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  • Sep 23, 2014
  • Updated: 12:27pm
Jake's View
PUBLISHED : Sunday, 12 January, 2014, 3:43am
UPDATED : Sunday, 12 January, 2014, 6:31am

How the export invoicing trick works

Illicit capital flows into the mainland from Hong Kong through over-invoicing from 2012 to March last year are estimated to have reached US$155 billion, sparking fresh concerns over currency speculation.

SCMP, January 9

So says Global Financial Integrity, a Washington-based research and advocacy group. Tick the boxes - name, geographic base and description. Yes, we have angels here again, far removed from Planet Earth.

The angelic argument in this case is that mainland exports to Hong Kong shot up last year while overall mainland export growth was soft. This must have been, they say, because these exporters inflated the payments they received for their goods.

Right, let's work out how this over-invoicing works. You ship goods to Hong Kong and you bill your customer for more than you said you would and then you take the money back across the border and invest it in China.

Now, first of all, how does your customer stay in business if he keeps paying too much this way? Assuming that it was actually your own money, why would you expose yourself to the Beijing taxman by taking money you had hidden away from him abroad and bringing it back in as corporate profits?

And anyway, why should Beijing object to Chinese citizens investing in China, particularly at a time when the balance of payments showed an unwelcome outflow of private capital?

Hmmm … lots of questions here. They have unusual ways of looking at things in heaven, these angels do.

Mind you, I fully accept that Hong Kong is a big conduit for investment in the mainland and that much of the money came from the mainland in the first place. It is done by under-invoicing, not over-invoicing. Our government calls it "rate of re-export margin". That confuses things nicely.

What the mainland exporter does is sell his goods at cost to a wholly owned agent in Hong Kong or further abroad and only tack on his own margin when the goods are out of the country. He can then bring this money in as foreign direct investment, which gives it special privileges, and he commonly does it by sending it through Hong Kong first as FDI.

The line chart shows you how it works. Notice first how closely matched our inflows and outflows of FDI have been. What comes in goes right back out.

And now look at the scale. In the 12 months to September last year, FDI outflows from Hong Kong amounted to HK$785 billion. That's billion, not million, and these are official government figures. It amounts to 37.4 per cent of gross domestic product and does not include securities investment or syndicated lending. Does the word "boggling" come to mind?

Put it in further perspective. The bar chart shows you what FDI outflows come to as a per cent of GDP elsewhere in Asia and the world. Only Singapore is remotely comparable. Singapore plays the same game with Malaysia and Indonesia that Hong Kong plays with the mainland. And now to tell the angels that this is just fine and there is nothing wrong with it, mission impossible.


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Jake missed answering the most important question to people in HK. Is this good or bad for HK?
John Adams
I agree with you JohnYuan - please see my reply below
John Adams
It would seem at first blush to be good for HK because:
a) HK gets more profit tax (albeit much less than China would get if the exporters paid their tax in full in China)
b) this round-tripping business employs a lot of HK people in the I/E trade, not to mention our huge container ports .
As to whether it's morally correct is another matter altogether. But if something immoral can somehow eventually become moral just by the the practice of time one can only add that this mind-boggling tax trickery has been going on for decades and our government turns a blind eye to it.
I can’t understand the logic. If Chinese exporters inflated the payments they received for their goods through over-invoicing, Hong Kong importers make more payments for the goods – this means Hong Kong companies incur more costs on the face of the transaction and therefore earn less profits and should pay less Profits Tax. Why is it said, “HK gets more profit tax”?
To John Adams:
It is better not to have law than getting around it in practice. A society can’t afford to be selective what law to obey and expect what remains would duly be respected.
The export tax evasion I am sure Chinese government has been fully knowing of the situation. But it is a means to let Hong Kong economically continue do well after the hangover. I am afraid it is not only less tax collected it is also planted the seed of a law-breaking culture in China.
John Adams
I agree with you JohnYuan on the legal side.
Sad that this tax avoidance - or rather evasion - has been so blatantly tolerated for the past 30 ( 40...? 50 ... ? ) years both by HK and China.
But I question whether we still need this round-tripping business in HK. If we abolished it (by law) we would lose a lot of profit tax but we could also afford to close down the container terminals and build on the land - which according to JvdK's calculations creates more than enough space for the next generation
Our comrades north of the border are fully aware of what is going on and turn a blind eye because HK is their money laundering ATM. Once the Yuan is freely convertible, HK is finished.


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