China’s Relationship with the Contentious U.S. FATCA

By Shawn Greene

For several years now, the United States has been preparing legislation under the Foreign Account Tax Compliance Act (FATCA), a complex reporting and withholding regime intended to enable the U.S. to better access offshore accounts, investments and income of U.S. citizens who have failed to rigorously report these holdings. Despite several nations’ embrace of the FATCA, China has continued to delay negotiations with the U.S. Treasury over whether or not to allow Chinese financial institutions to report U.S. taxpayer or U.S. firm information to the United States Government.

Under the FATCA, participating foreign financial institutions would be required to report to the IRS with information related to U.S. taxpayers, or foreign firms in which U.S. taxpayers hold substantial ownership.

Additionally, the U.S. would be able to impose a 30% withholding tax on “withholdable payments” to foreign persons at the highest levels unless it identifies U.S. interest holders or owners and disclose the required tax information to the United States. The FATCA will require those withholdable payments to be reported annually to the Internal Revenue Service (IRS) regardless of whether withholding from the payment has been required or completed.

To date, while most major economies are currently engaged in negotiations concerning how the FATCA will be applied to businesses within their borders, China has repeatedly refused to discuss the FATCA directly, and will likely continue to do so for the time being. Reports last September that Beijing and Washington had agreed to reach an intergovernmental agreement (IGA) on the FATCA before January have proven unfounded, with no such negotiations or agreement in sight despite the U.S. Treasury announcing a six-month extension on FATCA implementation last July in anticipation of an IGA with China.

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