Tax Imperialism Reaches Out to Slam Hong Kong

Andrew Work (Pacific Rim Policy Conference, 23 May 2007)

Representing the open city-state of Hong Kong, we tend to be biased against protectionism.  We are hugely dependent for our success on a world order that allows for the free flow of goods and capital.

While our record on freedom of people and services is less than stellar, there is little we can’t teach the world about free movement of goods and money.  Cash flows in and out of Hong Kong, freely and mostly privately.  Our stock market has struck the right balance between creating regulations that secure confidence in listed companies while letting the market decide how much risk it will bear based on information provided, even passing New York as a source of IPO’s last year.  We have preferred access to the RMB, one of the worlds’ most important restricted currencies.  Privacy laws suit our needs and that of our international partners allowing proper monitoring for security while protecting basic human rights to privacy and guarding against unnecessary government intrusion.

One of our safeguards is the simplicity of our tax regime.  Simple taxes mean a lean collection agency that doesn’t need to collect too much information. This has made Hong Kong massively attractive for inward investment and the undisputed champion of Asia Pacific headquarters.  However, all this is under attack.

Attackers from All Sides

If our situation was unique, this would be of little interest to anyone but Hong Kong.  But it isn’t unique – our model is being adopted now, after decades of example, by groups all over the world.  This is including jurisdictions in the Asia Pacific region, and countries like Ireland, Dubai of the UAE, Estonia, Lithuania, Singapore and many new small states.  Indeed, it sometimes seems that these states are more successful at discarding the old tax and welfare model that older established democracies seem unable to cast off.

These policies have been wildly successful, driving growth and investment in many of the jurisdictions mentioned.  For places like Hong Kong, Singapore and Ireland, this has driven economic growth across a range of industries.  For many smaller jurisdictions, especially in the South Pacific and Caribbean, privacy and low taxes are the driver for their sole non-agricultural/tourism business they have: private banking.   

Not everyone is happy however.  Protectionists of all stripes are now using any means possible to support the sclerotic welfare states by reaching out to deny the growth and attractiveness of these jurisdictions.  

Most people here will be familiar with the French and German occasional campaign to raise the issue of a common tax rate for Europe.  They complain that jurisdictions like Ireland have used their EU subsidies as poorer members to slash corporate tax rates to ‘unfair levels’, stealing investment and jobs away. While the former French and German administrations probably had a good point with regard to the subsidies, they reveal political pandering to special interest groups rather than a sound understanding of economics.  It is not a zero-sum game and Ireland is generating wealth for its citizens, whereas the statist policies pursued by union dependent political parties destroy incentive and the ability to generate wealth and jobs in their countries.  I will make a state now:  We believe that tax competition and the free flow of capital lend to wealth generation and efficient allocation of wealth.  Government blocks to that make the world a poorer place.

However, contrary thinking, that tax competition and the free flow of capital is bad, has led the Europeans not only to criticize their EU neighbours, but to influence other international organizations to bring pressure to bear on those pursuing tax competitive policies.

The European Assault

In 2000, the OECD created a blacklist of low tax jurisdictions and threatened them with sanctions if they did not implement measures to allow OECD members to track flows of wealth in and out of their countries.  Recommended actions seemed to do little to address serious security issues but instead advance the ability of industrialized nations to track and penalize legitimate players to move capital to tax friendlier nations.  Case in point?  The targeted nations exclude the US, the UK, Luxembourg, the Netherlands Belgium, Switzerland and Austria – all OECD members and well known tax havens.   

The European Commission jumped on the bandwagon with the European Savings Directive.  This was targeted at EU citizens possibly earning and keeping money abroad.  EU attempts to get offshore jurisdictions to report the holdings of Europeans was partially acceded to by Switzerland, but provoked a uniquely coordinated ‘NO’ from a Hong Kong and Singapore with no interest in becoming an enabler to Europe’s addiction to taxation.

American Imperialism

The United States is not free of its protectionists either.  There is more than one misguided way to try to keep capital and companies in your country.  One of the US’s most unique ways is global taxation of citizens.  For the non-Americans among you, you may be shocked to learn that Americans must file taxes every year regardless of where they live.  Americans may be shocked to learn they only share this strange practice with, to the best of my knowledge, two nations: North Korea and Eritrea.  In high tax jurisdictions, the filing requirement is annoying.  The system is structured with an exemption and tax is only paid when the amount owing to the US exceeds local taxes paid.  So in high tax France and Sweden, filing is expensive and annoying, but extra tax is rarely paid.

However, in low tax, high cost jurisdictions like Hong Kong and Singapore it makes Americans either unemployable, if employers consider paying their tax burden, or means Americans have to choose to live with up to 25% less income than colleagues paid exactly the same.  The result is that Americans are hugely uncompetitive compared to their international counterparts in these jurisdictions.  There are as many Canadian as American visa holders in Hong Kong.  Given the US has 10x the population, multinationals and economic might, why?  The MD at one of the major US investment banks in Hong Kong told me he was shocked to find out, that when he was trying to get a SuperBowl pool going, he discovered every North American accented person in his office of hundreds was, in fact, Canadian – and much more interested in a pool for the Stanley Cup Playoffs.  On enquiring with HR, he was told the Americans just weren’t cost competitive and Australians, Canadians and British nationals were perfectly qualified – and much cheaper.  It isn’t hard to see how this misguided policy makes Americans uncompetitive abroad.

However, this doesn’t seem to matter to Senators driving this agenda.  Senator Chuck Grassley is hated by Democrats and Republicans Abroad alike for his seemingly pathological hate of his countrymen abroad, as seen by his repeated attacks on Americans abroad through the tax code.

