Data exchange to combat tax evasion seen affecting Hong Kong private banks
A reporting standard devised by the OECD and the G20 aimed at unearthing hidden wealth will challenge institutions in the city, analysts say
An upcoming international information exchange system will affect the private banking industry and a number of companies in Hong Kong and Singapore, say analysts.
The Common Reporting Standard is the Organisation for Economic Co-operation and Development's (OECD) and G20's version of the Foreign Account Tax Compliance Act, a United States law designed to combat tax evasion.
The standard is due to start on December 31 next year, when financial institutions in participating jurisdictions are expected to collect information on new clients and conduct due diligence on existing clients. From January 2016, there should be automatic exchange of tax information among 44 early-adopter states.
"These changes will create much greater challenges for wealth management firms everywhere," said Richard Weisman, a lawyer with international law firm Baker & McKenzie.
The early adopters of the standard include Britain, Germany, France, as well as offshore centres like Bermuda, British Virgin Islands (BVI) and Cayman Islands.
"With the Common Reporting Standard, the ability for people to hide their money in banks is going to disappear. The ability to hide behind an overseas company will be a thing of the past," said Charles Kinsley, China tax principal at KMPG.
The number of high-net-worth individuals using private banks in Hong Kong and Singapore to avoid disclosure would shrink, Kinsley said. The fact that offshore hubs like BVI and Cayman will adopt the standard is important for Hong Kong because many companies operating here are registered in those jurisdictions or owned by companies registered there, he said.
Cayman Islands is the jurisdiction of choice for a large number of funds in Asia, Kinsley said.
"The number of companies in Hong Kong and Singapore using BVI and Cayman companies for non-disclosure will decrease," Kinsley predicted.
Toine Knipping, chief executive of international trust company Amicorp, said many Hong Kong shell companies would disappear. "There are over 100,000 companies registered in Hong Kong, and a significant portion of them will be affected as they are just a thin file in the cabinet," Knipping said.
Under the OECD-G20 plan, firms will be taxed where their operations are, not where their profits are booked, he said. "If you want to benefit from being a Hong Kong company, you have to prove you have operations and people in Hong Kong."
China was not among the early adopters of the standard, but was likely to join at some stage, Knipping said.
"From 2016 onwards, it will no longer make sense for a Chinese to have a bank account in Singapore or Hong Kong because that information will be known to the Chinese government," Knipping said.