No need to exaggerate FATCA’s anti-corruption effect

Recently, Foreign Account Tax Compliance Act (FATCA) took effect. We would like to discuss ‘it helps China’s struggle against corruption’, which is highly expected by many Chinese.

Under FATCA, signatory state is obliged to report financial status of American residents in this country and vice versa. And America has reached or basically reached Financial Information Sharing Agreement with 86 countries, which include not just tax heavens, such as Switzerland, Belgium, Denmark and Finland, but also Chinese Mainland, Hong Kong and Taiwan.

This means that China will report financial status of American residents in its financial institutes and vice versa. Chinese government will hence know account, profits and even account holder’s name and address of Chinese residents in American financial institutes.

The information shared between USA and the other party must be kept secret and used only for tax purposes as required by FATCA. But it doesn’t restrict its anti-corruption use. Because of FATCA’s ‘side-effect’, many think America is helping China to strike corruption.

Then does FATCA indeed promote China’s anti-corruption struggle?

‘Many to one ’model will have some grey space.

American government is burned by 17 trillion debts. Its residents are evading taxes through overseas assets. FATCA will effectively restrict American citizens’, green card holders’, American enterprises’ and foreign financial institutes’ tax evasion, bringing direct benefits to USA government. Therefore, the bill is fundamentally for striking tax evasion for American government, not for helping China.

Of course, it indeed is useful. It forces many to give up American nationality or green card. It’s ‘side effect’ is not empty talk. Insiders told medias that it will post great threatens to those, who want to hide funds in American banking system, if the America and China signed FATCA. Considering this, the bill is not for anti-corruption. It indeed has great grey space beyond anti-corruption for China.

According to FATCA, American government will share with the signatory state account information in their respective financial institutes equally and mutually beneficially. But FATCA is just a bilateral agreement, respectively signed with American government. Obligations and rights are effective only within the respective two signing parties, not like WTO, which is signed by all other member countries. That’s the root cause of grey space.

Specifically, a wife of a Chinese corrupt official holds American green card and hides funds in non-American financial institutes. These countries may only provide financial information to USA, not Chinese government, while the American government is not obliged to provide to its Chinese counterpart. Chinese government will obtain such information only when the ‘wife’ is Chinese resident and save funds in American financial institutes. Therefore, it’s hard to escape American government’s tax inspection, but it’s easy to avoid reporting to Chinese government.

FATCA is subject to American national interests

FATCA is successfully signed between China and America. This can be attributed to American government’s specific administrative requirements, laying foundation for Sino-American cooperation in taxes and justice. No denying that Sino-American disagreements will exist in the long run. In this case, the bill will be restricted by American national interests. Detailed information report execution may be disturbed in many situations, far from being optimistic.

In November, 2005, Gonzales, Minister of Justice of America, visited China. During his visit, he expressed enhanced cooperation between the two countries. And Sino-American judicial cooperation made great progress for the last 10 years. After all, judicial cooperation is only an important part of the two countries’ overall relationships, greatly subject to national interests of the two countries.

Actually, we can not ask anybody for help in terms of China’s anti-corruption. External help, whether extradition or account transparency, is only a technical solution, which will become a mere formality, if institutional support is not available.

Published in Beijing News | 2014-7-4