The crucial implications of FATCA for U.S. Citizens in Hong Kong & Globally including US Air Space!

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.

http://www.scmp.com/business/companies/article/1438783/cathay-withhold-us-pilots-wages-taxes

Cathay will start withholding tax from the second quarter of the year.

Cathay will start withholding tax from the second quarter of the year.

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.
http://fatca.thomsonreuters.com/wp-content/uploads/2014/04/ASIA-Hong-Kong-U.S.-tax-information-exchange-agreement-signals-a-formal-FATCA-pact.pdf

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_hk_us_purpose

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.

– See more at: http://hongkongbusiness.hk/financial-services/commentary/crucial-implications-fatca-us-citizens-in-hong-kong

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:

  • Banks
  • 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. 

https://www.kpmg.com/cn/en/services/tax/us-corporate-tax/foreign-account-tax-compliance-act/pages/default.aspx

Scariest Tax Form? Skip It, and IRS Can Audit Forever

Are you a U.S citizen or resident who is an officer or director of a foreign corporation ?
Do you have a company that holds a foreign bank account ?

When a U.S. shareholder holds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC.

A U.S. shareholder is a U.S. person who owns 10 percent or more of the foreign corporation’s total voting power.

1040 form

That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate.

What’s more, this penalty can apply even if no tax is due on the return. That seems harsh, but the next rule—about the statute of limitations—is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Normally, the statute expires after three or six years, depending on the issue and its magnitude.

This statutory override of the normal statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your return. Without it, it really isn’t a return.

And don’t assume that you have no issue if there is no CFC because U.S. shareholders don’t own over 50%. In fact, Forms 5471 are not only required of U.S. shareholders in CFCs. They are also required when a U.S. shareholder acquires stock that results in 10 percent ownership in any foreign company.

The harsh statute of limitation rule for Form 5471 was the result of the HIRE Act passed March 18, 2010. Not coincidentally, this was the same law that brought us FATCA, the Foreign Account Tax Compliance Act. Bottom line: be careful with CFCs and with Form 5471. The possibility that a statute will remain open can ruin more than your day.

Whats New: Filers of Form 5471 may be subject to net investment income tax on income from CFCs controlled foreign corporations.

This problem is commonly paired with other failings, such as the filing of foreign bank account forms known as FBARs. That means the potential for large civil penalties and perhaps even criminal liability can be palpable.

This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
Forbes Article Source: http://www.forbes.com/sites/robertwood/2014/03/03/scariest-tax-form-skip-it-and-irs-can-audit-forever/