Hong Kong intermediaries, who used to make a fortune on the territory’s status as an international financial conduit, are now taking a battering following the Panama Papers data leak.
Yet the exposés about hidden wealth in tax havens may bode well for Hong Kong as companies are making a beeline for our city amid clampdowns elsewhere.
There are things that Hong Kong must do to make the most of the trend.
The jillions of leaked files from the Panama City-based law firm Mossack Fonseca & Co. – 11 million documents on 214,000 offshore companies and shell businesses dating back to the 1970s –present a horrendous picture of the tax evasion, grey market trading, money laundering, corruption and other activities engaged in by the world’s rich and powerful.
Panama, along with Bermuda, Cayman Islands and the British Virgin Islands, caters to their need to hide their wealth from prying eyes via stringent privacy laws, extra-low taxes and other laissez-faire policies for foreign-registered firms.
Hong Kong is another epicenter of the revelations.
At least 2,212 firms and institutions in the city, particularly banks, consultants as well as law and audit firms, maintain some sort of connection with Mossack Fonseca as they help clients park and manage assets overseas.
As many as 37,675 entities in Panama were set up by clients from Hong Kong. All these dwarf corresponding figures from the United Kingdom, Switzerland, United States, Luxembourg, Singapore, and other jurisdictions.
Hong Kong is seldom considered an offshore haven as its legal regime does not allow incorporation by anonymous parties.
The Group of Twenty (G20) convened a meeting in April 2009 to discuss measures against tax havens including putting Hong Kong on the list, but the proposal was dropped as a result of China’s opposition.
With its independent judiciary, liberal regulation and financial infrastructure, the city has for a long time acted as a key middleman and entrepôt for tycoons heading for Panama, and, once made “invisible” and “anonymous”, their capital flows back to Hong Kong to pursue profit.
Now the wind has changed its direction: Panama and similar places are no longer safe harbors as Washington and its allies rein in offshore activities, particularly tax evasion.
These companies and individuals now find it hard to hide their fortunes, especially after the US Congress passed the Foreign Account Tax Compliance Act, which requires all banks to make a full disclosure of all overseas accounts owned by all their clients.
The “know your customer” verification is now also mandatory.
Deals have been struck with different tax jurisdictions, Panama included, to enhance tax transparency in exchange for taxpayers’ information. China and the European Union have also made similar agreements.
The world is now joining hands to round up offshore money and their owners.
The bonanza is already nearing its end following the 2009 peak when 81,810 shell firms were set up with Mossack Fonseca; that number dropped to 66,153 last year.
Panama is losing its allure and the leak is just expediting its decline.
All this can redound to Hong Kong’s advantage as capital retreating from Panama may not have too many other places to go.
The city’s simple and low tax regime and liberal regulatory environment make it more appealing than New York and London with only Singapore, Bangkok and Dubai offering competition.
The government estimates that Hong Kong’s total stock of inbound direct investment reached US$1.488 trillion at the end of 2014.
One distinct feature is the indirect channelling of capital from non-operating companies in tax haven economies. The British Virgin Islands, the Netherlands, Bermuda and Cayman Islands accounted for 35.5 percent, 6.4 percent, 5.3 percent and 3.4 percent, respectively, of the total stock of inbound direct investment that year.
Data from the Companies Registry also shows that the number of new companies incorporated surged 30 percent from 109,424 in 2009 to 139,530 in 2010, when the business of Mossack Fonseca started to peak. The figure rose further to 174,031 in 2013.
This can be a result of the tidal wave of capital swamping Hong Kong.
Another big draw of the city is its simple process and unbeatable price.
Setting up a shell company in Panama may cost US$1,500 (HK$11,700) including US$700 for the government licensing fee and other miscellaneous costs, such as service charges, may range between US$200 and US$400. Another US$1,000 per year is needed so as to remain registered there.
Hong Kong, on the other hand, charges HK$1,720 to HK$2,250 for business registration, and an annual renewal fee of HK$2,000 (or HK$5,200 for a three-year certificate).
The government has also waived business registration fees a number of times.
Some local agencies offer even cheaper packages that start from as low as HK$3,000.
Other than the restriction on anonymity, Hong Kong is a notch above Panama and the like in services and costs.
The government should now tap the opportunity to propel the city’s progress on top of strengthening ties with the mainland.
Rather than sitting idly by, officials should now start promoting the city’s many virtues.
This article appeared in the May issue of the Hong Kong Economic Journal Monthly.
Translation by Frank Chen
– Contact us at [email protected]
Panama Papers reveal the ugly truth about China’s elite
Youth leader’s UK nationality and Ming Pao’s axing of an editor