The rules of the global tax system need to be rewritten. This was the conclusion of Christine Lagarde, the then-chairwoman of the International Monetary Fund, last year. It seems hard to disagree. The European Union, for example, is believed to lose approximately 20 percent of its corporate tax revenue to tax havens, estimated as being equivalent to about half of all public spending on higher education for the region. This is of course not a recent phenomenon. Since the 1980s, a tax haven industry has developed that, according to the IMF, now costs governments US$500 billion to US$600 billion a year in lost corporate tax revenue. The organization estimates that US Fortune 500 companies alone held an estimated US$2.6 trillion offshore in 2017, while individuals stashed away a staggering US$8.7 trillion. Many experts believe the real number is actually far higher.
Governments can ill afford this, particularly during a time of unprecedented upheaval as they face up to the challenges presented by the spread of COVID-19. Low-income countries, deprived of funds for vital infrastructure projects, are particularly hard-hit, losing an estimated US$200 billion a year in corporate tax revenue. Up to 30 percent of private wealth in Africa, meanwhile, is believed to be hidden offshore, leading to an annual loss of about US$14 billion in revenue — that’s a lot of hospitals that cannot be built. But it is the poorest in all societies that suffer the most when the abilities of public health services are eroded by this loss of tax revenue. Tax havens, the services of which are largely only available to high-net-worth individuals and large multinational corporations, are not just a scourge for families of lesser means; it can also be toxic for the capitalist system. The vast funding gap resulting from this revenue loss must ultimately be plugged via higher contributions from the middle and working classes, making it much harder for them to accumulate real wealth in the long term.
Hong Kong may even have a genuine opportunity to transform itself into a global example of a legal offshore low-tax haven that emphasizes openness and fairness
According to the Tax Justice Network’s Financial Secrecy Index, which tracks economies’ financial secrecy levels, Hong Kong now has another wholly uncoveted title: a major tax haven. A recently updated list by the network places Hong Kong in fourth place, behind Switzerland, the United States, and the Cayman Islands. The organization noted that the territory remains a magnet for those seeking offshore services ranging from tax exemptions to the setting up of opaque trusts that diligently hide the names of involved parties. Few are celebrating that this is actually an improved position for Hong Kong, which just a few years ago was placed at No 2 on the list.
Just as with the management of the COVID-19 outbreak, financial transparency is vital to retaining public trust. Indeed, the Hong Kong government has attempted to improve transparency levels before. Back in 2017, there were attempts to compel all publicly traded and privately owned Hong Kong-incorporated companies to disclose and register their beneficial ownership: in other words, those who directly or indirectly hold more than 25 percent of shares or voting rights in a company, or otherwise have significant influence over the control of the company. After two months of consultation, reform advocates were disappointed when the government decided, citing privacy concerns, that it would not consider a public, centralized registry for beneficial ownership but instead maintain one that would only be accessible to the authorities.
Around the same time, the government signed a bill that sought to conclude pacts for the automatic exchange of financial account information in tax matters with 74 other jurisdictions. But again, the plan lacked any real teeth. For one thing, the bill left out five of the most egregious tax havens on the planet — Panama, Bermuda, Monaco, Barbados, and the British Virgin Islands. The government also stated that it would sign agreements with each jurisdiction one by one, instead of all at once, in a multilateral pact, ensuring that the process would remain hugely drawn out. Indeed, so far, it seems that only about nine of the 74 bilateral pacts have been signed.
Fewer banks are now willing to deal with the most infamous tax havens following the Panama Papers scandal, which revealed 13.4 million files containing the financial affairs and tax-planning strategies of many of the world’s wealthiest individuals as well as those of some of the largest multinational companies. As a result, Hong Kong may even have a genuine opportunity to transform itself into a global example of a legal offshore low-tax haven that emphasizes openness and fairness. In order to achieve this, the government should lead the way and make a sincere attempt to improve transparency. Most importantly, it must take meaningful steps to ensure that illicit financial flows that deplete public coffers and adversely affect some of the most vulnerable people in society comes to an end.
The author is a consultant and writer with over 15 years of experience working in financial crime compliance throughout the Asia-Pacific region.
The views do not necessarily reflect those of China Daily.
