There is a battle brewing between U.S. and Chinese regulators that may be bigger than the current standoff between the PCAOB and SEC with Chinese regulators over audit working papers.
The Foreign Accounts Tax Compliance Act (FATCA) requires non-U.S. banks, investment funds and other financial institutions to tell the U.S. Internal Revenue Service about accounts held by Americans with more than $50,000. If financial institutions do not cooperate, they could be kicked out of the U.S. We are talking big institutions here, like Bank of China and HSBC.
Like in the auditing standoff, many other countries have also resisted providing this information, and also like the auditing standoff, bilateral arrangements have been negotiated with many countries, including most importantly the popular bank secrecy country of Switzerland.
Unsurprisingly, China is holding out, as is Hong Kong. China probably views this as another attempt by the U.S. to extend U.S. law to China that impinges on China’s national sovereignty. This is an action against U.S. citizens, not Chinese, so it is probably less offensive to the Chinese than the SEC/PCAOB actions which go after Chinese accounting firms and U.S. listed Chinese companies.
In an interesting article today, Reuters speculates that the Chinese want similar information from the U.S. in exchange for cooperation. China’s tax system is very similar to the U.S. in that it taxes its citizens on their worldwide income. So, if Chinese citizens have unreported deposits in U.S. financial institutions they are evading Chinese taxes in the same way that Americans are suspected of evading U.S. taxes with deposits in Chinese financial institutions.
But the Chinese are probably interested in getting this information to track down corrupt officials. In 2011, the People’s Bank of China reported that between 16,000 and 18,000 officials and employees of state-owned companies had left China with more than $120 billion stolen from China. Most of this money went to the United States.
What is good for the goose is good for the gander.
It has been suggested that one solution to the auditing standoff is to make that cooperation a two way street. If U.S. companies are listed on Chinese stock exchanges, then Chinese regulators should have the right to inspect U.S. audit working papers and U.S. auditors. No U.S. companies are presently listed on China’s stock exchanges, but plans for an International Board could change that. But suppose that General Motors decides to list on the International Board. How will the U.S. react to Chinese regulators showing up in Detroit demanding to see the Deloitte’s working papers, considering that GM is a major defense contractor?
For my readers who are U.S. citizens with accounts in China and Hong Kong, it is not illegal to have foreign accounts with more than $50,000. However, you are going to get caught if you do not report them. Even if no deal is reached between the U.S. and China on this matter, the huge investment in tracking funds to fight terrorism means that the IRS has the power to find these accounts, particularly if you ever try to bring them back to the U.S. It costs a lot less to report the accounts and pay tax on the earnings than to pay the huge penalties, potentially including jail time, when you get caught.