China reached an agreement with the US over the controversial Foreign Account Tax Compliance Act (FATCA) with less than a week to spare before compliance is phased in worldwide. Analysts suspect a reciprocity clause may have prompted the move by China.

According to the website of the US department of the treasury, China reached an agreement with the US "in substance" on June 26 that will govern which and how Chinese financial institutions report the information required by US tax. China will therefore be treated as one of the jurisdictions that has an intergovernmental agreement (IGA) in effect. IGAs formalize the tax reporting and withholding procedures that FATCA entails and provides financial institutions with a six-month extension for registration with the IRS.

Because of its extraterritorial nature, FATCA was initially opposed by China. However, two developments seemed to have changed China’s stance:

1. both domestic banks and branches of foreign financial institutions lobbied Chinese authorities to come to an agreement with the US, in order to ease their compliance burden. 
2. Chinese tax authorities may themselves be able to curb tax evaders with the signing of the IGA as many wealthy Chinese nationals have bank accounts in New York or Miami. By signing an IGA - and provided it is the reciprocal IGA model 1 - all that information about these Chinese residents with US bank accounts will flow to Chinese tax authorities.

Other FATCA agreements

Hong Kong reached an agreement to sign an IGA model 2 in early May. Taiwan and Thailand reached agreements in substance on June 23 and June 24, respectively.