Taxing question of why China exports goods via Hong Kong

HK was busiest office of Panama Papers law firm

SCMP headline, April 8

Here is a teaser for you. Why should people in China want to export goods abroad by first shipping them to Hong Kong and then shipping them on unchanged as re-exports to their final destination? Why not go direct?

Elsewhere this sort of thing is occasionally done because of anomalies of trade treaties, but this is not the case here. Nor does it happen because we have the only worthwhile sea port around. We don’t.

The reason lies in the precise definition of the word “unchanged”. The goods are unchanged, but the accompanying paperwork is not. Along the way an extra margin of about 19 per cent is added to the prices of these goods.

This allows the exporter to escape profits tax in the mainland. No profits were made there. Conditions just now are so tight, you see. It also allows the exporter to escape profits tax in Hong Kong. No work was done on the goods. The paperwork doesn’t count.

Hong Kong was busiest office of Panama Papers law firm

We are talking here of tax avoidance on income of HK$570 billion a year. That’s billion, not million, and that’s per year and still growing as the first chart shows. Move aside, Panama, you ain’t seen nuttin’.

Here is another question for you. Would you believe me if I told you that the second chart is a track of me doing push-ups on a mirror?

OK, OK, but something is obviously happening on a mirror here and it happens to be the two sides of our capital flows. The line on top shows you how much foreigners invest in Hong Kong every year in total and the bottom line shows you how much we invest abroad every year.

Look at the scale markers on the left. On three occasions over the last eight years foreigners invested more than HK$2 trillion a year here, which is greater than the size of our entire economy, and on exactly these same three occasions we invested exactly as much abroad. Coincidence?

The reporting rules say this is supposed to be real investment in Hong Kong and real investment abroad but, in fact, it is money just passing through, trillions, plural, per year.

Why anyone should then bother passing it further through Panama is a mystery to me. We already wash it whiter than any Panama law office could wash it.

It is no mystery to me, however, that our courts have sentenced a number of people to long prison terms for money laundering after they were caught with larger sums of cash than they could have earned from their stated line of work.

My guess is that most were only keeping the wheels of cross-border commerce turning by facilitating payments on which Beijing still officially frowns.

But the point is that when judges who know next to nothing about these things invoke bad law to come down hard on people who don’t really matter, not really anyway, we can make Washington and Brussels think that we’re tough on money laundering.

Hong Kong, tough on money laundering.

Ha-ha-ha-ha.

Ho-ho-ho-ho.

Hee-hee-hee-hee.