Are Taiwan’s days numbered as a “tax haven”?
As low-tax jurisdictions in Asia prepare themselves for the introduction of international common reporting standards, Taiwan is proving something of a laggard on this front – to the extent that firms there are still openly touting the island as a tax haven.
This is something the local financial regulator appears alert to and keen to prevent, but it remains behind its peers in many other countries on taking action.
Most developed economies are part of a broad agreement on the automatic exchange of information relating to tax matters, which uses a common reporting standard (CRS) devised by the Organisation for Economic Cooperation and Development.
Things gained momentum with the 2010 enactment of an American law, the Foreign Account Tax Compliance Act (Fatca), which requires financial institutions in cooperating jurisdictions to file reports to the US government about their American clients.
Fifty-three jurisdictions, mostly European but also South Korea, are starting CRS exchanges in 2017. Next year they will be joined from the Asia-Pacific region by Australia, Brunei, China, Hong Kong, Indonesia, Japan, Marshall Islands, Macau, Malaysia, Nauru, New Zealand, Singapore and Vanuatu.
In Hong Kong and Singapore, the region’s two largest low-tax jurisdictions, which used to advertise complete confidentiality to foreign clients, preparations have been quietly under way for the advent of CRS.
“Unnoticed tax haven”
Taiwan, however, appears to have somewhat further to go.
Alex Cobham is chief executive of the UK-based group Tax Justice Network, which campaigns against tax evasion and money laundering. In March, he was bemused to receive a sales email from a Taiwanese company called Yuan Chih, inviting him to take advantage of the fact that Taiwan has yet to agree to the CRS protocol.
Ophélie Wang, a Yuan Chih sales executive, said an email: “Almost all the countries will participate in this international reporting system in 2017 or 2018 but Taiwan will not, so we can provide the client a clever way to perfectly hide their assets in Taiwan.”
Yuan Chih’s Facebook page depicts the capital’s Taipei 101 tower rising above the clouds, surrounded by stacked gold coins resembling skyscrapers. The caption reads: ‘The Un-noticed TAX HAVEN’. Taiwan’s Financial Supervisory Commission (FSC) was clearly embarrassed when AsianInvestor mentioned the solicitation.
The watchdog stated in writing: “It is very inappropriate to attract offshore customers by claiming that Taiwan has not participated in CRS. The FSC supports the progress of anti-tax avoidance measures such as CRS, Fatca or other automatic exchange tax information schemes. In the long term, participating in the CRS tax information exchange mechanism will help our banking industry to increase transparency, reputation, and to do business with sound operations.”
Taiwan introduced its offshore banking units (OBUs) in 1983. The FSC said its aim was to help Taiwan to compete with other financial centres by providing foreign exchange and tax benefits to offshore customers. “By attracting international capital to OBUs in Taiwan, it helps Taiwan become a regional financial centre gradually.”
That’s the official line. The reality is that OBUs are also used by the country’s citizens to dodge tax, said a credit analyst and expert on Taiwanese finance who asked not to be identified.
“They are disguised as overseas investors,” he noted. “They have shell companies in tax havens. They remit funds out of Taiwan and then back to Taiwan. They might conduct trade finance or they may invest in stocks. Our understanding is that Taiwanese banks mainly serve these kinds of customers.”
Moreover, offshore securities units, with generous tax benefits, were introduced in 2013. Offshore insurance units were added in 2015, as part of a goal to turn Taiwan into an asset management hub.
The government bristles at any suggestion that Taiwan’s thriving offshore industry might be a boon to tax evaders or money launderers.
Official sensitivity is not only a result of the onward global march of CRS. Last August, the New York Department of Financial Services slapped Mega International Commercial Bank with a fine of $180 million for violating anti-money-laundering laws. The ruling said Mega Bank’s compliance programme was “a hollow shell”.
Since then, the FSC said it had tightened its anti-money-laundering rules and supervision, including those that apply to Taiwan’s offshore industry.
Last December, Taiwan signed an agreement with the US to implement Fatca. The CRS is evidently a much tougher call. There have been numerous studies, and the Ministry of Finance pointed out that a draft bill to facilitate automatic exchanges of information had been received “positively” by Taiwanese legislators on March 29.
Yet the die has still not been cast and Taiwan’s banks continue to tout the advantages of secrecy. Bank SinoPac, for instance, assures on its website that ‘OBU account information is strictly confidential’.
One possible reason may be delicate relations with China. An agreement on exchange of tax-related information was signed in 2015 but has not been enforced. It is also limited to exchanges “on request” and not done automatically.
“Both the Taiwanese government and industry want to sell offshore financial services to the mainland, where there is a common language, but whether they will be successful is another matter,” the unnamed credit analyst noted.
“Mainland individuals are not very familiar with Taiwanese financial institutions. They hold the likes of AIA, HSBC, or Prudential in high regard, but for Taiwanese banks and insurance companies they won’t have as much familiarity and confidence.”
The full version of this article appeared in the April/May issue of AsianInvestor magazine. Look out for the second in this two-part piece, which will focus on developments related to tax transparency in Indonesia and Malaysia.