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Banking Secrecy in China, its related territories and Taiwan

Foreword. The Tax Justice Network is a non partisan network of experts working towards transparency, so we do not take any position about countries’ territorial and political claims.

However, we do expect countries with a de jure (legal) or de facto (in practice) influence over other territories, to take responsibility for their power. We point fingers at the UK for the secrecy of the overseas territories and Crown dependencies (Cayman Islands, BVI, etc.), against the U.S. about the U.S. Virgin Islands and Puerto Rico, and now it’s time for China, its related territories and Taiwan.

Hong Kong, Macao and Taiwan are becoming great risks for global transparency, especially when it comes to automatic exchange of bank account information. (It is not clear how much power China has to influence Taiwan’s laws or what role it has played in keeping Taiwan out of the relevant international agreements. Regardless of who is to blame, participation in global automatic exchange should be ensured for any country accepting deposits and investments from non-residents).

Hong Kong

This former British colony under the current control of China was ranked 2nd in TJN’s Financial Secrecy Index 2015. While it has committed to implement the OECD’s  Common Reporting Standard (CRS) for automatic exchange of banking information in 2018, it has also decided to make it harder for other countries to obtain information from Hong Kong banks. Instead of signing the Multilateral Competent Agreement (MCAA) – that would have facilitated the automatic exchange of information with over 85 signatory jurisdictions – Hong Kong has chosen the bilateral route. Any country willing to obtain information from Hong Kong will have to manage to sign a bilateral agreement with it.

So far only the UK and Japan have come to such agreements with Hong Kong. However, in view of the potential sanctions by a future blacklist of the European Union (EU) and the OECD, Hong Kong is now considering signing (bilateral) agreements with other countries, especially with EU countries. Apparently signing the MCAA is also under consideration. 

On top of the current bilateral approach to implement automatic exchange of information, Hong Kong is choosing “voluntary secrecy”. Others like Cayman Islands are also choosing “voluntary secrecy”, but at least they have signed the multilateral competent authority agreement (MCAA), so other countries should find it easier to obtain information from them.

“Voluntary secrecy” consists of countries choosing to send banking information to other countries, but refusing to receive it. This voluntary secrecy makes obviously very little sense in a new transparency initiative like automatic exchange of information because these countries could simply receive the information and then do nothing with it or simply throw it away. Instead, they want to legally ensure secrecy, either to promote their “fake” residency certificates in exchange for money (to allow foreigners to acquire their residency certificates and then lie to their banks about where the actually live) or to prove that they are not interested in either tax collection or the combat against money laundering and corruption. The OECD contemplates this “voluntary secrecy” by allowing countries that signed the MCAA to choose to be listed under Annex A. However, they are likely so ashamed of it – or they want to protect tax havens that chose this – that the OECD does not simply list the countries that chose voluntary secrecy. Instead, anyone interested in finding out who chose not to receive information has to look into the specific list of “activated exchange of information relationships” of each of the +100 countries that committed to the CRS. On each country’s list, one would have to compare (i) the countries from which each jurisdiction is receiving information, to (ii) the countries that each jurisdiction is sending information to. In the case of Hong Kong, its list of activated Exchange of information relationships shows that Hong Kong will send information to the UK and Japan, but will receive information from no country (not even from the UK and Japan). This proves it chose “voluntary secrecy”.

Macao

Macao was ranked 11th in the FSI 2015 edition. It has also committed to implement the OECD’s CRS for automatic exchange of information in 2018, but so far it hasn’t either signed the multilateral competent authority agreement (MCAA) to implement the CRS nor started to sign bilateral agreements (like Hong Kong did). It is still uncertain what route Macao will take (including “voluntary secrecy”), so we will give it the benefit of the doubt. 

