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  • Dec 20, 2014
  • Updated: 4:02pm

British Virgin Islands leaks

On April 4, 2013, the International Consortium of Investigative Journalists (ICIJ) began leaking the details of 2 million emails and other documents naming prominent public figures from around the world who were concealing their wealth through the offshore tax haven of the British Virgin Islands. Based on this leak, the ICIJ released a report focussing on China's elite on January 22, 2014.

NewsHong Kong

Hong Kong's rich face exposure in tax-haven leak

Journalists investigating British Virgin Islands data say those setting up offshore entities were mostly from Chinese mainland, HK and Taiwan

PUBLISHED : Friday, 05 April, 2013, 12:00am
UPDATED : Wednesday, 22 January, 2014, 9:44am

Some of the wealthiest and most powerful people in Hong Kong, on the mainland and elsewhere in the world are watching nervously as the identities of those holding accounts in the offshore haven of the British Virgin Islands (BVI) are being exposed in what is described as the biggest information leak in recent history.

More than two million documents naming many individuals and detailing their financial exploits have leaked from the British Virgin Islands to the US-based International Consortium of Investigative Journalists (ICIJ). The group is working with dozens of journalists around the world to process the data and publish the secret financial information.

Scroll down for latest updates

The ICIJ said its data analysis showed most people setting up offshore entities lived on the Chinese mainland and in Hong Kong and Taiwan. "This explains why the second-largest source of capital investment flowing into China is the offshore tax haven of BVI," it said.

Britain's The Guardian newspaper, which is working with the ICIJ, said the leak could cause "a seismic shock worldwide to the booming offshore trade". The leak, in terms of quantity, was 160 times bigger than the WikiLeaks' political data haul three years ago. The Guardian said the leak also included data on "offshoots in Singapore, Hong Kong and the Cook Islands in the Pacific".

There is so much information that people in Hong Kong and USA will recognise some of the names if ICIJ reveals more stories
John Bruce, Macau director of Hill & Associates

It will take weeks, even months, for ICIJ journalists to analyse the data. They will release their findings in batches.

A few details already released raise questions about French President Francois Hollande's personal friend and campaign treasurer Jean-Jacques Augier; Maria Imelda Marcos Manotoc, governor of a Philippine province and daughter of late Philippine dictator Ferdinand Marcos; as well as Mongolian politicians and Spanish art tycoons.

Augier was forced to publicly identify his Chinese partner in the offshore firm as Xi Shu - who he said was a businessman and member of the Chinese People's Political Consultative Conference, The Guardian said. Augier was also found to have a 2.5 per cent shareholding in a Hong Kong entity, Capital Concord Development. Many more names will start to appear as the ICIJ updates its findings through its website and Twitter messages.

Greece asked the ICIJ if it could examine the data for evidence of illegal conduct by Greeks, the ICIJ said.

More Hong Kong and mainland firms will be revealed, the ICIJ said. Many of the world's top banks, including Deutsche Bank and UBS, had been found to have helped clients transfer money to BVI and others havens, such as the Cayman Islands, it said.

"There is so much information that people in Hong Kong and USA will recognise some of the names if ICIJ reveals more stories," said John Bruce, Macau director of Hill & Associates, a Hong Kong risk consultancy. "This will be a major blow for BVI companies and a lot of individuals and companies … [and] hugely bad for BVI because people won't want to use them."



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So back to Qiao Xiaoyang. Lets see if he can explain exactly how all these powerful Hong Kong and Mainland business persons love China and Hong Kong. We will see clearly that what he was really talking about was not not love of the nation when he said that any future HK leaders must love China. What he was talking about was obedience to the power structures of China. ...Obedience that would result in the lining of theirs and other's pockets.
Will be interesting to see the impact of "some" mainland Chinese on the list. This time the Chinese government cannot blame the New York Times. A welcome tool for President Xi Jinping to combat corruption? Hmmm...
Therefore the real action will take place domestically as governments examine their options. If they decide to increase the cost of leaving (the American approach), they will see the same result the US experienced. Specifically, RECORD numbers of Golden Geese leaving, before the cost gets even higher. If a government were smart, they would rather bring in policies that would attract more Golden Geese to their tax system. This means making if more attractive than the system that they are currently considering leaving. Just as a small number of departing Golden Geese has an asymmetric negative impact on total tax revenues, the attraction of even a relatively small number of Golden Geese will have a disproportionate positive impact.
Since in most G9 countries the top 1% account for just over 1/3rd of all personal taxes collected, even a slight increase in the number of Golden Geese who leave the tax system will have a dramatic impact on future tax revenues. The real question will be how will various governments legislatively respond to all of this.

