THE global war on tax evasion rumbles on. What began as an American onslaught, with the Foreign Account Tax Compliance Act (FATCA) of 2010, has been joined by more than 100 countries through an initiative called the Common Reporting Standard (CRS). Under this, governments will exchange tax information on their financial firms’ clients on a regular, “automatic” basis, without having to be asked for it, starting this year. Holdouts such as Panama, the Bahamas and Lebanon have, one by one, been frogmarched into line.
But tax-dodgers and their advisers are enterprising sorts, eager to clamber through the smallest loophole—and gaps in the CRS there are. One involves becoming a pensioner in Hong Kong.
The territory, home to a big financial centre, has a type of pension known as an ORS (for Occupational Retirement Scheme). The beauty of ORS from a tax evader’s point of view is that anyone can get one and they are not caught in the CRS net. A German or Australian with money to hide can set up a Hong Kong shell company, appoint himself as its director, with a local employment contract, and sign up with a trust company that provides an ORS. He can throw in cash, property or other assets, oversee the account himself, retire as soon or as far in the future as he likes, and then take out as much or as little as he chooses, whenever he wants. An ORS, in short, is like a flexible bank account.
The arrangement falls outside the CRS and FATCA because the Hong Kong authorities classify ORS as “low risk” from a tax-evasion standpoint, meaning those running them are “non-reporting financial institutions” under both standards. Not surprisingly, some financial firms are hawking them enthusiastically to foreigners. A brochure from Legacy Trust, a Hong Kong-based firm, presents the ORS as “arguably the most tax-efficient pension structure available to high net-worth individuals”. It also suggests that Hong Kong’s status as a respectable financial centre, not on any international tax blacklist, confers “legitimacy” on ORS. Legacy Trust did not respond to a request for comment.
Tax experts say private-banking circles are abuzz with talk of ORS, with hundreds of rich clients looking to move money into them as the date approaches for CRS compliance. “I’ve met people with $50m, $100m even, including from the Chinese mainland, looking to do this,” says one. “No one knows how much they’re shifting. It has to be a lot.” Asked whether Hong Kong’s tax authority is aware of this, he says: “It’s either acquiescence or ignorance on their part. Either way, not good.”
The Financial Services and Treasury Bureau, the Hong Kong government department responsible for international tax matters, says it has weighed the risks posed by the schemes and considers it “justifiable” to include their managers as non-reporting institutions. As of March 31st, there were 4,522 ORS registered. The pensions regulator declines to say whether the number has been growing.
The OECD, which administers the CRS, says it is aware of several supposedly kosher investment schemes that may be anything but, including ORS. It says it is in discussions with Hong Kong, though it will not be drawn on when the loophole might be closed. Earlier this month, the OECD launched a portal where whistle-blowers can anonymously report schemes designed to circumvent its tax-transparency standard; they can even upload documents, such as marketing materials. The OECD says products in its sights include pensions, insurance and citizenship-for-sale schemes, known euphemistically in the trade as “investment migration” products. Tips are already flowing in, it says.
But the biggest hole in the CRS is not a product, nor Hong Kong. It is America. It gets all the information it needs from other countries through its heavy-handed application of FATCA, and therefore sees no need to sign up to the CRS. So it is in the unique position of being able to take a lot, give little, and continue getting away with it. Not surprisingly, lots of tainted foreign cash is believed to have flowed into American banks, trusts and shell companies in recent years. Schemes such as ORS may provide tax-dodging opportunities for a while yet, but American non-participation is, as one OECD official puts it, “the elephant in the room”.