Thanks to a new law, Hong Kong’s property prices are unlikely to come down.
It is called the Common Reporting Standard (CRS). Behind the benign name is a nerve-wracking mechanism that threatens to expose the wealth of the fat cats.
Faced with this almost existential crisis, houses are where they seek to hide their riches.
To understand their fear, let’s start with the basics.
Imagine yourself as a senior government official or a successful entrepreneur who has accumulated a multibillion-dollar fortune over the years.
Once the money is out of the country, you are safe. Nobody knows about it, thanks to the camouflage skilfully deployed by your accountant and lawyer.
A simple version: you’ve got yourself a passport from country A and set up a company in country B. Your company created a trust in country C which then opened accounts with banks in country D.
Since there is no information-sharing among the four countries, no regulator knows your wealth, questions your integrity or wonders how little tax you have paid over the years.
You have a good time playing with shares, bonds and other creative financial products, snowballing your wealth while continuing to chant the right political slogans with a stern face.
The CRS will tear down the information wall and shatter your cover-up.
(Money Matters: That includes not only your personal account but also that of your companies, trusts or foundations. You get letters from the banks to tell you what country you are paying tax to. If your address of residence has always been in China, you will have a difficult time explaining why you are not a tax resident of China.)
“The bank communicates in electronic format to the tax authority of jurisdiction B the information concerning the accounts of Mr X.
(Money Matters: The information includes the total gross amount paid to your account during the reporting period and the account balance or value at the end of the year or the closure of the account. Don’t bother to close your account in an attempt hide. It won’t help. We are not only talking about cash here but interest, dividends, income from insurance products, and sales proceeds from financial assets.)
“The tax authority of jurisdiction B transmits the information of Mr X automatically and electronically to the tax authority of jurisdiction A.
(Money Matters: More than 100 jurisdictions have committed to this annual automatic exchange from 2017 onwards. Among them is Hong Kong, China and notorious tax havens like Panama. Soon mainland authorities will know the wealth you have been hiding in different parts of the world.)
“The tax authority of jurisdiction A could use the information to check whether the tax affairs of Mr X are in order.”
(Money Matters: In China, you will be very lucky if only the tax officials are after you.)
If this sounds bad enough, try multiplying that with infinity. This is because it’s not only banks that have to do the reporting but also brokers, asset managers, custodians, certain insurance companies and collective investment vehicles.
It is very much an all-encompassing net.
But private bankers, accountants and lawyers say there is one way out - property investment.
This advice was confirmed by a spokesman for the Financial Service and Treasury Bureau in response to Money Matters’ enquiries.
“While it (the law) does not refer to assets of every kind, the term ‘financial asset’ intends to encompass any assets that may be held in an account maintained by a financial institution with the exception of a non-debt, direct interest in real property,” she said.
Instead of inviting the attention of regulators with accounts bursting with billions of dollars, fat cats have been showering the money on overseas properties. As long as a mortgage is not involved, that will leave little trace.
It is a no-brainer for them. Beijing has made it clear that it will start the global information exchange by the end of 2018. No one wants to be caught unprepared.
Even if the market goes down by 20 per cent, it is a price worth paying to avoid the graft fighters and the risk of losing everything.
The only challenge is in finding the right individual or structure to hold the properties so that they won’t be traced back to the fat cats. Many professionals are there to help.
No wonder house prices have been regularly hitting record highs.