China's Fatca pact could prompt move into property

While China has agreed to comply with the US's Foreign Account Tax Compliance Act (Fatca), the legislation only covers certain financial instruments, which could prompt Chinese nationals overseas to move into assets not covered by the law.

Under the agreement, China-based financial institutions will report information on the financial accounts of US persons to America’s Internal Revenue Service, and US firms will send information on Chinese account holders to mainland tax authorities.

But the reporting system covers only financial instruments that produce dividend income and capital gains. Tangible assets such as real estate are not included, noted Karl Egbert of law firm Dechert.

“We know that Chinese investors have been very interested in real estate and [other] hard goods, so the compliance of China may further push Chinese investors into sectors of the economy that aren’t covered by Fatca,” he said.

Jones Lang LaSalle forecasts that Chinese investment in foreign property may grow by 30% this year from 2013 to $14 billion.

Moreover, if China were to request information on the real estate assets held in the US by its nationals, the US would be hard pressed to provide it, because the market is fragmented across more than 50 states and territories, Egbert noted. He added that he doesn't expect the collection of information on property to be included in Fatca.

Meanwhile, the Organisation for Economic Co-operation and Development’s (OECD) tax reporting system – which is modelled on Fatca – does not cover property. China said in August that it would join a group of 50 countries that participated in the OECD’s system to exchange information on tax matters and combat tax avoidance.

Algirdas Šemeta, the European Union’s commissioner for taxation, who was involved in setting up the OECD’s tax exchange standard, said property is not currently under consideration but could be included in future.

Tax information sharing systems around the globe first focus on financial instruments because their movement through financial systems is reported, said Šemeta during a recent visit to Hong Kong. Developing a system for detecting tax evasion through property investment would require the deployment of significant resources, he added.

The EU is introducing an information exchange system that would require its 28 member states to report the incomes of European individuals living in other member states, including the ownership of and income from properties, as well as other information such as employment income and pensions data.