There will be naive efforts to try and lobby for a global "level tax playing field". This effort is doomed from the outset, because of the prisoner's dilemma. Even efforts to try to impose standards for government fiscal policies across the eurozone weren't possible. Try making a broader effort over a vastly increased number of independent countries, all of whole are trying to keep and attract Golden Geese to their shores, is hopeless.
Option 3) "Cheat the Game": In years past, it was cheap and easy to engage in tax evasion. The morally challenged who were considering this option, did not seriously consider that they would ever have to pay the penalty of discovery. However the penalties of executing Option 3, are now real and unattractive.

The obvious impact of the Golden Geese no longer considering cheating the game, is that they will be focusing on the first two options. Initially, more Golden Geese will be taking advantage of legally available tax avoidance strategies. Obviously the government will respond by closing various currently legal opportunities. With cheating off the table and playing the game better having a decreasing value, the attention of the Golden Geese will focus on leaving.. As they discover that the cost and difficulty of leaving the game is not really that high (now that they have seriously examined it), you will see an ever increasing number of wealthy taxpayers leaving their current tax system.
Let me expand on this last question.
A wealthy individual (aka Golden Goose) who feels they pay too much tax has three basic strategies that they can follow:
Option 1) "Play the Game Better": This means using all the LEGAL methods of avoiding tax under the laws of the relevant taxing jurisdiction(s). This option has the advantage that the individual does not need to overcome life inertia with major life or business disruptions. The disadvantages are that there is only limited tax reduction which can be accomplished with this option AND the government constantly moves the goal posts. This results in decreased future tax savings as loopholes/ exemptions disappear and the on-going costs of adjusting your previous strategy and structure;
Option 2) "Leave the Game": For most taxpayers, this involves becoming non-resident. For Americans this requires giving up their US citizenship or resident alien status. Generally it means bringing forward the payment of capital gains. This is not necessarily a bad thing for the following reasons a) interest rates are low to borrow money to pay any tax immediately owing on a deemed disposition; b) no longer have any tax liability to your current tax home from this point forward; c) do not have to worry if government decides to increase income, capital gains, gift or estate taxes OR bring in new taxes like mansion or wealth taxes. The major disadvantage is that the individual has to go through a effort to overcome their life inertia.
Why is it necessary or in the public interest for any Hong Kong company listed on our the stock exchange to incorporate its business in an offshore tax haven?
This is all about dishonesty, tax evasion, non-disclosure and fiddling of accounts.
Our Government should give fair warning to companies to re-incorporate in Hong Kong within a limited grace period or face delisting in Hong Kong. This is the way the wind is blowing in Europe and we should be sailing in the same direction.
I don't know if I am showing my geekiness by being so intellectually interested in the bigger implications of these various events, but I truly feel that there are a variety of things from Cypriot bank account seizures; to Putin's demand for no more offshore accounts; to outing of tax evaders which have caused a tipping point to be reached. It is increasingly obvious to me, that we are experiencing a major disruption to the standard government revenue model which has been in place for the past century. Namely, a progressive tax system. Whether you think such a system is "fair" does not change that fact that it is inherently unstable because of an extreme over reliance on a small number of Golden Geese for such a huge portion of total tax revenues.
Previously governments could a implement policies that continue to add to the tax burden to Golden Geese. If a Golden Goose reacted by cheating the game, they could prosecute them. If a Golden Goose reacted by trying to play the game better they could change the rules. However, in a globalized world where Golden Geese can set up their personal and business lives in many jurisdictions other than that of their birth, governments will now see a reaction to their increased burdens on the Golden Geese that will immediately and dramatically cause a drop in total tax revenues. Recognition of the paradigm shift is the first step. Properly reacting to the paradigm shift is ultimately the most important step.
Yesterday's revelations about people who hold accounts in the British Virgin Islands certainly heightens interest in this area. The really interesting story will be "What happens next?"
This has several facets:
1) How many of these accounts are tax compliant and how many represent tax evasion?
2) How vigorously will the authorities prosecute the tax evaders?
3) What resources and skill sets do the government tax authorities have to follow-up?
4) Can whistle blower legislation be used to arm a private sector army of tax evasion hunters to supplement government tax authority efforts?
5) What will be the response of the wealthy to this event and what will be the impact of that response on government resources?
TAX EVASION - Analysis in 3 charts about tax evasion in Europe and Emerging Markets (BRICs) - The real enemy of the middle class - ****www.miguelangeldiez.com/2013/04/04/brics


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