Mind the Gap

Hong Kong should rebrand itself as a low tax haven

As an offshore domicile, Hong Kong is confronted with a genuine opportunity to dominate the compliant tax haven business

PUBLISHED : Sunday, 12 November, 2017, 6:51pm
UPDATED : Sunday, 12 November, 2017, 10:09pm

“We [the rich] don’t pay taxes. Only the little people pay taxes,” said Leona Helmsley, a notorious New York heiress who was sentenced for 16 years for federal income tax evasion in 1989. That explains why rich people wish and possess the means to avoid taxes (legally or illegally) using offshore jurisdictions and havens. But, revealing the tax plans of the global oligarchy doesn’t fully explain the significance of the “Paradise Papers.”

The Paradise Papers represents 13.4 million files at 1.4 terabytes, leaked from two offshore service providers and 19 tax havens’ company registries. The files reveal the offshore financial affairs and tax planning strategies of some of the world’s biggest multinational companies and wealthiest individuals. They weren’t as voluminous as the Panama Papers (2.6 terabytes), but the Bahamas and Cayman Islands are more popular domiciles covering a wider range of people and companies.

Since the global financial crisis, tax fraud and money laundering enforcement have accelerated to the point where the concept of the offshore haven needs redefining. The distinction between privacy and secrecy has disappeared. Clients can no longer expect anonymity or secrecy unless you hide assets in politically risky jurisdictions. True account secrecy no longer exists in Switzerland after the UBS conviction for taking part in US$20 billion of evasion and illegal tax planning from the US government in 2014.

Global banks will probably not provide financial services for clients using disreputable havens. Money laundering using offshore tax havens is usually considered a predicate for other crimes. Financial institutions, lawyers and accountants assiduously avoid these transactions.

Tax evasion versus avoidance have been rolled into one deceptive, grey area by authorities, too. The difference is no longer permanently distinguished by your accountant’s tax structure, but rather what the US Internal Revenue Service and Department of Justice decide in the future. It is all too easy for a once compliant tax structure to eventually be deemed illegal or non-compliant. That is why so many private banks no longer offer or recommend tax planning advice. It is simply too risky after the number of tax fraud convictions that banks have been hit with.

But, despite being socially reviled, tax havens will not vanish. High net worth people will always seek to legally reduce or optimise their taxes. The emergence of tax havens parallels the historic rise of economic superpowers. Britain’s economic rise necessitated the creation of offshore havens such as the Bahamas and Guernsey. The US has Delaware. The business elite need domiciles to hide assets from their business partners, wives or mistresses- and most of the authorities. Governments prefer they use domiciles under their national jurisdiction for law enforcement purposes. And today, that’s why Macau and Hong Kong are China’s offshore tax havens.

Among lawyers and service providers certain havens are safer than others. Panama used to offer the best secrecy- anonymous, bearer share certificates. However, fewer banks will deal with Panama incorporated shell companies.

So competition for the most compliant tax havens will emerge. As an offshore domicile, Hong Kong is confronted with a genuine opportunity to dominate this business. The walls of secrecy and privacy are collapsing. The competitive basis for a jurisdiction will be to reckon the contradictions and operate a legal, transparent, offshore and low tax haven. Sustainable features such as data security and real time, know-your-client and anti-money-laundering compliance will become critical sources of competitive advantage.

Peter Guy is a financial writer and former international banker