City may lose out on billions because of offshore companies: experts
Toh Han Shih and Tanna Chong
The widespread practice of registering companies overseas by Hong Kong's richest, most powerful people raises questions about their corporate governance, transparency and the possibility that the city may be losing out on billions in city tax revenues, according to experts on corporate finance.
They were reacting to the release of data collected by the non-profit International Consortium of Investigative Journalists (ICIJ) showing that Hong Kong residents held stakes or directorships in more than 14,500 offshore companies, the vast majority in the British Virgin Islands (BVI), as of 2010.
For example, Henry Cheng Kar-shun, chairman of the Hong Kong conglomerate New World Development, is a director of at least 110 offshore companies, according to the documents.
Richard Li Tzar-kai, the youngest son of Hong Kong's richest man Li Ka-shing, is a shareholder in at least 15 offshore companies and director of at least 28, the ICIJ data reveals.
Cheng could not be reached for comment. A spokeswoman at Cheung Kong Infrastructure, the Hong Kong-listed infrastructure firm controlled by Li Ka-shing, said: "All our companies fully comply with regulatory, tax and legal requirements of the countries in which they operate."
A spokesman for Richard Li had no immediate comment.
Registering a company offshore is legal and hundreds of thousands of people have registered countless companies in the British Virgin Islands. But because it is difficult to trace the ownership of companies in the islands, individuals may register there to avoid paying taxes or to conceal business activities, said Hugo Williamson, managing director of the Risk Resolution Group, a London consultancy.
"It is often the case that corporate ownerships end up being held by seemingly small and often innocuously named BVI entities, whose apparent scale and limited profile belie the substantial stake and control they have, while concealing the identities of who lies behind them," Williamson said. The US government has indicated that business ties to British Virgin Islands entities raises suspicions.
The Justice Department and Securities and Exchange Commission "hold the position that conducting business in or through suspect jurisdictions may be a red flag, including notoriously opaque banking jurisdictions like the British Virgin Islands and corruption-prone countries", said a report by law firm Hughes Hubbard & Reed.
Accounting lawmaker Kenneth Leung said that although offshore ownership did not equate with misconduct, the large number of offshore companies in the ICIJ documents could indicate that the city's public coffers had lost billions of Hong Kong dollars in stamp duty, taxes levied on property transactions.
According to Hong Kong court documents, at least two companies have registered overseas to avoid paying stamp duty.
In the late 1990s, Sun Hung Kai Properties and Swire Properties registered a company in the BVI, Calm Seas Developments, to avoid paying HK$349.65 million in stamp duty for a property in Tseung Kwan O.
Sun Hung Kai and Swire's lawyers argued that the purchase was not subject to Hong Kong stamp duty because Calm Seas was not based in Hong Kong.
After a four-year battle, the Court of Final Appeal ruled in 2003 that Swire Properties and Sun Hung Kai owed the Hong Kong government HK$349.65 million in stamp duty for the project. A Sun Hung Kai Properties spokesman said it is widespread practice in Hong Kong's property market to register offshore companies to conduct property transactions.
Leung said companies should not be allowed to avoid paying stamp duty by registering companies overseas. He has told officials there should be specific disclosure requirements for offshore companies that own Hong Kong properties.
As of the end of last year there were nine Cayman Islands companies bearing the name "Li Ka-shing" on the list of Restricted Trust Licensees of Cayman Islands, another offshore haven, according to the Cayman Islands Monetary Authority.