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Tax havens not sole attraction

By Hong Liang (China Daily)
Updated: 2009-04-14 07:41

Of all the years I worked in Hong Kong as a reporter covering markets and companies, I never knew that the place was a tax haven. Stories on that topic were mainly about Hong Kong companies moving their domiciles to overseas tax havens, such as the Cayman Islands, Bermuda, or some exotic locale in the Pacific.

Therefore, I was most surprised to read of French President Nicolas Sarkozy's attempt at the London G20 meeting to include Hong Kong in the list of tax havens. Thanks to the intervention of Chinese President Hu Jintao and US President Barack Obama, Hong Kong, along with Macao and some other jurisdictions, were rightfully taken off the final list.

Hong Kong has played host to the regional headquarters of many foreign banks and multinational companies. These establishments chose Hong Kong over other economies for myriad reasons. One of them is tax.

Rather than being a tax haven, Hong Kong has maintained a low and simple tax regime that is equitable and transparent. And unlike many competing economies, Hong Kong has never seen the need to attract foreign investments by offering tax holidays or other such incentives.

To do so would have undermined the very foundation of our free market principle, which requires our government to be a facilitator of all businesses rather than showing favor to particular sectors. What is more, tax incentives can only complicate the tax system unnecessarily without bringing too significant a benefit to the recipients because of the already very low corporate tax rate.

In the past, Hong Kong and Singapore were both havens of hot money from various other Southeast Asian countries. At one time many years ago, more than half of the bank deposits in Hong Kong were from foreign depositors, mainly overseas Chinese, seeking protection of their wealth from potential political and racial persecutions.

They chose to bank their money in Hong Kong, or Singapore, for that matter, not because they were seeking tax havens, but rather because they had confidence in the governments and the banking systems of these jurisdictions. The Hong Kong law against the sharing of tax information with the authorities of other jurisdictions was enacted to provide added security to overseas depositors against such persecutions rather than for tax avoidance purposes. At that time, the interest withholding tax was still in place.

Things have changed much in the past several decades. Rapid economic development leading to increased prosperity has brought social and racial harmony to many Southeast Asian countries. During that time, Hong Kong and Singapore have developed into efficient financial centers offering clients in the entire region a wide range of high quality banking and wealth management services. Capital continues to gravitate to these centers to take advantage of the excellent services they offer, and not, as Sarkozy implied, to avoid tax.

"The low tax rates and simple tax system doesn't mean Hong Kong has become a tax haven," Chief Executive Donald Tsang Yam-kuen said.

Other government officials have suggested that Hong Kong is prepared to modify its law to allow the sharing of tax data with authorities of other jurisdictions.

"We have to adapt our tax ordinance so that we can do better in exchanging information with other countries," said Secretary for Financial Services and the Treasury Chan Ka-keung.

E-mail: jamesleung@chinadaily.com.cn