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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. 

More unfair tax treaties may be renegotiated

ugandaThis time it’s Uganda. From Martin Hearson:

“The government announced in its latest budget that it has finished formulating its new tax treaty policy, and will be renegotiating treaties that don’t comply. Seatini and ActionAid Uganda will no doubt chalk this up as a success.”

In Uganda, these two local NGOs have argued, apparently with good reason, that the country’s tax treaty network ‘is one of the mechanisms used by companies to avoid paying taxes, leading to illicit financial flows and tax losses for Uganda.’

Hearson also has a new working paper, co-authored with Jalia Kangave, entitled A Review of Uganda’s Tax Treaties and Recommendations for Action, whose summary states:

Report: The treaties that cut taxes in poorest countries

Lovisa Möller, ActionAid

Lovisa Möller

New analysis: The treaties that cut taxes in some of the world’s poorest countries

A guest blog by Lovisa Möller, ActionAid

Today ActionAid releases battery of resources for academics, negotiators and activists that want to know more about the tax treaties that some of the world’s poorest countries have signed up to. This guest blog provides you with a round-up of the key findings and the new resources that have just become available.

Developing countries have now signed on to around a whopping 1,500 tax treaties with their wealthier counterparts. These agreements between countries carve up the right to tax business that operate across borders.

Taiwan – the un-noticed Asian tax haven?

Taiwan flagThis is a speculative blog based initially on a couple of conversations with people in the industry, with some supporting evidence.

A (slightly tidied-up) conversation we’ve just had went along these lines:

“You’ll never guess what is the new Switzerland for Asia. And I mean big time. The Asian money is heading there. Banks set up there as its a financial centre that doesn’t tax foreigners. And its perceived as safe, and not a signatory to the CRS [The OECD’s Common Reporting Standard.] TAIWAN.”

Now, what to make of this?

Still Broken: major new report on global corporate tax cheating

TJN gatj

 

Update, Dec 7, 2015: a new paper in the Journal of World Business, which contains this:

“Home country statutory corporate tax rates have a small impact on tax haven use. In general, corporate tax rates are an important factor in driving MNEs to set up tax haven subsidiaries. However, as long as there is a significant gap between tax rates in OECD countries and those in tax havens, our results suggests that reducing corporate tax rates will not substantially change the likelihood of MNEs setting up tax havens subsidiaries. MNEs will continue to take advantage of the host country specific advantages available in tax haven locations, which include minimal rates of corporate income tax, light-touch regulation and secrecy.”

Our emphasis added. Which strongly supports the conclusions of the reports we cite below.

From the summary of our co-authored new report:

“In 2013 the OECD, supported by the G20, promised to bring an end to international corporate tax avoidance which costs countries around the world billions in tax revenues each year. However, with the recently announced actions against corporate tax dodging, G20 and OECD countries have failed to live up to their promise. Despite some meaningful actions, they have left the fundamentals of a broken tax system intact and failed to curb tax competition and harmful tax practices.”

In dollar terms, G20 countries are the biggest losers – while low income developing countries such as Honduras, the Philippines and Ecuador are hardest hit because corporate tax revenues comprise a higher proportion of their national income. The G20 Heads of State are expected to consider a package of measures they claim will address corporate tax avoidance at their annual meeting in Turkey on 15th and 16th November.

The key reforms are the OECD’s so-called “BEPS” project on corporate tax cheating, which we’ve written about extensively. And the details from the report:

“In 2012, US multinationals alone shifted $500–700bn, or roughly 25 percent of their annual profits, mostly to countries where these profits are not taxed, or taxed at very low rates. In other words, $1 out of every $4 of profits generated by these multinationals is not aligned with real economic activity.”

These findings are based on major new TJN research by Alex Cobham and Petr Jansky, which can be found here (and will be permanently available on our “Reports” and “Magnitudes” pages: it focuses on U.S. multinationals, not just because it’s important, but also because of data availability.)

Here’s a picture that illustrates one important aspect of the problem:

Bermuda Honduras

 

For some, that may seem like just numbers and graphics. But as the report notes, this has major implications:

“As governments are losing tax revenues, ordinary people end up paying the price: schools and hospitals lose funding and vital public services are cut. Fair taxation of profitable businesses and rich people is central to addressing poverty and inequality through the redistribution of income. Instead, the current global system of tax avoidance redistributes wealth upwards to the richest in society.

That is why civil society organizations, united in the C20 group, together with trade unions, are calling for the actions announced by the OECD to be regarded only as the beginning of a longer and more inclusive process to re-write global tax rules and to ensure that multinationals pay their fair share, in the interest of developed and developing countries around the world.”

Claire Godfrey, head of policy for Oxfam’s Even it Up Campaign said:

“Rich and poor countries alike are haemorrhaging money because multinational companies are not required to pay their fair share of taxes where they make their money. Ultimately the cost is being borne by ordinary people – particularly the poorest who rely on public services and who are suffering because of budget cuts.”

Rosa Pavanelli, general secretary of Public Services International said:

“Public anger will grow if the G20 leaders allow the world’s largest corporations to continue dodging billions in tax while inequality rises, austerity bites and public services are cut.”

Alex Cobham, TJN’s Director of Research, said:

“The corporate tax measures being adopted by the G20 this week are not enough. They will not stop the race to the bottom in corporate taxation, and they will not provide the transparency that’s needed to hold companies and tax authorities accountable. It’s in the G20’s own interest to support deeper reforms to the global tax system.”

Endnotes

The report is available in French and Spanish too, on the Global Alliance for Tax Justice site.

The full paper behind the report is published in the peer-reviewed working paper series of the International Centre for Tax and Development – the leading international and interdisciplinary academic centre in its field, funded by the UK and Norwegian governments:

Full ICTD working paper and the data annex: Cobham Jansky 2015 – Data annexes.

Our new ScaleBEPS page is permanently available on our “Reports” and “Magnitudes” pages and will be updated with latest news on the size of corporate tax cheating.

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