Two other Senators, Byron Dorgan of North Dakota and Carl Levin of Michigan, are attacking offshore jurisdictions through bill S. 396, targeting American companies and bill  S. 681, targeting individuals.  Over 40 jurisdictions around the world are threatened with retaliation if they do not toe the Senators’ lines, 75% in the developing world.  Again, OECD tax havens are off the list.  Are you on the list?  Hong Kong is!  Singapore is!

A full list of jurisdictions under attack can be obtained by emailing us at

However, this matters to us all.  Speaking from Hong Kong experience, our ability to create corporate structures including BVIs and other off-shore havens outside the Asia Pacific region form a huge part of our business success and the same is, or could be, true for others.

All these US, OECD, and European actions come under the broader umbrella of tax imperialism.  They reduce beneficial tax competition and restrict capital flows by driving funds to less competitive jurisdictions.  One recent initiative by a largely ignored northern country may set one of the most dangerous precedents in this arena.

Canada: The Most Dangerous Country of All?

Canada is not immune to special interest politics that would paint Canadian companies and people abroad as tax-dodgers and seek to find ways to make them pay.  Of concern to the broader issue of tax imperialism is a new provision that, unless jurisdictions sign a tax treaty or enter into a Tax Exchange Information Agreement, the Canadian government will tax Canadian branches abroad at a rate of 35%.  But if they don’t have the information, how will they know 35% of what?  They’ll guess – and then the onus is on the company to prove them wrong by opening their books.

Now here’s the clever part.  Clearly this is not in the interest of Canadian companies put at a disadvantage to t
heir competitors.  Nor is it in the interest of the host country, who lose attractiveness as an investment destination.  So here’s how Canada gets them to comply.  If the country or jurisdiction in question does sign such an agreement – Canadian companies operate there tax free.

For jurisdictions like Hong Kong, the dilemma is clear.  Hong Kong does not, and does not want to, collect the complex information that Canada does.  Singapore and Hong Kong told much bigger and more important Europe that they would not take measures to help implement the European Savings Directive.

However, a prisoners’ dilemma arises.  What if Hong Kong says no, and Singapore, a regional competitor, says yes?  With the ESD, there was all pain and no gain in complying, no pain in not complying.  But now, jurisdictions around the world will have to choose between an administrative hassle or punishing un-competitiveness.

This measure must be stopped.  While Canada is, in the greater scheme of things, a small player, the precedent is deadly.  If Canada can get this unopposed, what is stopping other jurisdictions from implementing the same strong arm tactics from Europe, Australia, the US and other real and aspiring tax imperialists?

Once the information infrastructure is in place, what is to stop these nations from implementing a small 1% tax to cover, perhaps, consular services?  Maybe a 0.5% increase next year.  And again.  You can see where this is going.  Given the opening salvo was 35%, anything below that will seem reasonable.

We Can Stop Tax Imperialism

This is my call to action.  I am not a tax accountant, an expert on WTO regulations or even a celebrated tax economist.  I am what Hayek called a second hand trader in ideas.  I have to give much of the credit for the content of the non-Canadian and Hong Kong part of this talk to work done by Dan Mitchell of The Cato Institute and Andy Quinlan of The Center of Freedom and Prosperity.  They have been tireless in researching this issue and promoting the cause of tax freedom and privacy while combating European and US advances in this case.   

The new battleground will be the Canadian precedent. Canada is particularly susceptible to arguments claiming someone somewhere is not paying their fair share of taxes due to a kibbutz mentality and deep seated belief that everyone should participate in expensive national socialist programs.  However, they are also open to accusations of bullying from small developing nations due to the same socialist ethic.   

If offshore havens could make the argument that Canada was a rich country taking measures to retard their growth, they would have some credibility if they stood together to refuse to collect the information requested by the Canadian government.  Canadian companies would then pitch a fit and fight this measure in Canada.  Currently the mood in corporate Canada seems to be to encourage countries to sign up for a treaty or Tax Information Exchange Agreement. They don’t seem to understand yet that once the information infrastructure is in place, a new administration could use it to ravage them via taxes.  It will be much harder for them to fight the government once this infrastructure is in place.

The global precedent would be alarming to say the least.  Widely adopted, off-shore tax havens could disappear and the tools for a global war of tax imperialism would be in place.   

The benefits of tax competition would be lost.  Instead, we would replace it with impediments reminiscent of those implemented at the beginning of the Great Depression.  As more measures were implemented, they accelerated and spread the depression, until in 1937, 75% of European trade was conducted by barter.  By trying to rein in capital and prevent capital from flowing freely to the best returns, we penalize the wealth creators and enable the wealth destroyers.

I am calling on the people here today to:

Find out more.  Contact the Center for Freedom and Prosperity.  They are knowledgeable and active on this issue.  They campaign tirelessly and have initiatives that companies and organizations can join.   

Contact Canadian companies in your jurisdiction to find out what their take is on the issue.  Firms like Manulife, Scotiabank, Northern Telecom and Research in Motion have a vital interest.  Contact your local Canadian Chamber of Commerce for a list of those companies.  Then check and see what your countries’ finance, treasury or other relevant department’s opinion is on this issue.  Advise them to just say no and join interested parties to do so.

Continue to encourage your local government to engage in tax competition by simplifying and lowering taxes and resist tax imperialism wherever it rears its ugly head.  The global network of business and the great experiment of humanity depend on our success in keeping the world free.


Facebook Comments