Jake's View

‘Rate of re-export margin’ – we call it money laundering

PUBLISHED : Saturday, 14 May, 2016, 7:44pm
UPDATED : Saturday, 14 May, 2016, 8:01pm

China is mulling plans to tighten tax reporting requirements on multinationals operating in the country to help close a massive global loophole.

If the plan goes ahead, multinationals would have to file extensive reports on internal pricing and costs between overseas branches and headquarters, sources said.

SCMP, May 12

A curious feature of Hong Kong’s trade statistics is that re-exports are about 20 per cent greater than they should be when you calculate them by subtracting retained imports from total imports.

This anomaly is officially called the rate of re-export margin, a term that I suspect was adopted to confuse you.

Let me unconfuse you.

We normally call it money laundering and, as the first chart shows you, this form of it has grown steadily to about HK$570 billion a year, which is the equivalent of about a quarter of the size of our economy. We are talking big numbers here.

China airs plan to help close multibillion-dollar corporate tax loophole

We are also talking small taxes. Exporters on the mainland tell their taxman that times are tight and they can barely make any money from sales to their buyers in Hong Kong.

Once these goods reach Hong Kong, however, the price is marked up by about 20 per cent before the goods are shipped elsewhere as re-exports. There you have the mainland exporter’s profit and it’s not taxed in Hong Kong as we recognise that no work was done here.

We are now told Beijing is mulling how to close this and other such loopholes in pricing between the multiple arms of multinationals.

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Let’s clarify some things about this. In the first place, it’s about as much a loophole as the space between earth and the moon is a loophole, just an teeny-weeny bit bigger than a loophole, you know.

Secondly, there isn’t much multinational to it. Beijing has been reluctant to grant multinationals any sizeable presence in the domestic economy. This is a constant sore point in diplomatic relations with Europe and America, one reason that Donald Trump has such a large following in the US presidential campaign, but the pace of change here would make a snail look like an Olympic sprinter.

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I know that about 45 per cent of mainland exports are still registered as coming from foreign invested corporations but it’s a fiction. I think most of that “foreign invested” is only those laundered export earnings pretending to be foreign.

I also see little in the way of different arms of the same corporation dealing with each other. We’re mostly talking counterparties, business between separate entities rather than branches of the same entity. They may be connected under the surface but I defy the Beijing taxman to find and unravel these links.

And while this initiative is billed as being part of a global effort against transfer pricing, I think the second chart shows you that there may be a reason closer to the bone. A rapidly accelerating fiscal deficit has already surpassed 2.5 trillion yuan a year. Beijing has money in mind more than it does morality.

But I don’t think it will get much of that money. The mountains are still high and the emperor is still far away.