Hong Kong’s prudent governance may be what got it on a EU blacklist. The countries accusing Hong Kong may be unfamiliar with smart governance and the low taxes it enables – they may never have seen it before at home.
PIGS and Minnows
“Bulgaria, Croatia, Estonia, Greece, Italy, Latvia, Lithuania, Poland, Portugal and Spain, bastions of transparency and honest administration to a man.”
So writes a political observer, a bit of wag, I know, on the topic of ten countries that have something brazen and bizarre in common: They list Hong Kong as an “uncooperative tax jurisdiction”.
Those of you in the know remember the OECD trying to blacklist Hong Kong years ago, and China was in our corner and it never happened.
10 is the magic number
The EU is a little different. Under a new system, if 10 member countries blacklist Hong Kong, then the EU steps in line – it’s automatic (differentiated from a Brussels driven blacklisting). Never mind if the countries in question are PIGS (Portugal Italy Greece Spain) and minnows (see above). Never mind most are serial blacklisters of others, while Germany and the UK, for example, blacklist no one. Never mind Britain, France, Germany, The Netherlands, Sweden, Belgium and many other ‘clean’ countries have no issues with Hong Kong.
Never mind that Hong Kong has actually signed tax treaties with Spain and Portugal that are in effect. Never mind that Hong Kong has signed a double taxation treaty with Italy wherein, the Italian parliament dragged its heels for years before finally ratifying it. It entered effect Aug 14, 2015. Hong Kong: Still blacklisted.
Never mind that Hong Kong has gotten religion on the issues and has signed Exchange of Information (EoI) agreements and soon Automatic EoI (AEoI) agreements. Never mind the OECD has declared many recently blacklisted countries very compliant and is astounded at the national blacklistings leading to the EU-wide blacklisting.
No – Hong Kong, as of June, is considered by all of the EU an “uncooperative tax jurisdiction”.
Can’t beleive it
This must be causing some embarrassment to EU diplomats who know Hong Kong to be no such thing. Hong Kong’s governance, compared to these PIGS and minnows, is exemplary. Our tax system is stunning clear and transparent. Our courts are transparent and fair. Our government’s finances are spectacularly solid, meaning they have no desperate need to chase citizens around the world for money, like most Western nations. Hong Kong doesn’t obsess about everyone’s global wealth because they have no designs to seize it.
Rather simple, low taxes more than compensate for high costs, creating a huge per capita flow of business whose tiny percentage of contribution adds up to more revenue than the government can spend. These PIGS and minnows, with one or two exceptions, can’t understand this model. All they know are complex and high taxes, coupled with insane spending, leading to rampant tax evasion that is probably justified in the face of a rapacious and bureaucratic government.
However, there are some quirks that bear investigation. If Spain and Portugal have deals with Hong Kong, why are we on their national lists? Italy finally ratified our DTA (as mentioned above), but we’re still on their bad list, making it onerous for Italians who want to invest in Hong Kong, having to complete mountains of paperwork to prove innocence as the status assumes investment into Hong Kong is guilty.
Leaving us with Bulgaria, Croatia, Estonia, Greece, Latvia, Lithuania, and Poland. What gives? I can’t believe these countries are worried about masses of their nationals hiding money overseas in Hong Kong. Maybe Greek shipping magnates with holdings in Hong Kong. But the rest? Something stinks.
Some of these countries have wonderful diplomats here who are probably quite embarrassed by the whole situation. Indeed, HT spoke to some who had no idea. Most of them are here to promote trade and their companies could be burdened with masses of paperwork to do business here, making administration difficult and them unattractive business partners and clients of banks.
There are a number of questions to be asked and an outcome to be had. If one country drops Hong Kong, it drops below the threshold.
This EiC suspects some of the minnows have traded their right to blacklist for something else. Concessions in the Common Agricultural Policy? Chairmanship of a crucial committee in Brussels? And who would be so intent on hitting the magic ten? If it is this kind of political horse trading, then it might not even be one of the ten driving this process. It might be a player outside the national governments who can influence politics in small (and big) countries. A European House of Cards?
Chaos, not conspiracy
One tax expert we spoke to says it might be worse than conspiracy. It may be chaos.
He suggested many of these countries might have automatic processes of their own. Tax under a certain level automatically gets you blacklisted. When this 10-country mechanism was conceived, it wasn’t known what would come out the other end. When the results came out, many were surprised, listed countries blindsided.
As he put it, “There may have been no conscious thought.” Indeed.
In that case, it should be a case of a few sensible conversations with the countries in question to get their processes changed or exemptions created. Anyone who thinks that will be easy has never encountered bureaucratic inertia. It may take decades.
Barbados was another afflicted by Italy after signing a DTA. It managed to get its situation sorted out and Italy de-listed them, suggesting Hong Kong could perhaps do the same.