After nearly a year of preparation, the EU recently published its first blacklist of "tax havens", with 17 countries and territories listed: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau (China), the Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates. As soon as the list was published, many countries and territories protested: we are doing fine - how did we become "tax havens" in your eyes? A Beijing Youth Daily reporter interviewed Liu Huan, a counsellor of the State Council and former vice dean of the School of Taxation at the Central University of Finance and Economics, to answer these questions.
Point of interest 1: Why was China's Macau included on the "blacklist"?
Beijing Youth Daily: What kind of country or territory becomes a "tax haven"?
Liu Huan: Generally speaking, relatively few countries or territories can be classified as "tax havens". They are mainly a few "enclaves", including British, French and Dutch territories, mostly small islands concentrated in Latin America or Oceania. Precisely because they are "enclaves", these countries or territories do not have many sovereign considerations; most rely on overseas military forces for protection, so they have no army or police, and their revenue needs are relatively small.
For example, in the Cayman Islands and the Virgin Islands, every person landing on the island pays a landing fee of a few dozen US dollars, and that money is enough to cover the local government's daily expenses. So in these countries or territories, many things are taxed lightly or not at all in order to attract tourism and investment. Over time, these places came to be called "tax havens".
Beijing Youth Daily: The claim that Macau is a tax haven has long circulated internationally, and China has always opposed it. Why is it still on the EU blacklist this time?
Liu Huan: The practices of these "enclaves" or island nations have been emulated by many countries and regions. Hong Kong and Macau historically had eras of tax avoidance just like them. But it must first be made clear that Hong Kong and Macau are now special administrative regions, and under the guidance of the Chinese government's major policies, granting low-tax or tax-exempt treatment to certain income or certain activities is completely different from being a so-called tax haven.
At the G20 meeting in 2009, cracking down on tax havens became one of the topics of concern for participating countries, and there was a proposal at the time to include Hong Kong and Macau on the tax haven list, which was not adopted owing to China's opposition.
At present, the actual situations of the two regions are somewhat different. Hong Kong is now a window of reform and opening up; much investment entering China chooses Hong Kong as a springboard, and Hong Kong's low-tax policy benefits domestic and foreign enterprises alike, which the international community recognises as a special policy. Macau is different: in recent years Macau's gaming industry has developed rapidly, and apart from that it has no other particular pillar industry. Although Macau's actual tax burden is higher than Hong Kong's, the international community believes that the benefits of Macau's low taxes are enjoyed only by China itself, so it placed Macau on the "tax haven" blacklist.
Beijing Youth Daily: The list this time also includes South Korea and Mongolia. Why have they also become "tax havens"?
Liu Huan: We were also surprised to see these two countries. On analysis, both countries have recently adjusted their tax policies; they may have been listed as tax-avoiding countries because of policy anomalies, though they should really be counted as "countries with abnormal taxation".
South Korea recovered from the financial crisis ten years ago, and since then the international community has generally regarded the Korean nation as highly resilient, admired its economic model, and considered it relatively strong at attracting foreign investment. But recently, South Korea's situation has been delicate: tensions on the Korean Peninsula have not eased, and combined with some domestic turmoil, investor interest in South Korea is declining. After President Moon Jae-in took office, wanting to restore South Korea's former position in Northeast Asian economic development, he introduced some tax reductions and preferential policies. Unlike the island nations or "enclaves" that are "tax havens" in the traditional sense, South Korea is a sovereign state, and its practices can have a great impact on the world economy. As a result, the international community believes it has adopted incorrect tax policies, so it was listed as a "tax-avoiding country".
Mongolia has no seaport, and its own overall conditions are not convenient for stepping up efforts to attract foreign investment. So last year Mongolia announced a number of tax system reform plans, some of which exceeded the scope permitted by its own level of economic development and by international recognition, and were therefore regarded as "malicious competition" and listed as a "tax-avoiding country".
Beijing Youth Daily: The United States has also recently been adjusting its tax policy, and some people believe the US may once again become a "tax haven". Why is it not on the list?
Liu Huan: First of all, it should be clear that US tax administration is very strict, and tax evasion is severely punished.
Previously, the US income tax rate was 35%. In this tax reform, the corporate income tax was cut to 20%. Although the overall reduction is relatively large, most countries in the world are actually around 25%, so the US has dropped to a slightly lower level, which is within a reasonable range and does not excessively violate international norms and perceptions; legally, it is defensible. Overall, there is no possibility of it becoming a "tax haven".
Beijing Youth Daily: Among the remaining countries and territories on the list, which are controversial?
Liu Huan: Listing Palau as a "tax haven" is quite controversial.
Palau was once the highest-taxed country in the world. It later carried out tax reform and its rates came down somewhat. But now the US is also cutting taxes, and China's "replacing business tax with VAT" also reduces the corporate tax burden, and neither has been considered tax avoidance - yet Palau entered the "blacklist".
Analysing the reasons, it may be that people have doubts about why Palau cut taxes. The US is the world's largest economy, and people can understand it cutting taxes to revive the economy. But Palau is a small island nation, and when it cuts taxes, other small countries in similar situations may object, wondering whether the tax cuts constitute "malicious competition" and the like.
Point of interest 2: Why draw up a "tax haven" blacklist?
Beijing Youth Daily: From this perspective, the "blacklist" does not seem fair. Why did the EU draw it up?
Liu Huan: In the contest for economic interests, high-tax countries have lost out.
The EU has more than twenty countries. Some need to revive their economies, and the most important way is to attract foreign investment through policy guidance and heat up investment. If a country's tax burden is heavy and there is little room to cut taxes, other countries cutting taxes becomes a threat. Moreover, many European countries are now high-welfare states: if they do not lower residents' welfare levels, they will struggle to collect taxes amid economic weakness, and their governments will be unsustainable. So, out of national interest, they are inherently very averse to tax avoidance.
Point of interest 3: How should the "tax haven" blacklist be treated?
Beijing Youth Daily: What impact does this "blacklist" have on China?
Liu Huan: The list includes some countries and territories that are tax havens in the traditional sense, as well as some that are controversial. Moreover, the list contains none of the EU's own member states, and some traditional tax havens near the Caribbean are also absent. So this list is not necessarily 100% truth; there are unfair criteria of judgement in it.
For China, the blacklist deserves our attention: we should compare our own behaviour against it to see whether it is compliant and where improvements are needed. China is now the world's second-largest economy, with growing international influence and an increasingly full voice. In many matters, we must also take into account the feelings of other countries and the impact on them.
But the scientific rigour and authority of the evaluation itself still need further consideration - we cannot simply accept whatever they say. Take Macau, which is on the list: historically, Hong Kong was a commercial port in the Far East second only to Tokyo, with rapid development in finance, manufacturing, services and tourism. Macau's position, however, has been rather awkward; for a long time, apart from the gaming industry and some entertainment activities, it has had no particular industries. We hope Macau can play the same "Pearl of the Orient" role as Hong Kong, but that is not easy to achieve in a short time. So Macau's industrial positioning should be adjusted to develop tourism, high-end services and especially medical services, which would also meet people's demands for a better quality of life and the pursuit of happiness. If low-tax policies were applied to health-related industries so that Chinese citizens and the world benefit, there would be far less controversy over this region's tax policies.
Source: Beijing Youth Daily 2017-12-10