penalty of 50% of the balance of any unreported account(s) per year, and the IRS is increasingly aggressive about this penalty.
Even non-willful conduct can result in substantial monetary sanctions, and the assessment of tax and interest.
Who is impacted?
Foreign financial institutions, including Hong Kong based financial institutions and Hong Kong branches of international financial institutions, are all subject to the impending FATCA regime.
Equally impacted are all residents in Hong Kong with U.S. citizenship or U.S. residency status, as the FATCA rules will require compliant financial institutions to disclose their account information to the Internal Revenue Service (IRS).
Additionally, certain non-U.S. account holders will be required to comply with requests from their financial institutions for additional documentation in order to avoid being subject to the 30 percent withholding tax.
Under FATCA, “Foreign financial institutions” (FFIs) include:
- Private equity funds
- Hedge funds
- Institutional investment funds
- Retirement funds & trusts
- Insurance companies
- Securities brokers and dealers
In essence, any non-U.S. organisation that holds, or manages customers’ money is considered an FFI subject to FATCA, irrespective of where it is headquartered or whether or not the shareholding structure is American.
What effect will FATCA have on your business?
Organisations will need to rapidly determine the potential business implications of FATCA and define their compliance strategy accordingly.
Executives should make it a priority to increase their organisation’s FATCA knowledge.