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U.S.-China anti-tax evasion deal seen as crucial, but elusive

By Patrick Temple-West and Yimou Lee

WASHINGTON/HONG KONG (Reuters) - The success of a broad U.S. crackdown on offshore tax dodging will be determined in part by China's cooperation, but talks with Chinese officials are making little headway, former U.S. Treasury Department officials and tax professionals said.

FATCA requires foreign financial institutions to tell the United States about Americans' offshore financial holdings.

One obstacle in the Chinese talks is likely that China wants, in return, more tax information than U.S. officials are willing to share about Chinese citizens who have assets in the United States, accountants and tax lawyers said.

China - the world's second-largest economy - is seen by some tax experts as an important participant if the U.S. Foreign Accounts Tax Compliance Act, or FATCA, is to work effectively, especially in Asia.

Without China, FATCA won't be airtight, said John Harrington, a partner with law firm SNR Denton. He previously served as Treasury's international tax counsel.

China's State Administration of Taxation did not respond to questions. In November, a senior official at China's central bank criticized FATCA as overreaching.

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. Financial firms that do not comply with FATCA, which takes effect in January 2014, could effectively be frozen out of U.S. markets.

Treasury has negotiated FATCA deals, known as intergovernmental agreements (IGAs), with five countries: the UK, Denmark, Mexico, Ireland and, most recently, Switzerland. Negotiations with dozens more countries are under way.

Talks with China have been hush-hush, but are occurring. "We have engaged with China on FATCA and will continue to do so," a Treasury spokeswoman said, declining to comment further.

HONG KONG'S ROLE

China is seen as a critical part of the FATCA puzzle not only due to the country's own global economic prominence, but also because of its sway over Hong Kong, a major money center.

The Hong Kong Association of Banks said in a statement: "FATCA is an issue highly relevant to Hong Kong ... We have been and will closely follow relevant developments, in discussion with the Hong Kong Government."

The Financial Services and the Treasury Bureau of Hong Kong did not respond to questions.

It was unclear whether Hong Kong may be able to negotiate an IGA on its own with the United States. Hong Kong became part of China in 1997, but retained its own currency and local government.

"The Chinese could attempt to use Hong Kong as negotiating leverage for their own IGA," said Richard Harvey, a tax professor at Villanova University.

Treasury started implementing FATCA last year, largely via the vehicle of IGAs, bilateral agreements that spell out how a country and its financial institutions can comply with FATCA, and what, if anything, they get in return from the Americans.

RECIPROCITY SOUGHT

Foreign countries have pushed, with limited success, for reciprocal information sharing, but generally IGAs have not allowed an equal two-way sharing of taxpayer information.

With IGA negotiations in mind, the Obama administration is considering asking Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments.

The IRS this year started giving some foreign governments information about interest payments earned by their citizens in U.S. bank accounts. This has already raised privacy concerns.

The Chinese are thought to be seeking more information about their citizens' U.S. accounts than previous IGAs have allowed.

Treasury negotiators "will have to look at whether they can go further than they have" to meet Chinese demands, said Philip West, who served as Treasury's international tax counsel and is now a partner at law firm Steptoe & Johnson LLP.

Like the United States, China taxes citizens on worldwide income. So China should be interested in getting tax information about its citizens' U.S. investments, tax experts said.

But inking an IGA will require the Chinese to swallow some national pride, said Alan Granwell, a former Treasury tax official now with law firm DLA Piper. FATCA "effects their sovereignty ... It's much more than just a tax issue there."

(Editing by Kevin Drawbaugh and Leslie Gevirtz)

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