Mainland China

China was ranked 20th in the FSI 2015 edition. While its secrecy score is not as bad (as opaque) as that of Hong Kong and Macao, it still has room for improvement. China is now a party to the OECD Multilateral Tax Convention on Administrative Assistance in Tax Matters which serves as the legal basis to implement the OECD’s CRS for automatic exchange of information. China also signed the Multilateral Competent Authority Agreement (MCAA) to implement the CRS. However, it has not extended the coverage of either treaty to Hong Kong or Macao. This means that without pressure, Macao may follow Hong Kong and sign bilateral treaties to exchange information automatically. 

Taiwan

After news about Taiwan becoming a tax haven, TJN started assessing its legal framework in the 2015 edition of the FSI. Given the lack of external assessments of Taiwan’s legal framework, Taiwan could not be ranked in the FSI, although its range of potential “secrecy score” (how secretive its legal framework is) is among the worst secrecy jurisdictions (or “tax havens”).

Taiwan has not even committed to implement the OECD’s CRS for automatic exchange of banking information let alone signed the multilateral competent authority agreement to implement it. On top of everything, Taiwan is exploiting this voluntary self-exclusion to promote itself as a tax haven. An email sent to the Tax Justice Network by a Taiwan Company told us the following

“almost all the countries will participate in this international reporting system in 2017 or 2018 but Taiwan will not, so we can provide the client a clever way to perfectly hide their asset in Taiwan. We search online recently the websites about offshore tax haven and read about your article about un-noticed tax haven—Taiwan (…)

The world famous tax havens such as Cayman and the Virgin Islands are the first countries to sign CRS, January 1, 2017 from the implementation, and promised to complete the first exchange in 2017; even the tax evasion protagonist Panama, for fear of G20 countries on its economic sanctions, and therefore on April 17 to join, with China, Hong Kong, Singapore, have become the second batch of signatories, starting next year. In the future there will be a third wave, the fourth wave of countries have joined, but Taiwan has not heard any relevant discussion, customers in Mainland China, Japan, Hong Kong, Singapore have noticed that Taiwan has not yet joined.”

 The OECD should address this urgently.

 Conclusion 

Automatic exchange of information is a clear improvement towards transparency, in spite of all of its loopholes (especially lack of access by developing countries). However, if major financial centres like the U.S. and now also China, its related territories and Taiwan are off the hook, it is uncertain whether it will have any impact at all. Sanctions seem to be the only way to encourage global participation.

Now, do you understand why TJN (sadly) laughed at OECD’s comments about the “end of banking secrecy”?

Photo credit: Barbara Willi on Flickr under a creative commons license. 

Links Mar 13

Corporate taxation key to protecting human rights in the global economy CESR

UN urges US to not exploit American Samoa The Guam Daily Post
‘The United Nations has “strongly urged” the United States to refrain from using American Samoa as, among other things, a tax haven’. A significant shift? Development policy guidance recognises that tax havenry hurts the local population.

Luxembourg Frieden says government should lower taxes for companies, private individuals Luxemburger Wort
‘…says Luxembourg must become more competitive when it comes to taxes’. Read about the Race to the Bottom, here.

New Report – Delivering a level playing field for offshore bank accounts

The Automatic Exchange of Banking Information, which is due to start this year requires nation states to implement domestic legislation to participate in the scheme. tjnMain3616x3616

The OECD’s Global Forum conducted a (confidential) first-stage evaluation of the laws of countries that want to participate in the system to assess whether they are ready to do so. Now, the Global Forum is working on a terms of reference to assess countries once automatic exchanges are in place, to make sure they comply with the international standard called the Common Reporting Standard (CRS).

Links Jan 30

EU Committee on Economic and Monetary Affairs – Committee of Inquiry to investigate alleged contraventions and maladministration in the application of Union law in relation to money laundering, tax avoidance and tax evasion
Live stream 31 Jan at 9.30am (Brussels time)

Africa: Accelerated Agenda on Illicit Financial Flows Global Alliance for Tax Justice

Shell companies: How Russia sold its oil jewel: without saying who bought it Reuters
“Like many large deals, the Rosneft privatization uses a structure of shell companies owning shell companies, commonly referred to in Russia as a “matryoshka”, after the wooden nesting dolls that open to reveal a smaller doll inside.”

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