27 October 2016
Many prominent listed firms in Hong Kong have offshore vehicles. Photo: Reuters
Many prominent listed firms in Hong Kong have offshore vehicles. Photo: Reuters

Hong Kong’s offshore companies legal but not ethical

The Panama Papers leak has unveiled Hong Kong’s very close links with offshore companies set up abroad.

So far, no government officials have come up with an explanation.

The leaked documents showed that Hong Kong has 2,212 intermediaries — entities that set up companies, foundations and trusts to help clients hide their wealth.

A quarter of these middlemen are based in Hong Kong.

Also, Hong Kong has as many as 37,600 offshore companies registered in Panama, almost one in five (19 percent) of the total in that tax haven.

On one hand, the revelations prove that Hong Kong is the world’s most successful wealth management center, which has attracted many political leaders and members of the business elite.

On the other hand, the city appears to have a very murky financial underbelly.

It’s totally legal, of course, to set up offshore companies for legitimate uses.

In fact, many prominent listed firms in Hong Kong — including CK Hutchison Holdings Ltd. (00001.HK), Li & Fung Ltd. (00494.HK), Kunlun Energy Co. Ltd. (00135.HK) and Tencent Holdings Ltd. (00700.HK) – have offshore vehicles.

An offshore company is a very convenient vehicle for investment holdings.

Assets injected into the offshore company can easily be transferred without incurring various taxes.

Companies from mainland China need to go through lots of red tape for an overseas listing.

Using an offshore vehicle as a holding company can save them a lot of trouble when seeking a public listing.

Offshore companies don’t need to submit annual reports, which saves considerable administration costs.

Besides, offshore companies enjoy strict privacy, and information about shareholders is not accessible to the public. Information about the directors is also not available in some offshore centers.

This allows billionaires to hide their wealth using offshore companies.

However, these arrangements benefit investors, not governments.

For example, locally registered companies need to pay stamp duty when transferring stocks in Hong Kong. But offshore companies do not need to pay the duty.

Offshore vehicles undermine the public interest despite their legitimacy.

That has led to an even wider wealth gap between the rich and the poor.

Those who do not have the money to set up offshore companies must pay taxes, while those with deep pockets get away without having to do so.

In the past, mainland companies had to apply to the China Securities Regulatory Commission before listing overseas. The aim was to ensure the quality of these companies.

However, many firms have opted for indirect overseas listings using offshore companies, because of the mainland’s tedious procedures, high cost and the length of time involved.

Because of the absence of strict screening by the CSRC, overseas investors have to accept the mixed quality of these firms.

The Foreign Account Tax Compliance Act in the United States requires non-US financial institutions to hand over details about accounts and investments controlled by US taxpayers to the country’s Internal Revenue Service.

Individuals and companies might be required by Hong Kong banks to report their financial details as long as they have some connection with the US.

That means the whole world is paying the price for tax evaders from the US.

The European Union announced recently that large multinational companies with annual revenues of more than 750 million euros (US$848 million) will have to publish a report with income and tax information that will be made accessible to the public.

The new policy will take effect as early as 2018, and as many as 6,500 companies will be affected.

This article appeared in the Hong Kong Economic Journal on April 15 under the pen name Bittermelon.

Translation by Julie Zhu

[Chinese version 中文版]

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