TAX EVASION

Crackdown on Caribbean tax havens a surprise boon for Hong Kong

PUBLISHED : Thursday, 19 November, 2015, 11:25am
UPDATED : Thursday, 19 November, 2015, 11:25am

Hong Kong is tipped to become the world’s largest offshore corporate services centre by 2020, helped ironically, by the industry’s own struggles against reform demands coming from western governments and pressure groups.

On notice after high profile money laundering and tax avoidance scandals, traditional offshore havens like the British Virgin Islands and Bermuda face being squeezed by government action groups now coordinating new guidelines on transparency and tighter regulation.

Industry leaders say they need to rally in support of the sector.

“It is clear...that the push for regulation - the push to squelch the ambitions of offshore - will remain both ambitious and exigent...Proving the worth of offshore could weaken the regulatory urge,” Jonathan Clifton, managing director of incorporation giant OIL, a division of Vistra Group, now argues.

For Hong Kong this renewed assault may actually work in the city’s favour. The city’s common law system and relatively hassle free bureaucracy has long helped make it a key global player in the still fast growing market for incorporation, trust, and fund services, among others, with investors keen to take advantage of the city’s role as a bridgehead between China and the world. This market has in turn supported a local ecosystem of lawyers, accountants and advisers.

Helped by a forecast five-year 72 per cent explosion in Greater China demand for such services, by the end of the decade Hong Kong will be the world’s largest offshore market, OIL analysts predict, overtaking the British Virgin Islands, Cayman Islands, and Singapore.

Some industry experts now call Hong Kong ‘midshore’, which contrary to widespread concerns the city is a conduit for dirty mainland money, suggests a more rigorous regulatory approach to corporate oversight compared to other jurisdictions.

“The outlook for Hong Kong is very positive. It is ‘super jurisdiction’. Both an originating market (from cross border money flows) and a destinational jurisdiction,” Clifton said.

Tighter banking rules globally are making it harder for offshore companies in island tax havens, and especially offshore trusts where beneficiaries are sometimes hidden, to even open a bank account; a first step to doing business or making an investment.

“The boom times are probably over (for the BVI and Cayman Islands). They have to present a value proposition for why people should use those company (structures),” said John Barclay, managing director of Primasia Corporate Services.

A broader threat to the sector comes from the Common Reporting Standard, an initiative by the rich nation backed Organisation for Economic Cooperation and Development to freely share, upon official request, information on individuals and companies as part of a general tax evasion and money laundering clampdown.

Countries that don’t comply could be blacklisted by the OECD making it harder for companies and trusts registered there to bank globally.

Though still in consultation phase, “it would be a downward spiral for any country to say we are not going into it,” believes Tim Prudhoe, a BVI based barrister at Kobre & Kim.

A separate UK led effort to strong arm crown dependencies like the Cayman Islands and BVI - where it is close to impossible to know who or what stands behind secretive offshore structures - to disclose “people of significant control” kicked off in April with a change in English companies law making such disclosures mandatory in England and Wales.

In response the BVI government is already debating how it can share information with the UK, Prudhoe said.

“If it becomes clear people can find out about your financial status anyway, one reason people use the BVI may reduce over time,” he said.

“They then might as well have money closer to home,” like to Hong Kong.

The OECD is also looking at ways member countries can tighten up transfer pricing, another area where offshore jurisdictions, most notably Luxembourg, have excelled. Also known as base erosion and profit shifting, multinationals like Amazon and Facebook use legitimate gaps in the tax code to book profits offshore meaning they pay little or no tax in countries where the revenue originated.

The mooted changes are only in an early consultation phase, but if they are successfully implemented by OECD member countries, Hong Kong could again be a beneficiary as its 16.5 per cent flat corporation tax rate, while higher than some offshore centres, is still low on a regional basis.